Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 85141 November 28, 1989
FILIPINO MERCHANTS INSURANCE CO., INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK SENG, respondents.
Balgos & Perez Law Offices for petitioner.
Lapuz Law office for private respondent.

REGALADO, J.:
This is a review of the decision of the Court of Appeals, promulgated on July
19,1988, the dispositive part of which reads:
WHEREFORE, the judgment appealed from is affirmed insofar as it orders defendant
Filipino Merchants Insurance Company to pay the plaintiff the sum of P51,568.62
with interest at legal rate from the date of filing of the complaint, and is modified
with respect to the third party complaint in that (1) third party defendant E. Razon,
Inc. is ordered to reimburse third party plaintiff the sum of P25,471.80 with legal
interest from the date of payment until the date of reimbursement, and (2) the
third-party complaint against third party defendant Compagnie Maritime Des
Chargeurs Reunis is dismissed. 1
The facts as found by the trial court and adopted by the Court of Appeals are as
follows:
This is an action brought by the consignee of the shipment of fishmeal loaded on
board the vessel SS Bougainville and unloaded at the Port of Manila on or about
December 11, 1976 and seeks to recover from the defendant insurance company
the amount of P51,568.62 representing damages to said shipment which has been
insured by the defendant insurance company under Policy No. M-2678. The
defendant brought a third party complaint against third party defendants
Compagnie Maritime Des Chargeurs Reunis and/or E. Razon, Inc. seeking judgment
against the third (sic) defendants in case Judgment is rendered against the third
party plaintiff. It appears from the evidence presented that in December 1976,
plaintiff insured said shipment with defendant insurance company under said cargo
Policy No. M-2678 for the sum of P267,653.59 for the goods described as 600 metric
tons of fishmeal in new gunny bags of 90 kilos each from Bangkok, Thailand to

Manila against all risks under warehouse to warehouse terms. Actually, what was
imported was 59.940 metric tons not 600 tons at $395.42 a ton CNF Manila. The
fishmeal in 666 new gunny bags were unloaded from the ship on December 11,
1976 at Manila unto the arrastre contractor E. Razon, Inc. and defendant's surveyor
ascertained and certified that in such discharge 105 bags were in bad order
condition as jointly surveyed by the ship's agent and the arrastre contractor. The
condition of the bad order was reflected in the turn over survey report of Bad Order
cargoes Nos. 120320 to 120322, as Exhibit C-4 consisting of three (3) pages which
are also Exhibits 4, 5 and 6- Razon. The cargo was also surveyed by the arrastre
contractor before delivery of the cargo to the consignee and the condition of the
cargo on such delivery was reflected in E. Razon's Bad Order Certificate No. 14859,
14863 and 14869 covering a total of 227 bags in bad order condition. Defendant's
surveyor has conducted a final and detailed survey of the cargo in the warehouse
for which he prepared a survey report Exhibit F with the findings on the extent of
shortage or loss on the bad order bags totalling 227 bags amounting to 12,148
kilos, Exhibit F-1. Based on said computation the plaintiff made a formal claim
against the defendant Filipino Merchants Insurance Company for P51,568.62
(Exhibit C) the computation of which claim is contained therein. A formal claim
statement was also presented by the plaintiff against the vessel dated December
21, 1976, Exhibit B, but the defendant Filipino Merchants Insurance Company
refused to pay the claim. Consequently, the plaintiff brought an action against said
defendant as adverted to above and defendant presented a third party complaint
against the vessel and the arrastre contractor. 2
The court below, after trial on the merits, rendered judgment in favor of private
respondent, the decretal portion whereof reads:
WHEREFORE, on the main complaint, judgment is hereby rendered in favor of the
plaintiff and against the defendant Filipino Merchant's (sic) Insurance Co., ordering
the defendants to pay the plaintiff the following amount:
The sum of P51,568.62 with interest at legal rate from the date of the filing of the
complaint;
On the third party complaint, the third party defendant Compagnie Maritime Des
Chargeurs Reunis and third party defendant E. Razon, Inc. are ordered to pay to the
third party plaintiff jointly and severally reimbursement of the amounts paid by the
third party plaintiff with legal interest from the date of such payment until the date
of such reimbursement.
Without pronouncement as to costs. 3
On appeal, the respondent court affirmed the decision of the lower court insofar as
the award on the complaint is concerned and modified the same with regard to the
adjudication of the third-party complaint. A motion for reconsideration of the

aforesaid decision was denied, hence this petition with the following assignment of
errors:
1. The Court of Appeals erred in its interpretation and application of the "all risks"
clause of the marine insurance policy when it held the petitioner liable to the
private respondent for the partial loss of the cargo, notwithstanding the clear
absence of proof of some fortuitous event, casualty, or accidental cause to which
the loss is attributable, thereby contradicting the very precedents cited by it in its
decision as well as a prior decision of the same Division of the said court (then
composed of Justices Cacdac, Castro-Bartolome, and Pronove);
2. The Court of Appeals erred in not holding that the private respondent had no
insurable interest in the subject cargo, hence, the marine insurance policy taken out
by private respondent is null and void;
3. The Court of Appeals erred in not holding that the private respondent was guilty
of fraud in not disclosing the fact, it being bound out of utmost good faith to do so,
that it had no insurable interest in the subject cargo, which bars its recovery on the
policy. 4
On the first assignment of error, petitioner contends that an "all risks" marine policy
has a technical meaning in insurance in that before a claim can be compensable it
is essential that there must be "some fortuity, " "casualty" or "accidental cause" to
which the alleged loss is attributable and the failure of herein private respondent,
upon whom lay the burden, to adduce evidence showing that the alleged loss to the
cargo in question was due to a fortuitous event precludes his right to recover from
the insurance policy. We find said contention untenable.
The "all risks clause" of the Institute Cargo Clauses read as follows:
5. This insurance is against all risks of loss or damage to the subject-matter insured
but shall in no case be deemed to extend to cover loss, damage, or expense
proximately caused by delay or inherent vice or nature of the subject-matter
insured. Claims recoverable hereunder shall be payable irrespective of percentage. 5
An "all risks policy" should be read literally as meaning all risks whatsoever and
covering all losses by an accidental cause of any kind. The terms "accident" and
"accidental", as used in insurance contracts, have not acquired any technical
meaning. They are construed by the courts in their ordinary and common
acceptance. Thus, the terms have been taken to mean that which happens by
chance or fortuitously, without intention and design, and which is unexpected,
unusual and unforeseen. An accident is an event that takes place without one's
foresight or expectation; an event that proceeds from an unknown cause, or is an
unusual effect of a known cause and, therefore, not expected. 6

The very nature of the term "all risks" must be given a broad and comprehensive
meaning as covering any loss other than a willful and fraudulent act of the
insured. 7 This is pursuant to the very purpose of an "all risks" insurance to give
protection to the insured in those cases where difficulties of logical explanation or
some mystery surround the loss or damage to property. 8 An "all asks" policy has
been evolved to grant greater protection than that afforded by the "perils clause," in
order to assure that no loss can happen through the incidence of a cause neither
insured against nor creating liability in the ship; it is written against all losses, that
is, attributable to external causes. 9
The term "all risks" cannot be given a strained technical meaning, the language of
the clause under the Institute Cargo Clauses being unequivocal and clear, to the
effect that it extends to all damages/losses suffered by the insured cargo except (a)
loss or damage or expense proximately caused by delay, and (b) loss or damage or
expense proximately caused by the inherent vice or nature of the subject matter
insured.
Generally, the burden of proof is upon the insured to show that a loss arose from a
covered peril, but under an "all risks" policy the burden is not on the insured to
prove the precise cause of loss or damage for which it seeks compensation. The
insured under an "all risks insurance policy" has the initial burden of proving that
the cargo was in good condition when the policy attached and that the cargo was
damaged when unloaded from the vessel; thereafter, the burden then shifts to the
insurer to show the exception to the coverage. 10 As we held in Paris-Manila
Perfumery Co. vs. Phoenix Assurance Co., Ltd. 11 the basic rule is that the insurance
company has the burden of proving that the loss is caused by the risk excepted and
for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine insurance policy creates a
special type of insurance which extends coverage to risks not usually contemplated
and avoids putting upon the insured the burden of establishing that the loss was
due to the peril falling within the policy's coverage; the insurer can avoid coverage
upon demonstrating that a specific provision expressly excludes the loss from
coverage. 12 A marine insurance policy providing that the insurance was to be
"against all risks" must be construed as creating a special insurance and extending
to other risks than are usually contemplated, and covers all losses except such as
arise from the fraud of the insured. 13 The burden of the insured, therefore, is to
prove merely that the goods he transported have been lost, destroyed or
deteriorated. Thereafter, the burden is shifted to the insurer to prove that the loss
was due to excepted perils. To impose on the insured the burden of proving the
precise cause of the loss or damage would be inconsistent with the broad protective
purpose of "all risks" insurance.
In the present case, there being no showing that the loss was caused by any of the
excepted perils, the insurer is liable under the policy. As aptly stated by the

respondent Court of Appeals, upon due consideration of the authorities and

jurisprudence it discussed
... it is believed that in the absence of any showing that the losses/damages were
caused by an excepted peril, i.e. delay or the inherent vice or nature of the subject
matter insured, and there is no such showing, the lower court did not err in holding
that the loss was covered by the policy.
There is no evidence presented to show that the condition of the gunny bags in
which the fishmeal was packed was such that they could not hold their contents in
the course of the necessary transit, much less any evidence that the bags of cargo
had burst as the result of the weakness of the bags themselves. Had there been
such a showing that spillage would have been a certainty, there may have been
good reason to plead that there was no risk covered by the policy (See Berk vs.
Style [1956] cited in Marine Insurance Claims, Ibid, p. 125). Under an 'all risks'
policy, it was sufficient to show that there was damage occasioned by some
accidental cause of any kind, and there is no necessity to point to any particular
cause. 14
Contracts of insurance are contracts of indemnity upon the terms and conditions
specified in the policy. The agreement has the force of law between the parties. The
terms of the policy constitute the measure of the insurer's liability. If such terms are
clear and unambiguous, they must be taken and understood in their plain, ordinary
and popular sense. 15
Anent the issue of insurable interest, we uphold the ruling of the respondent court
that private respondent, as consignee of the goods in transit under an invoice
containing the terms under "C & F Manila," has insurable interest in said goods.
Section 13 of the Insurance Code defines insurable interest in property as every
interest in property, whether real or personal, or any relation thereto, or liability in
respect thereof, of such nature that a contemplated peril might directly damnify the
insured. In principle, anyone has an insurable interest in property who derives a
benefit from its existence or would suffer loss from its destruction whether he has or
has not any title in, or lien upon or possession of the property y. 16 Insurable interest
in property may consist in (a) an existing interest; (b) an inchoate interest founded
on an existing interest; or (c) an expectancy, coupled with an existing interest in
that out of which the expectancy arises. 17
Herein private respondent, as vendee/consignee of the goods in transit has such
existing interest therein as may be the subject of a valid contract of insurance. His
interest over the goods is based on the perfected contract of sale. 18 The perfected
contract of sale between him and the shipper of the goods operates to vest in him
an equitable title even before delivery or before be performed the conditions of the
sale. 19 The contract of shipment, whether under F.O.B., C.I.F., or C. & F. as in this
case, is immaterial in the determination of whether the vendee has an insurable

interest or not in the goods in transit. The perfected contract of sale even without
delivery vests in the vendee an equitable title, an existing interest over the goods
sufficient to be the subject of insurance.
Further, Article 1523 of the Civil Code provides that where, in pursuance of a
contract of sale, the seller is authorized or required to send the goods to the buyer,
delivery of the goods to a carrier, whether named by the buyer or not, for, the
purpose of transmission to the buyer is deemed to be a delivery of the goods to the
buyer, the exceptions to said rule not obtaining in the present case. The Court has
heretofore ruled that the delivery of the goods on board the carrying vessels
partake of the nature of actual delivery since, from that time, the foreign buyers
assumed the risks of loss of the goods and paid the insurance premium covering
them. 20
C & F contracts are shipment contracts. The term means that the price fixed
includes in a lump sum the cost of the goods and freight to the named
destination. 21 It simply means that the seller must pay the costs and freight
necessary to bring the goods to the named destination but the risk of loss or
damage to the goods is transferred from the seller to the buyer when the goods
pass the ship's rail in the port of shipment. 22
Moreover, the issue of lack of insurable interest was not among the defenses
averred in petitioners answer. It was neither an issue agreed upon by the parties at
the pre-trial conference nor was it raised during the trial in the court below. It is a
settled rule that an issue which has not been raised in the court a quo cannot be
raised for the first time on appeal as it would be offensive to the basic rules of fair
play, justice and due process. 23 This is but a permuted restatement of the long
settled rule that when a party deliberately adopts a certain theory, and the case is
tried and decided upon that theory in the court below, he will not be permitted to
change his theory on appeal because, to permit him to do so, would be unfair to the
adverse party. 24
If despite the fundamental doctrines just stated, we nevertheless decided to indite a
disquisition on the issue of insurable interest raised by petitioner, it was to put at
rest all doubts on the matter under the facts in this case and also to dispose of
petitioner's third assignment of error which consequently needs no further
discussion.
WHEREFORE, the instant petition is DENIED and the assailed decision of the
respondent Court of Appeals is AFFIRMED in toto.
SO ORDERED.
Paras, Padilla and Sarmiento, JJ., concur.
Melencio-Herrera (Chairperson), J., is on leave.

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

CORPORATION,
Respondent.

Promulgated:

June 8, 2007

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

DECISION

NACHURA, J.:

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

The facts are as follows:

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

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

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

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

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

A profound scrutiny of the provisions of the contract which is a contract of adhesion at once
exposed the use of several contradictory terms. To name a few, in Section 9 of the said contract

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

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

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

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

xxxx

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

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

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

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

Thus, the court concluded with the following disposition:

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

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

SO ORDERED.[11]

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

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

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

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

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

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

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

SO ORDERED.[17]

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

contending that:

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; otherwise, it would violate basic
principles of fair play.[19]

Second, there is no legal basis for Lim to question the authority of the CA to go beyond
the matters agreed upon during the pre-trial conference, or in not dismissing the appeal for failure of
FEB to file its brief on time, or in not ruling separately on the 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 is
free to reject the stipulations entirely.[22] If the terms thereof are accepted without objection, then the
contract serves as the law between the parties.

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

SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE

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

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 Acceptance Certificates. The basic purpose of a financial leasing transaction is to
enable the prospective buyer of equipment, who is unable to pay for such equipment in cash in one lump
sum, to lease such equipment in the meantime for his use, at a fixed rental sufficient to amortize at least
70% of the acquisition cost (including the expenses and a margin of profit for the financial lessor) with
the expectation that at the end of the lease period the buyer/financial lessee will be able to pay any
remaining balance of the purchase price.[23]

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

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

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

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

The stipulation in Section 14[28] of the lease contract, that the equipment shall be insured at the cost and
expense of the lessee against loss, damage, or destruction from fire, theft, accident, or other insurable risk
for the full term of the lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable
interest in the equipment and motor vehicles leased. Section 17 of the Insurance Code provides that the
measure of an insurable interest in property is the extent to which the insured might be damnified by loss

or injury thereof. It cannot be denied that JVL will be directly damnified in case of loss, damage, or
destruction of any of the properties leased.

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

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

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

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

We join the CA in rejecting this view because to allow the transaction involving the pick-up to be read
into the terms of the lease agreement would expand the coverage of the agreement, in violation of Article
1372 of the New Civil Code. [31] The lease contract subject of the complaint speaks only of a lease. Any

agreement between the parties after the lease contract has ended is a different transaction altogether and
should not be included as part of the lease. Furthermore, it is a cardinal rule in the interpretation of
contracts that if the terms of a contract are clear and leave no doubt as to the intention of the contracting
parties, the literal meaning of its stipulations shall control. No amount of extrinsic aid is necessary in
order to determine the parties' intent.[32]

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

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 147839

June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.
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 petitioner's
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 respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed
by it since the loss was due to fire which it could not prevent or foresee; that IMC
and LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured. 6
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.
On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire was
not attributable to the negligence of the petitioner; that it has not been established

that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that
"it is further agreed that merely for purpose of securing the payment of purchase
price, the above-described merchandise remains the property of the vendor until
the purchase price is fully paid", IMC and LSPI retained ownership of the delivered
goods and must bear the loss.
Dissatisfied, petitioner appealed to the CA. 9 On October 11, 2000, the CA rendered
its decision setting aside the decision of the RTC. The dispositive portion of the
decision reads:
WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc.
to pay:
1. the amount of P2,119,205.60 representing the amount paid by the plaintiffappellant 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 plaintiffappellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of
demand until fully paid.
With costs against the defendant-appellee.
SO ORDERED.10
The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire
must be borne by petitioner since the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code, to the general rule that if the
thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the
time the loss under the principle of res perit domino; that petitioner's obligation to
IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid
account and as such the obligation to pay is not extinguished, even if the fire is
considered a fortuitous event; that by subrogation, the insurer has the right to go
against petitioner; that, being a fire insurance with book debt endorsements, what
was insured was the vendor's interest as a creditor. 11
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13
Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT
CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.
THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC
SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT. 14
Anent the first error, petitioner contends that the insurance in the present case
cannot be deemed to be over credit since an insurance "on credit" belies not only
the nature of fire insurance but the express terms of the policies; that it was not
credit that was insured since respondent paid on the occasion of the loss of the
insured goods to fire and not because of the non-payment by petitioner of any
obligation; that, even if the insurance is deemed as one over credit, there was no
loss as the accounts were not yet due since no prior demands were made by IMC
and LSPI against petitioner for payment of the debt and such demands came from
respondent only after it had already paid IMC and LSPI under the fire insurance
policies.15
As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured fire
insurance policies over the goods.
Concerning the third ground, petitioner submits that there is no subrogation in favor
of respondent as no valid insurance could be maintained thereon by IMC and LSPI
since all risk had transferred to petitioner upon delivery of the goods; that petitioner
was not privy to the insurance contract or the payment between respondent and its
insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay,
limiting its interest to keeping the insured goods safe from fire.
For its part, respondent counters that while ownership over the ready- made
clothing materials was transferred upon delivery to petitioner, IMC and LSPI have
insurable interest over said goods as creditors who stand to suffer direct pecuniary
loss from its destruction by fire; that petitioner is liable for loss of the ready-made
clothing materials since it failed to overcome the presumption of liability under
Article 126516 of the Civil Code; that the fire was caused through petitioner's
negligence in failing to provide stringent measures of caution, care and
maintenance on its property because electric wires do not usually short circuit
unless there are defects in their installation or when there is lack of proper
maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable to
respondent for contracted lawyer's fees, litigation expenses and cost of suit. 17
As a general rule, in petitions for review, the jurisdiction of this Court in cases
brought before it from the CA is limited to reviewing questions of law which involves
no examination of the probative value of the evidence presented by the litigants or

any of them.18 The Supreme Court is not a trier of facts; it is not its function to
analyze or weigh evidence all over again. 19 Accordingly, findings of fact of the
appellate court are generally conclusive on the Supreme Court. 20
Nevertheless, jurisprudence has recognized several exceptions in which factual
issues may be resolved by this Court, such as: (1) when the findings are grounded
entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when in making its findings the CA went
beyond the issues of the case, or its findings are contrary to the admissions of both
the appellant and the appellee; (7) when the findings are contrary to the trial court;
(8) when the findings are conclusions without citation of specific evidence on which
they are based; (9) when the facts set forth in the petition as well as in the
petitioner's main and reply briefs are not disputed by the respondent; (10) when the
findings of fact are premised on the supposed absence of evidence and contradicted
by the evidence on record; and (11) when the CA manifestly overlooked certain
relevant facts not disputed by the parties, which, if properly considered, would
justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present
petition.
At issue is the proper interpretation of the questioned insurance policy. Petitioner
claims that the CA erred in construing a fire insurance policy on book debts as one
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of
the ready-made clothing materials sold and delivered to petitioner.
The Court disagrees with petitioner's stand.
It is well-settled that when the words of a contract are plain and readily understood,
there is no room for construction.22 In this case, the questioned insurance policies
provide coverage for "book debts in connection with ready-made clothing materials
which have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still
appearing in the Book of Account of the Insured 45 days after the time of the loss
covered under this Policy." 24 Nowhere is it provided in the questioned insurance
policies that the subject of the insurance is the goods sold and delivered to the
customers and dealers of the insured.
Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are
to be understood literally just as they appear on the face of the contract. 25 Thus,
what were insured against were the accounts of IMC and LSPI with petitioner which
remained unpaid 45 days after the loss through fire, and not the loss or destruction
of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further
agreed that merely for purpose of securing the payment of the purchase price the
above described merchandise remains the property of the vendor until the purchase
price thereof is fully paid."26
The Court is not persuaded.
The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery
has been made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his obligations
under the contract, the goods are at the buyer's risk from the time of such delivery;
(Emphasis supplied)
xxxx
Thus, when the seller retains ownership only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer. 27 Accordingly, petitioner bears the risk of
loss of the goods delivered.
IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who
bears the risk of loss, in property insurance, one's interest is not determined by
concept of title, but whether insured has substantial economic interest in the
property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the
insured." Parenthetically, under Section 14 of the same Code, an insurable interest
in property may consist in: (a) an existing interest; (b) an inchoate interest founded
on existing interest; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises.
Therefore, an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject matter of the insurance, and
neither the title nor a beneficial interest is requisite to the existence of such an
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. 30Indeed, 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 vendor's 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?
Petitioner's argument that it is not liable because the fire is a fortuitous event under
Article 117432 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 petitioner's accounts with IMC and LSPI that remained unpaid 45 days
after the fire. Accordingly, petitioner's 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 debtor's fault and before he has
incurred in delay will not have the effect of extinguishing the obligation. 35This 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.41Respondent's action against petitioner is squarely sanctioned by
Article 2207 of the Civil Code which provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person who has violated the contract. x
xx
Petitioner failed to refute respondent's 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 petitioner's General Manager, Stephen S. Gaisano, Jr.,
since it is not an admission of petitioner's unpaid account with LSPI. It only confirms
the loss of Levi's products in the amount of P535,613.00 in the fire that razed
petitioner's 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 petitioner's
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 MODIFICATIONthat 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

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

G.R. No. L-31845 April 30, 1979

GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for
petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the Resolution of this
Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in
both cases seek similar relief, through these petitions for certiorari by way of
appeal, from the amended decision of respondent Court of Appeals which affirmed
in toto the decision of the Court of First Instance of Cebu, ordering "the defendants
(herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly
and severally to pay plaintiff (herein private respondent Ngo Hing) the amount of
P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific
Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life
of his one-year old daughter Helen Go. Said respondent supplied the essential data
which petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu
City wrote on the corresponding form in his own handwriting (Exhibit I-M).
Mondragon finally type-wrote the data on the application form which was signed by
private respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as
his commission for being a duly authorized agebt of Pacific Life. Upon the payment
of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to
private respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the
bottom of the back page of the application form his strong recommendation for the
approval of the insurance application. Then on April 30, 1957, Mondragon received

a letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The
letter stated that the said life insurance application for 20-year endowment plan is
not available for minors below seven years old, but Pacific Life can consider the
same under the Juvenile Triple Action Plan, and advised that if the offer is
acceptable, the Juvenile Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children, pointing out that
since 1954 the customers, especially the Chinese, were asking for such coverage
(Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of
influenza with complication of bronchopneumonia. Thereupon, private respondent
sought the payment of the proceeds of the insurance, but having failed in his effort,
he filed the action for the recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier refered to against both
petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt
(Exhibit E) constituted a temporary contract of the life insurance in question; and
(2) whether private respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is
considered a BINDING RECEIPT. These conditions state that:
A. If the Company or its agent, shan have received the premium deposit ... and the
insurance application, ON or PRIOR to the date of medical examination ... said
insurance shan be in force and in effect from the date of such medical examination,
for such period as is covered by the deposit ...,PROVIDED the company shall be
satisfied that on said date the applicant was insurable on standard rates under its
rule for the amount of insurance and the kind of policy requested in the application.
D. If the Company does not accept the application on standard rate for the amount
of insurance and/or the kind of policy requested in the application but issue,
or offers to issue a policy for a different plan and/or amount ..., the insurance shall
not be in force and in effect until the applicant shall have accepted the policy as
issued or offered by the Company and shall have paid the full premium thereof. If
the applicant does not accept the policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition A above, and the
Company declines to approve the application the insurance applied for shall not
have been in force at any time and the sum paid be returned to the applicant upon
the surrender of this receipt. (Emphasis Ours).

The aforequoted provisions printed on Exhibit E show that the binding deposit
receipt is intended to be merely a provisional or temporary insurance contract and
only upon compliance of the following conditions: (1) that the company shall be
satisfied that the applicant was insurable on standard rates; (2) that if the company
does not accept the application and offers to issue a policy for a different plan, the
insurance contract shall not be binding until the applicant accepts the policy
offered; otherwise, the deposit shall be reftmded; and (3) that if the applicant is not
ble according to the standard rates, and the company disapproves the application,
the insurance applied for shall not be in force at any time, and the premium paid
shall be returned to the applicant.
Clearly implied from the aforesaid conditions is that the binding deposit receipt in
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis of whether or not the
applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved
the insurance application of respondent Ngo Hing, the binding deposit receipt in
question had never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement
is made between the applicant and the agent, no liability shall attach until the
principal approves the risk and a receipt is given by the agent. The acceptance is
merely conditional and is subordinated to the act of the company in approving or
rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt"
does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41
Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to
children less than seven years of age. What it offered instead is another plan known
as the Juvenile Triple Action, which private respondent failed to accept. In the
absence of a meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life insurance in the amount of
P50,000.00 in favor of the latter's one-year old daughter, and with the noncompliance of the abovequoted conditions stated in the disputed binding deposit
receipt, there could have been no insurance contract duly perfected between thenl
Accordingly, the deposit paid by private respondent shall have to be refunded by
Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person
or by their agents ... The contract, to be binding from the date of the application,

must have been a completed contract, one that leaves nothing to be dione, nothing
to be completed, nothing to be passed upon, or determined, before it shall take
effect. There can be no contract of insurance unless the minds of the parties have
met in agreement."
We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would
not have any adverse effect on the allegedly perfected temporary contract
(Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected
between the parties who had no meeting of their minds. Private respondet, being an
authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware
that said company does not offer the life insurance applied for. When he filed the
insurance application in dispute, private respondent was, therefore, only taking the
chance that Pacific Life will approve the recommendation of Mondragon for the
acceptance and approval of the application in question along with his proposal that
the insurance company starts to offer the 20-year endowment insurance plan for
children less than seven years. Nonetheless, the record discloses that Pacific Life
had rejected the proposal and recommendation. Secondly, having an insurable
interest on the life of his one-year old daughter, aside from being an insurance
agent and an offense associate of petitioner Mondragon, private respondent Ngo
Hing must have known and followed the progress on the processing of such
application and could not pretend ignorance of the Company's rejection of the 20year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of
then Appellate Associate Justice Ruperto G. Martin who later came up to this Court,
from his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum of rejection
(Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the desire for
applicant's father to have the application considered as one for a 20-year
endowment plan was ever duly communicated to Ngo; Hing, father of the minor
applicant. I am not quite conninced that this was so. Ngo Hing, as father of the
applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-1).
The unchallenged statement of appellant Mondragon in his letter of May 6, 1957)
(Exhibit 4-M), specifically admits that said Ngo Hing was "our associate" and that it
was the latter who "insisted that the plan be placed on the 20-year endowment
plan." Under these circumstances, it is inconceivable that the progress in the
processing of the application was not brought home to his knowledge. He must have
been duly apprised of the rejection of the application for a 20-year endowment plan
otherwise Mondragon would not have asserted that it was Ngo Hing himself who
insisted on the application as originally filed, thereby implictly declining the offer to
consider the application under the Juvenile Triple Action Plan. Besides, the associate
of Mondragon that he was, Ngo Hing should only be presumed to know what kind of

policies are available in the company for minors below 7 years old. What he and
Mondragon were apparently trying to do in the premises was merely to prod the
company into going into the business of issuing endowment policies for minors just
as other insurance companies allegedly do. Until such a definite policy is however,
adopted by the company, it can hardly be said that it could have been bound at all
under the binding slip for a plan of insurance that it could not have, by then issued
at all. (Amended Decision, Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm
belief that private respondent had deliberately concealed the state of health and
piysical condition of his daughter Helen Go. Wher private regpondeit supplied the
required essential data for the insurance application form, he was fully aware that
his one-year old daughter is typically a mongoloid child. Such a congenital physical
defect could never be ensconced nor disguished. Nonetheless, private respondent,
in apparent bad faith, withheld the fact materal to the risk to be assumed by the
insurance compary. As an insurance agent of Pacific Life, he ought to know, as he
surely must have known. his duty and responsibility to such a material fact. Had he
diamond said significant fact in the insurance application fom Pacific Life would
have verified the same and would have had no choice but to disapprove the
application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good
faith, absolute and perfect candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not
for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda
de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a
partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether
intentional or unintentional the concealment entitles the insurer to rescind the
contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105
Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316).
Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected between
the parties with the noncompliance of the conditions provided in the binding receipt,
and concealment, as legally defined, having been comraitted by herein private
respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof,
one is hereby entered absolving petitioners Lapulapu D. Mondragon and Great
Pacific Life Assurance Company from their civil liabilities as found by respondent
Court and ordering the aforesaid insurance company to reimburse the amount of
P1,077.75, without interest, to private respondent, Ngo Hing. Costs against private
respondent.
SO ORDERED.

Teehankee (Chairman), Makasiar, Guerrero and Melencio-Herrera, JJ., concur.

Fernandez, J., took no part.

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.

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 of P2,890,000.00
after 20 years.[1] Manuel signed the application and left to Perla the task of
supplying the information needed in the application. [2] Respondent Ma. Celeste
Abcede, Perlas daughter, signed the application as sales counselor. [3]

Aside from pension benefits, the comprehensive pension plan also provided life
insurance coverage to Florendo.[4] This was covered by a Group Master Policy that
Philippine American Life Insurance Company (Philam Life) issued to Philam Plans.
[5]
Under the master policy, Philam Life was to automatically provide life insurance
coverage, including accidental death, to all who signed up for Philam Plans
comprehensive pension plan.[6] 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 matured, entitling the beneficiary to the
maturity value of the pension plan.[7]

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 [8] to
Manuel, with petitioner Ma. Lourdes S. Florendo, his wife, as beneficiary. In time,
Manuel paid his quarterly premiums.[9]

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 under her husbands plan. [10] Because Manuel died before his pension
plan matured and his wife was to get only the benefits of his life insurance, Philam
Plans forwarded her claim to Philam Life.[11]

On May 3, 1999 Philam Plans wrote Lourdes a letter,[12] 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 under the plan [13] but Philam

Plans rejected it,[14] prompting her to file the present action against the pension plan
company before the Regional Trial Court (RTC) of Quezon City.[15]

On March 30, 2006 the RTC rendered judgment, [16] 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.

On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision,
[17]
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 aware or material facts that he
knew or ought to know.[18]

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
health. Consequently, it could not blame him for not mentioning it. [19]

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 since he had been on Coumadin, a treatment for venous
thrombosis,[21] and insulin, a drug used in the treatment of diabetes mellitus, at that
time.[22]

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 the pension plan. [23] 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 disclosure contemplated. [24] 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 contraction of
the heart muscles and restores normalcy to the heartbeat. [25] 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 the theory of imputed knowledge, [26] it is not
claimed that Perla was aware of his two other afflictions that needed medical
treatments. Pursuant to Section 27[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 her own and cannot
prejudice Manuel.[28]

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 herebycertify 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)

As the Court said in New Life Enterprises v. Court of Appeals:[31]

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 have been
collected. [34]

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.

Since Manuel died on the eleventh month following the issuance of his plan, [36] 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.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-30685 May 30, 1983
NG GAN ZEE, plaintiff-appellee,
vs.
ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendant-appellant.
Alberto Q. Ubay for plaintiff-appellee.
Santiago F. A lidio for defendant-appellant.

ESCOLIN, J.:
This is an appeal from the judgment of the Court of First Instance of Manila, ordering
the appellant Asian-Crusader Life Assurance Corporation to pay the face value of an
insurance policy issued on the life of Kwong Nam the deceased husband of appellee
Ng Gan Zee. Misrepresentation and concealment of material facts in obtaining the
policy were pleaded to avoid the policy. The lower court rejected the appellant's
theory and ordered the latter to pay appellee "the amount of P 20,000.00, with
interest at the legal rate from July 24, 1964, the date of the filing of the complaint,
until paid, and the costs. "
The Court of Appeals certified this appeal to Us, as the same involves solely a
question of law.
On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his
life for the sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On
the same date, appellant, upon receipt of the required premium from the insured,
approved the application and issued the corresponding policy. On December 6,
1963, Kwong Nam died of cancer of the liver with metastasis. All premiums had
been religiously paid at the time of his death.
On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to
appellant for payment of the face value of the policy. On the same date, she
submitted the required proof of death of the insured. Appellant denied the claim on
the ground that the answers given by the insured to the questions appealing in his
application for life insurance were untrue.
Appellee brought the matter to the attention of the Insurance Commissioner, the
Hon. Francisco Y. Mandamus, and the latter, after conducting an investigation, wrote
the appellant that he had found no material concealment on the part of the insured

and that, therefore, appellee should be paid the full face value of the policy. This
opinion of the Insurance Commissioner notwithstanding, appellant refused to settle
its obligation.
Appellant alleged that the insured was guilty of misrepresentation when he
answered "No" to the following question appearing in the application for life
insuranceHas any life insurance company ever refused your application for insurance or for
reinstatement of a lapsed policy or offered you a policy different from that applied
for? If, so, name company and date.
In its brief, appellant rationalized its thesis thus:
... As pointed out in the foregoing summary of the essential facts in this case, the
insured had in January, 1962, applied for reinstatement of his lapsed life insurance
policy with the Insular Life Insurance Co., Ltd, but this was declined by the insurance
company, although later on approved for reinstatement with a very high premium
as a result of his medical examination. Thus notwithstanding the said insured
answered 'No' to the [above] question propounded to him. ... 1
The lower court found the argument bereft of factual basis; and We quote with
approval its disquisition on the matterOn the first question there is no evidence that the Insular Life Assurance Co., Ltd.
ever refused any application of Kwong Nam for insurance. Neither is there any
evidence that any other insurance company has refused any application of Kwong
Nam for insurance.
... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong
Nam's request for reinstatement and amendment of his lapsed insurance policy on
April 24, 1962 [Exh. L-2 Stipulation of Facts, Sept. 22, 1965). The Court notes from
said application for reinstatement and amendment, Exh. 'L', that the amount
applied for was P20,000.00 only and not for P50,000.00 as it was in the lapsed
policy. The amount of the reinstated and amended policy was also for P20,000.00. It
results, therefore, that when on May 12, 1962 Kwong Nam answered 'No' to the
question whether any life insurance company ever refused his application for
reinstatement of a lapsed policy he did not misrepresent any fact.
... the evidence shows that the application of Kwong Nam with the Insular Life
Assurance Co., Ltd. was for the reinstatement and amendment of his lapsed
insurance policy-Policy No. 369531 -not an application for a 'new insurance policy.
The Insular Life Assurance Co., Ltd. approved the said application on April 24, 1962.
Policy No. 369531 was reinstated for the amount of P20,000.00 as applied for by
Kwong Nam [Exhs. 'L', 'L-l' and 'L-2']. No new policy was issued by the Insular Life
Assurance Co., Ltd. to Kwong Nam in connection with said application for

reinstatement and amendment. Such being the case, the Court finds that there is no
misrepresentation on this matter. 2
Appellant further maintains that when the insured was examined in connection with
his application for life insurance, he gave the appellant's medical examiner false
and misleading information as to his ailment and previous operation. The alleged
false statements given by Kwong Nam are as follows:
Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been
associated with ulcer of stomach. Tumor taken out was hard and of a hen's egg size.
Operation was two [2] years ago in Chinese General Hospital by Dr. Yap. Now,
claims he is completely recovered.
To demonstrate the insured's misrepresentation, appellant directs Our attention to:
[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the
Chinese General Hospital on May 22, 1960, i.e., about 2 years before he applied for
an insurance policy on May 12, 1962. According to said report, Dr. Fu Sun Yuan had
diagnosed the patient's ailment as 'peptic ulcer' for which, an operation, known as a
'sub-total gastric resection was performed on the patient by Dr. Pacifico Yap; and
[2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen
removed from the patient's body was 'a portion of the stomach measuring 12 cm.
and 19 cm. along the lesser curvature with a diameter of 15 cm. along the greatest
dimension.
On the bases of the above undisputed medical data showing that the insured was
operated on for peptic ulcer", involving the excision of a portion of the stomach,
appellant argues that the insured's statement in his application that a tumor, "hard
and of a hen's egg size," was removed during said operation, constituted material
concealment.
The question to be resolved may be propounded thus: Was appellant, because of
insured's aforesaid representation, misled or deceived into entering the contract or
in accepting the risk at the rate of premium agreed upon?
The lower court answered this question in the negative, and We agree.
Section 27 of the Insurance Law [Act 2427] provides:
Sec. 27. Such party a contract of insurance must communicate to the other, in good
faith, all facts within his knowledge which are material to the contract, and which
the other has not the means of ascertaining, and as to which he makes no
warranty. 3
Thus, "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 assurer, but he designedly and intentionally withholds the

same." 4
It has also been held "that the concealment must, in the absence of inquiries, be
not only material, but fraudulent, or the fact must have been intentionally
withheld." 5
Assuming that the aforesaid answer given by the insured is false, as claimed by the
appellant. Sec. 27 of the Insurance Law, above-quoted, nevertheless requires that
fraudulent intent on the part of the insured be established to entitle the insurer to
rescind the contract. And as correctly observed by the lower court,
"misrepresentation as a defense of the insurer to avoid liability is an 'affirmative'
defense. The duty to establish such a defense by satisfactory and convincing
evidence rests upon the defendant. The evidence before the Court does not clearly
and satisfactorily establish that defense."
It bears emphasis that Kwong Nam had informed the appellant's medical examiner
that the tumor for which he was operated on was "associated with ulcer of the
stomach." In the absence of evidence that the insured had sufficient medical
knowledge as to enable him to distinguish between "peptic ulcer" and "a tumor", his
statement that said tumor was "associated with ulcer of the stomach, " should be
construed as an expression made in good faith of his belief as to the nature of his
ailment and operation. Indeed, such statement must be presumed to have been
made by him without knowledge of its incorrectness and without any deliberate
intent on his part to mislead the appellant.
While it may be conceded that, from the viewpoint of a medical expert, the
information communicated was imperfect, the same was nevertheless sufficient to
have induced appellant to make further inquiries about the ailment and operation of
the insured.
Section 32 of Insurance Law [Act No. 24271 provides as follows:
Section 32. The right to information of material facts maybe waived either by the
terms of insurance or by neglect to make inquiries as to such facts where they are
distinctly implied in other facts of which information is communicated.
It has been held that where, upon the face of the application, a question appears to
be not answered at all or to be imperfectly answered, and the insurers issue a policy
without any further inquiry, they waive the imperfection of the answer and render
the omission to answer more fully immaterial. 6
As aptly noted by the lower court, "if the ailment and operation of Kwong Nam had
such an important bearing on the question of whether the defendant would
undertake the insurance or not, the court cannot understand why the defendant or
its medical examiner did not make any further inquiries on such matters from the

Chinese General Hospital or require copies of the hospital records from the
appellant before acting on the application for insurance. The fact of the matter is
that the defendant was too eager to accept the application and receive the
insured's premium. It would be inequitable now to allow the defendant to avoid
liability under the circumstances."
Finding no reversible error committed by the trial court, the judgment appealed
from is hereby affirmed, with costs against appellant Asian-Crusader life Assurance
Corporation.
SO ORDERED.

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 Resolution3 denying the petitioners 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 P100,000.00, in Soteros 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 respondents 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 1390 13 of the Civil Code.
Respondent filed a Motion to Dismiss14 claiming that petitioners 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, petitioners investigator testified
in court, stating among others that the insurance underwriter who solicited the
insurance is a cousin of respondents husband, Dindo Aban, 15and 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 Order 17 granting respondents Motion
to Dismiss, thus:
WHEREFORE, defendant CRESENCIA P. ABANs 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 petitioners 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.22Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL
COURT DISMISSING THE COMPLAINT ON THE GROUND OF PRESCRIPTION IN
CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE JURISPRUDENCE.

II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE
INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR
RECONSIDERATION.23
Petitioners Arguments
In praying that the CA Decision be reversed and that the case be remanded to the
trial court for the conduct of further proceedings, petitioner argues in its Petition
and Reply24 that Section 48 cannot apply to a case where the beneficiary under the
insurance contract posed as the insured and obtained the policy under fraudulent
circumstances. It adds that respondent, who was merely Soteros 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 respondents 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 latters 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
Respondents Arguments
Respondent, on the other hand, essentially argues in her Comment 26 that the CA is
correct in applying Section 48. She adds that petitioners 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 CAs 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 CAs 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 petitioners case is severely weakened, if not totally
disproved. Allegations of fraud, which are predicated on respondents 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 selfserving 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 courts 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 insureds 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 insureds
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-appellants 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 respondents 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 premiumpaying 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 formers 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

G.R. No. L-15774

November 29, 1920

PILAR C. DE LIM, plaintiff-appellant,

vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Sanz and Luzuriaga for appellant.
Cohn and Fisher for appellee.

MALCOLM, J.:
This is an appeal by plaintiff from an order of the Court of First Instance of
Zamboanga sustaining a demurrer to plaintiff's complaint upon the ground that it
fails to state a cause of action.
As the demurrer had the effect of admitting the material facts set forth in the
complaint, the facts are those alleged by the plaintiff. On July 6, 1917, Luis Lim y
Garcia of Zamboanga made application to the Sun Life Assurance Company of
Canada for a policy of insurance on his life in the sum of P5,000. In his application
Lim designated his wife, Pilar C. de Lim, the plaintiff herein, as the beneficiary. The
first premium of P433 was paid by Lim, and upon such payment the company issued
what was called a "provisional policy." Luis Lim y Garcia died on August 23, 1917,
after the issuance of the provisional policy but before approval of the application by
the home office of the insurance company. The instant action is brought by the
beneficiary, Pilar C. de Lim, to recover from the Sun Life Assurance Company of
Canada the sum of P5,000, the amount named in the provisional policy.
The "provisional policy" upon which this action rests reads as follows:
Received (subject to the following stipulations and agreements) the sum of four
hundred and thirty-three pesos, being the amount of the first year's premium for a
Life Assurance Policy on the life of Mr. Luis D. Lim y Garcia of Zamboanga for
P5,000, for which an application dated the 6th day of July, 1917, has been made to
the Sun Life Assurance Company of Canada.
The above-mentioned life is to be assured in accordance with the terms and
conditions contained or inserted by the Company in the policy which may be
granted by it in this particular case for four months only from the date of the
application, provided that the Company shall confirm this agreement by issuing a
policy on said application when the same shall be submitted to the Head Office in
Montreal. Should the Company not issue such a policy, then this agreement shall be
null and void ab initio, and the Company shall be held not to have been on the risk
at all, but in such case the amount herein acknowledged shall be returned.

[SEAL.]
(Sgd.) T. B. MACAULAY, President.
(Sgd.) A. F. Peters, Agent.
Our duty in this case is to ascertain the correct meaning of the document above
quoted. A perusal of the same many times by the writer and by other members of
the court leaves a decided impression of vagueness in the mind. Apparently it is to
be a provisional policy "for four months only from the date of this application." We
use the term "apparently" advisedly, because immediately following the words
fixing the four months period comes the word "provided" which has the meaning of
"if." Otherwise stated, the policy for four months is expressly made subjected to the
affirmative condition that "the company shall confirm this agreement by issuing a
policy on said application when the same shall be submitted to the head office in
Montreal." To reenforce the same there follows the negative condition
Should the company not issue such a policy, then this agreement shall be null and
void ab initio, and the company shall be held not to have been on the risk."
Certainly, language could hardly be used which would more clearly stipulate that
the agreement should not go into effect until the home office of the company should
confirm it by issuing a policy. As we read and understand the so-called provisional
policy it amounts to nothing but an acknowledgment on behalf of the company, that
it has received from the person named therein the sum of money agreed upon as
the first year's premium upon a policy to be issued upon the application, if the
application is accepted by the company.
It is of course a primary rule that a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents. So long as an
application for insurance has not been either accepted or rejected, it is merely an
offer or proposal to make a contract. The contract, to be binding from the date of
the application, must have been a completed contract, one that leaves nothing to
be done, nothing to be completed, nothing to be passed upon, or determined,
before it shall take effect. There can be no contract of insurance unless the minds of
the parties have met in agreement. Our view is, that a contract of insurance was not
here consummated by the parties.lawph!l.net
Appellant relies on Joyce on Insurance. Beginning at page 253, of Volume I, Joyce
states the general rule concerning the agent's receipt pending approval or issuance
of policy. The first rule which Joyce lays down is this: If the act of acceptance of the
risk by the agent and the giving by him of a receipt, is within the scope of the
agent's authority, and nothing remains but to issue a policy, then the receipt will
bind the company. This rule does not apply, for while here nothing remained but to
issue the policy, this was made an express condition to the contract. The second
rule laid down by Joyce is this: Where an agreement is made between the applicant
and the agent whether by signing an application containing such condition, or
otherwise, that no liability shall attach until the principal approves the risk and a
receipt is given buy the agent, such acceptance is merely conditional, and it

subordinated to the act of the company in approving or rejecting; so in life

insurance a "binding slip" or "binding receipt" does not insure of itself. This is the
rule which we believe applies to the instant case. The third rule announced by Joyce
is this: Where the acceptance by the agent is within the scope of his authority a
receipt containing a contract for insurance for a specific time which is not absolute
but conditional, upon acceptance or rejection by the principal, covers the specified
period unless the risk is declined within that period. The case cited by Joyce to
substantiate the last principle is that a Goodfellow vs. Times & Beacon Assurance
Com. (17 U. C. Q. B., 411), not available.
The two cases most nearly in point come from the federal courts and the Supreme
Court of Arkansas.
In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489} the
facts were that the amount of the first premium had been paid to an insurance
agent and a receipt given therefor. The receipt, however, expressly declared that if
the application was accepted by the company, the insurance shall take effect from
the date of the application but that if the application was not accepted, the money
shall be returned. The trite decision of the circuit court of appeal was, "On the
conceded facts of this case, there was no contract to life insurance perfected and
the judgment of the circuit court must be affirmed."
In the case of Cooksey vs. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the
person applying for the life insurance paid and amount equal to the first premium,
but the application and the receipt for the money paid, stipulated that the insurance
was to become effective only when the application was approved and the policy
issued. The court held that the transaction did not amount to an agreement for
preliminary or temporary insurance. It was said:
It is not an unfamiliar custom among life insurance companies in the operation of
the business, upon receipt of an application for insurance, to enter into a contract
with the applicant in the shape of a so-called "binding receipt" for temporary
insurance pending the consideration of the application, to last until the policy be
issued or the application rejected, and such contracts are upheld and enforced
when the applicant dies before the issuance of a policy or final rejection of the
application. It is held, too, that such contracts may rest in parol. Counsel for
appellant insists that such a preliminary contract for temporary insurance was
entered into in this instance, but we do not think so. On the contrary, the clause in
the application and the receipt given by the solicitor, which are to be read together,
stipulate expressly that the insurance shall become effective only when the
"application shall be approved and the policy duly signed by the secretary at the
head office of the company and issued." It constituted no agreement at all for
preliminary or temporary insurance; Mohrstadt vs. Mutual Life Ins. Co., 115 Fed., 81,
52 C. C. A., 675; Steinle vs. New York Life Ins. Co., 81 Fed., 489, 26 C. C. A., 491."
(See further Weinfeld vs. Mutual Reserve Fund Life Ass'n. [1892], 53 Fed, 208'

Mohrstadt vs. Mutual Life Insurance Co. [1902], 115 Fed., 81; Insurance co. vs.
Young's Administrator [1875], 90 U. S., 85; Chamberlain vs. Prudential Insurance
Company of America [1901], 109 Wis., 4; Shawnee Mut. Fire Ins. Co. vs. McClure
[1913], 39 Okla., 509; Dorman vs. Connecticut Fire Ins. Co. [1914], 51 contra, Starr
vs. Mutual Life Ins. Co. [1905], 41 Wash., 228.)
We are of the opinion that the trial court committed no error in sustaining the
demurrer and dismissing the case. It is to be noted, however, that counsel for
appellee admits the liability of the company for the return of the first premium to
the estate of the deceased. It is not to be doubted but that the Sun Life Assurance
Company of Canada will immediately, on the promulgation of this decision, pay to
the estate of the late Luis Lim y Garcia the of P433.
The order appealed from, in the nature of a final judgment is affirmed, without
special finding as to costs in this instance. So ordered.
Mapa, C.J., Johnson, Araullo, Avancea and Villamor, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-38613 February 25, 1982
PACIFIC TIMBER EXPORT CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WORKMEN'S INSURANCE
COMPANY, INC., respondents.

DE CASTRO, ** J.:
This petition seeks the review of the decision of the Court of Appeals reversing the
decision of the Court of First Instance of Manila in favor of petitioner and against
private respondent which ordered the latter to pay the sum of Pll,042.04 with
interest at the rate of 12% interest from receipt of notice of loss on April 15, 1963
up to the complete payment, the sum of P3,000.00 as attorney's fees and the
costs 1 thereby dismissing petitioner s complaint with costs. 2
The findings of the of fact of the Court of Appeals, which are generally binding upon
this Court, Except as shall be indicated in the discussion of the opinion of this Court
the substantial correctness of still particular finding having been disputed, thereby
raising a question of law reviewable by this Court 3 are as follows:
March 19, l963, the plaintiff secured temporary insurance from the defendant for its
exportation of 1,250,000 board feet of Philippine Lauan and Apitong logs to be
shipped from the Diapitan. Bay, Quezon Province to Okinawa and Tokyo, Japan. The
defendant issued on said date Cover Note No. 1010, insuring the said cargo of the
plaintiff "Subject to the Terms and Conditions of the WORKMEN'S INSURANCE
COMPANY, INC. printed Marine Policy form as filed with and approved by the Office
of the Insurance Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in favor of the
plaintiff on April 2, 1963. The two marine policies bore the numbers 53 HO 1032 and
53 HO 1033 (Exhibits B and C, respectively). Policy No. 53 H0 1033 (Exhibit B) was
for 542 pieces of logs equivalent to 499,950 board feet. Policy No. 53 H0 1033 was
for 853 pieces of logs equivalent to 695,548 board feet (Exhibit C). The total cargo
insured under the two marine policies accordingly consisted of 1,395 logs, or the
equivalent of 1,195.498 bd. ft.
After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the
two marine policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to

be exported were lost during loading operations in the Diapitan Bay. The logs were
to be loaded on the 'SS Woodlock' which docked about 500 meters from the
shoreline of the Diapitan Bay. The logs were taken from the log pond of the plaintiff
and from which they were towed in rafts to the vessel. At about 10:00 o'clock a. m.
on March 29, 1963, while the logs were alongside the vessel, bad weather
developed resulting in 75 pieces of logs which were rafted together co break loose
from each other. 45 pieces of logs were salvaged, but 30 pieces were verified to
have been lost or washed away as a result of the accident.
In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of
'appropriately 32 pieces of log's during loading of the 'SS Woodlock'. The said letter
(Exhibit F) reads as follows:
April 4, 1963
Workmen's Insurance Company, Inc. Manila, Philippines
Gentlemen:
This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd.
ft. Philippine Lauan and Apitong Logs. We would like to inform you that we have
received advance preliminary report from our Office in Diapitan, Quezon that we
have lost approximately 32 pieces of logs during loading of the SS Woodlock.
We will send you an accurate report all the details including values as soon as same
will be reported to us.
Thank you for your attention, we wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT CORPORATION
(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.
Although dated April 4, 1963, the letter was received in the office of the defendant
only on April 15, 1963, as shown by the stamp impression appearing on the left
bottom corner of said letter. The plaintiff subsequently submitted a 'Claim
Statement demanding payment of the loss under Policies Nos. 53 HO 1032 and 53
HO 1033, in the total amount of P19,286.79 (Exhibit G).
On July 17, 1963, the defendant requested the First Philippine Adjustment
Corporation to inspect the loss and assess the damage. The adjustment company
submitted its 'Report on August 23, 1963 (Exhibit H). In said report, the adjuster
found that 'the loss of 30 pieces of logs is not covered by Policies Nos. 53 HO 1032
and 1033 inasmuch as said policies covered the actual number of logs loaded on
board the 'SS Woodlock' However, the loss of 30 pieces of logs is within the
1,250,000 bd. ft. covered by Cover Note 1010 insured for $70,000.00.

On September 14, 1963, the adjustment company submitted a computation of the

defendant's probable liability on the loss sustained by the shipment, in the total
amount of Pl1,042.04 (Exhibit 4).
On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on
the ground they defendant's investigation revealed that the entire shipment of logs
covered by the two marines policies No. 53 110 1032 and 713 HO 1033 were
received in good order at their point of destination. It was further stated that the
said loss may be considered as covered under Cover Note No. 1010 because the
said Note had become 'null and void by virtue of the issuance of Marine Policy Nos.
53 HO 1032 and 1033'(Exhibit J-1). The denial of the claim by the defendant was
brought by the plaintiff to the attention of the Insurance Commissioner by means of
a letter dated March 21, 1964 (Exhibit K). In a reply letter dated March 30, 1964,
Insurance Commissioner Francisco Y. Mandanas observed that 'it is only fair and
equitable to indemnify the insured under Cover Note No. 1010', and advised early
settlement of the said marine loss and salvage claim (Exhibit L).
On June 26, 1964, the defendant informed the Insurance Commissioner that, on
advice of their attorneys, the claim of the plaintiff is being denied on the ground
that the cover note is null and void for lack of valuable consideration (Exhibit M).

Petitioner assigned as errors of the Court of Appeals, the following:

I
THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND
VOID FOR LACK OF VALUABLE CONSIDERATION BECAUSE THE COURT DISREGARDED
THE PROVEN FACTS THAT PREMIUMS FOR THE COMPREHENSIVE INSURANCE
COVERAGE THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT
INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO SEPARATE
PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS COVER NOTES.
II
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS
RELEASED FROM LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE
DELAY IN GIVING NOTICE OF LOSS BECAUSE THE COURT DISREGARDED THE
PROVEN FACT THAT PRIVATE RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY
OBJECT TO THE CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND,
CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84
OF THE INSURANCE ACT. 5
1. Petitioner contends that the Cover Note was issued with a consideration when, by
express stipulation, the cover note is made subject to the terms and conditions of
the marine policies, and the payment of premiums is one of the terms of the
policies. From this undisputed fact, We uphold petitioner's submission that the

Cover Note was not without consideration for which the respondent court held the
Cover Note as null and void, and denied recovery therefrom. The fact that no
separate premium was paid on the Cover Note before the loss insured against
occurred, does not militate against the validity of petitioner's contention, for no
such premium could have been paid, since by the nature of the Cover Note, it did
not contain, as all Cover Notes do not contain particulars of the shipment that would
serve as basis for the computation of the premiums. As a logical consequence, no
separate premiums are intended or required to be paid on a Cover Note. This is a
fact admitted by an official of respondent company, Juan Jose Camacho, in charge of
issuing cover notes of the respondent company (p. 33, tsn, September 24, 1965).
At any rate, it is not disputed that petitioner paid in full all the premiums as called
for by the statement issued by private respondent after the issuance of the two
regular marine insurance policies, thereby leaving no account unpaid by petitioner
due on the insurance coverage, which must be deemed to include the Cover Note. If
the Note is to be treated as a separate policy instead of integrating it to the regular
policies subsequently issued, the purpose and function of the Cover Note would be
set at naught or rendered meaningless, for it is in a real sense a contract, not a
mere application for insurance which is a mere offer. 6
It may be true that the marine insurance policies issued were for logs no longer
including those which had been lost during loading operations. This had to be so
because the risk insured against is not for loss during operations anymore, but for
loss during transit, the logs having already been safely placed aboard. This would
make no difference, however, insofar as the liability on the cover note is concerned,
for the number or volume of logs lost can be determined independently as in fact it
had been so ascertained at the instance of private respondent itself when it sent its
own adjuster to investigate and assess the loss, after the issuance of the marine
insurance policies.
The adjuster went as far as submitting his report to respondent, as well as its
computation of respondent's liability on the insurance coverage. This coverage
could not have been no other than what was stipulated in the Cover Note, for no
loss or damage had to be assessed on the coverage arising from the marine
insurance policies. For obvious reasons, it was not necessary to ask petitioner to pay
premium on the Cover Note, for the loss insured against having already occurred,
the more practical procedure is simply to deduct the premium from the amount due
the petitioner on the Cover Note. The non-payment of premium on the Cover Note
is, therefore, no cause for the petitioner to lose what is due it as if there had been
payment of premium, for non-payment by it was not chargeable against its fault.
Had all the logs been lost during the loading operations, but after the issuance of
the Cover Note, liability on the note would have already arisen even before payment
of premium. This is how the cover note as a "binder" should legally operate
otherwise, it would serve no practical purpose in the realm of commerce, and is
supported by the doctrine that where a policy is delivered without requiring

payment of the premium, the presumption is that a credit was intended and policy
is valid. 7
2. The defense of delay as raised by private respondent in resisting the claim
cannot be sustained. The law requires this ground of delay to be promptly and
specifically asserted when a claim on the insurance agreement is made. The
undisputed facts show that instead of invoking the ground of delay in objecting to
petitioner's claim of recovery on the cover note, it took steps clearly indicative that
this particular ground for objection to the claim was never in its mind. The nature of
this specific ground for resisting a claim places the insurer on duty to inquire when
the loss took place, so that it could determine whether delay would be a valid
ground upon which to object to a claim against it.
As already stated earlier, private respondent's reaction upon receipt of the notice of
loss, which was on April 15, 1963, was to set in motion from July 1963 what would
be necessary to determine the cause and extent of the loss, with a view to the
payment thereof on the insurance agreement. Thus it sent its adjuster to
investigate and assess the loss in July, 1963. The adjuster submitted his report on
August 23, 1963 and its computation of respondent's liability on September 14,
1963. From April 1963 to July, 1963, enough time was available for private
respondent to determine if petitioner was guilty of delay in communicating the loss
to respondent company. In the proceedings that took place later in the Office of the
Insurance Commissioner, private respondent should then have raised this ground of
delay to avoid liability. It did not do so. It must be because it did not find any delay,
as this Court fails to find a real and substantial sign thereof. But even on the
assumption that there was delay, this Court is satisfied and convinced that as
expressly provided by law, waiver can successfully be raised against private
respondent. Thus Section 84 of the Insurance Act provides:
Section 84.Delay in the presentation to an insurer of notice or proof of loss is
waived if caused by any act of his or if he omits to take objection promptly and
specifically upon that ground.
From what has been said, We find duly substantiated petitioner's assignments of
error.
ACCORDINGLY, the appealed decision is set aside and the decision of the Court of
First Instance is reinstated in toto with the affirmance of this Court. No special
pronouncement as to costs.
SO ORDERED.
Teehankee (Chairman), Makasiar, Fernandez Guerrero, Melencio-Herrera and Plana,
JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-5915

March 31, 1955

EAGLE STAR INSURANCE CO., LTD., KURR STEAMSHIP CO., INC., ROOSEVELT
STEAMSHIP AGENCY, INC., and LEIF HOEGH & COMPANY, A/S., petitioners,
vs.
CHIA YU, respondent.
Ross, Selph, Carrascoso and Janda and Delfin L. Gonzales for petitioner.
Nabong and Sese for respondent.
REYES, A., J.:
On January 15, 1946, Atkin, Kroll & Co., loaded on the S. S. Roeph Silverlight owned
and operated by Leigh Hoegh & Co., A/S, of San Francisco California, 14 bales of
assorted underwear valued at P8,085.23 consigned to Chia Yu in the City of Manila.
The shipment was insured against all risks by Eagle Star Ins. Co. of San Francisco,
California, under a policy issued to the shipper and by the latter assigned to the
consignee. The vessel arrived in Manila on February 10, 1946, and on March 4
started discharging its cargo into the custody of the Manila Terminal Co., Inc., which
was then operating the arrastre service for the Bureau of Customs. But the 14 bales
consigned to Chia Yu only 10 were delivered to him as the remaining 3 could not be
found. Three of those delivered were also found damaged to the extent of 50 per
cent.
Chia Yu claimed indemnity for the missing and damaged bales. But the claim was
declined, first, by the carrier and afterward by the insurer, whereupon Chia Yu
brought the present action against both, including their respective agents in the
Philippines. Commenced in the Court of First Instance of Manila on November 16,
1948, or more than two years after delivery of the damaged bales and the date
when the missing bales should have been delivered, the action was resisted by the
defendants principally on the ground of prescription. But the trial court found for
plaintiff and rendered judgment in his favor for the sum claimed plus legal interest
and costs. The judgment was affirmed by the Court of Appeals, and the case is now
before us on appeal by certiorari.
Except for the controversy as to the amount for which the carrier could be held
liable under the terms of the bill of lading, the only question presented for
determination is whether plaintiff's action has prescribed.
On the part of the carrier the defense of prescription is made to rest on the
following stipulation of the bill of lading:

In any event the carrier and the ship shall be discharged from all liability in respect
of loss or damage unless suit is brought within one year after the delivery of the
goods or the date when the goods should have been delivered.
The stipulation is but a repetition of a provision contained in section 3 (6) of the
United States Carriage of Goods by Sea, Act of 1936, which was adopted and made
applicable to the Philippines by Commonwealth Act 65 and by express agreement
incorporated by reference in the bill of lading. Following our decision in Chua Kuy vs.
Everett Steamship Corporation,1 G. R. No L-5554 (May 27, 1953) and in E. R. Elser,
Inc., et al., vs. Court of Appeals,. et al.,2 G. R. No. L-6517 (November 29, 1954)
giving force and effect to this kind of stipulation in bills of lading covering shipments
from the United States to the Philippines, we have to hold that plaintiff's failure to
bring his action "within one year after the delivery of the goods or the date when
the goods should have been delivered" discharged the carrier from all liability. This
dispenses with the necessity of deciding how much could be recovered from the
carrier under the terms of the bill of lading.
The case for the insurer stands on a different footing, for its claim of prescription is
founded upon the terms of the policy and not upon the bill of lading. Under our law
the time limit for bringing a civil action upon a written contract is ten years after the
right of action accrues. (Sec. 43, Act 190; Art. 1144, New Civil Code.) But counsel for
the insurer claim that this statutory in the policy:
No suit action on this Policy, for the recovery of any claim, shall be sustainable in
any Court of law or equity unless the insured shall have fully complied with all the
terms and conditions of this Policy nor unless commenced with twelve (12) months
next after the happening of the loss . . .
To this we cannot agree.
In the case of E. Macias & Co. vs. China Fire Insurance & Co., Ltd., et al., 46 Phil.
345, relied upon by the insurer, this Court held that a clause in an insurance policy
providing that an action upon the policy by the insured must be brought within a
certain time is, if reasonable, valid and will prevail over statutory limitations of the
action. That decision, however, was rendered before the passage of Act 4101, which
amended the Insurance Act by inserting the following section in chapter one
thereof:
SEC. 61-A. Any condition, stipulation or agreement in any policy of insurance,
limiting the time for commencing an action thereunder to a period of less than one
year from the time when the cause of action accrues, is void.
As "matters respecting a remedy, such as the bringing of suit, admissibility of
evidence, and statute of limitations, depend upon the law of the place where the
suit is brought" (Insular Government vs. Frank, 13 Phil. 236), any policy clause

repugnant to this amendment to the Insurance Act cannot be given effect in an

action in our courts.
Examining the policy sued upon in the present case, we find that its prescriptive
clause, if given effect in accordance with the terms of the policy, would reduce the
period allowed the insured for bringing his action to less than one year. This is so
because the said clause makes the prescriptive period begin from the happening of
the loss and at the same time provides that the no suit on the policy shall be
sustainable in any court unless the insured shall have first fully complied with all the
terms and conditions of the policy, among them that which requires that, as so as
the loss is determined, written claim therefor be filed with the carrier and that the
letter to the carrier and the latter's reply should be attached to the claim papers to
be sent to the insurer. It is obvious that compliance with this condition precedent
will necessarily consume time and thus shorten the period for bringing suit to less
than one year if the period is to begin, as stated in the policy, from "the happening
of the loss." Being contrary to the law of the forum, such stipulation cannot be given
effect.
It may perhaps be suggested that the policy clause relied on by the insurer for
defeating plaintiff's action should be given the construction that would harmonize it
with section 61-A of the Insurance Act by taking it to mean that the time given the
insured for bringing his suit is twelve months after the cause of action accrues. But
the question then would be: When did the cause of action accrue? On that question
we agree with the court below that plaintiff's cause of action did not accrue until his
claim was finally rejected by the insurance company. This is because, before such
final rejection, there was no real necessity for bringing suit. As the policy provides
that the insured should file his claim, first, with the carrier and then with the insurer,
he had a right to wait for his claim to be finally decided before going to court. The
law does not encourages unnecessary litigation.
At this junction it should be explained that while the decision of the Court of Appeals
states that the claim against the insurance company "was finally rejected o April 22,
1947, as correctly concluded by the court below," it is obvious from the context and
we find it to be a fact that the date meant was April 22, 1948, for this was the date
when, according to the finding of the trial court, the insurance company in London
rejected the claim. The trial court's decision says:
On September 21, 1946, after Roosevelt Steamship Agency Inc., and Manila
Terminal Co., Inc., denied plaintiff's claim, a formal insurance claim was filed with
Kerr & Co., Ltd., local agents of Eagle Star Insurance Co., Ltd., (Exh. L.)Kerr & Co.,
Ltd., referred the insurance claim to Eagle Star Insurance Co., Ltd. in London but the
latter, after insistent request of plaintiffs for action, rejected the claim on April 22,
1948, giving as its reasons the lapse of the expiry day of the risks covered by the
policy and returned the claim documents only in August of 1948. (pp. 87-88, Record
on Appeal.)

Furthermore, there is nothing in the record to show that the claim was rejected in
the year 1947, either by the insurance company in London or its settling agents in
the Philippines, while on the other hand defendant's own Exhibit L-1 is indisputable
proof that it was on 22nd April 1948" that the settling agents informed the claimant
"that after due and careful consideration, our Principals confirm our declination of
this claim." It not appearing that the settling agents' decision on claims against their
principals were not subject to reversal or modification by the latter, while on the
contrary the insurance policy expressly stipulates, under the heading "Important
Notice," that the said agents "have authority to certify only as to the nature, cause
and extent of the damage," and it furthermore appearing that a reiteration of
plaintiffs claim was made to the principals and the latter gave it due course since
only "after due and careful consideration" did they confirm the action taken by the
agents, we conclude that, for the purpose of the present action, we should consider
plaintiff's claim to have been finally rejected by the insurer on April 22, 1948.
Having been filed within twelve months form that date, the action cannot be
deemed to have prescribed even on the supposition that the period given the
insured for bringing suit under the prescriptive clause of the policy is twelve months
after the accrual of the cause of action.
In concluding, we may state that contractual limitations contained in insurance
policies are regarded with extreme jealousy by courts and will be strictly construed
against the insurer and should not be permitted to prevent a recovery when their
just and honest application would not produce that result. (46 C. J. S. 273.)
Wherefore, the judgment appealed from is reversed with respect to the carrier and
its agents but affirmed with respect to the insurance company and its agents, with
costs against the latter.
Pablo, Bengzon, Padilla, Jugo, Bautista Angelo, Concepcion, and Reyes,
J.B.L., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-24566

July 29, 1968

AGRICULTURAL CREDIT & COOPERATIVE FINANCING ADMINISTRATION

(ACCFA), plaintiff-appellant,
vs.
ALPHA INSURANCE & SURETY CO., INC., defendant-appellee,
RICARDO A. LADINES, ET AL., third party-defendants-appellees.
Deogracias E. Lerma and Esmeraldo U. Guloy for plaintiff-appellant.
L. L. Reyes for defendant-appellee.
Geronimo F. Abellera for third party defendants-appellees.
REYES, J.B.L., J.:
Appeal, on points of law, against a decision of the Court of First Instance of Manila,
in its Case No. 43372, upholding a motion to dismiss.
At issue is the question whether or not the provision of a fidelity bond that no action
shall be had or maintained thereon unless commenced within one year from the
making of a claim for the loss upon which the action is based, is valid or void, in
view of Section 61-A of the Insurance Act invalidating stipulations limiting the time
for commencing an action thereon to less than one year from the time the cause of
action accrues.
Material to this decision are the following facts: 1wph1.t
According to the allegations of the complaint, in order to guarantee the Asingan
Farmers' Cooperative Marketing Association, Inc. (FACOMA) against loss on account
of "personal dishonesty, amounting to larceny or estafa of its Secretary-Treasurer,
Ricardo A. Ladines, the appellee, Alpha Insurance & Surety Company had issued, on
14 February 1958, its bond, No. P-FID-15-58, for the sum of Five Thousand Pesos
(P5,000.00) with said Ricardo Ladines as principal and the appellee as solidary
surety. On the same date, the Asingan FACOMA assigned its rights to the appellant,
Agricultural Credit Cooperative and Financing Administration (ACCFA for short), with
approval of the principal and the surety.
During the effectivity of the bond, Ricardo Ladines converted and misappropriated,
to his personal benefit, some P11,513.22 of the FACOMA funds, of which P6,307.33
belonged to the ACCFA. Upon discovery of the loss, ACCFA immediately notified in
writing the survey company on 10 October 1958, and presented the proof of loss
within the period fixed in the bond; but despite repeated demands the surety

company refused and failed to pay. Whereupon, ACCFA filed suit against appellee on
30 May 1960.
Defendant Alpha Insurance & Surety Co., Inc., (now appellee) moved to dismiss the
complaint for failure to state a cause of action, giving as reason that (1) the same
was filed more than one year after plaintiff made claim for loss, contrary to the
eighth condition of the bond, providing as follows: .
EIGHT LIMITATION OF ACTION
No action, suit or proceeding shall be had or maintained upon this Bond unless the
same be commenced within one year from the time of making claim for the loss
upon which such action, suit or proceeding, is based, in accordance with the fourth
section hereof.
(2) the complaint failed to show that plaintiff had filed civil or criminal action against
Ladines, as required by conditions 4 and 11 of the bond; and (3) that Ladines was a
necessary and indispensable party but had not been joined as such.
At first, the Court of First Instance denied dismissal; but, upon reconsideration, the
court reversed its original stand, and dismissed the complaint on the ground that
the action was filed beyond the contractual limitation period (Record on Appeal,
pages 56-59).
Hence, this appeal.
We find the appeal meritorious.
A fidelity bond is, in effect, in the nature of a contract of insurance against loss from
misconduct, and is governed by the same principles of interpretation: Mechanics
Savings Bank & Trust Co. vs. Guarantee Company, 68 Fed. 459; Pao Chan Wei vs.
Nemorosa, 103 Phil. 57. Consequently, the condition of the bond in question,
limiting the period for bringing action thereon, is subject to the provisions of Section
61-A of the Insurance Act (No. 2427), as amended by Act 4101 of the preCommonwealth Philippine Legislature, prescribing that

SEC. 61-A A condition, stipulation or agreement in any policy of insurance,

limiting the time for commencing an action thereunder to a period of less than one
year from the time when the cause of action accrues is void.
Since a "cause of action" requires, as essential elements, not only a legal right of
the plaintiff and a correlative obligation of the defendant but also "an act or
omission of the defendant in violation of said legal right" (Maao Sugar Central vs.
Barrios, 79 Phil. 666), the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its duty (in this case, to pay the

amount of the bond). The year for instituting action in court must be reckoned,
therefore, from the time of appellee's refusal to comply with its bond; it can not be
counted from the creditor's filing of the claim of loss, for that does not import that
the surety company will refuse to pay. In so far, therefore, as condition eight of the
bond requires action to be filed within one year from the filing of the claim for loss,
such stipulation contradicts the public policy expressed in Section 61-A of the
Philippine Insurance Act. Condition eight of the bond, therefore, is null and void, and
the appellant is not bound to comply with its provisions.
In Eagle Star Insurance Co. vs. Chia Yu, 96 Phil. 696, 701, this Court ruled: .
1wph1.t
It may perhaps be suggested that the policy clause relied on by the insurer for
defeating plaintiff's action should be given the construction that would harmonize it
with section 61-A of the Insurance Act by taking it to mean that the time given the
insured for bringing his suit is twelve months after the cause of action accrues. But
the question then would be: When did the cause of action accrue? On that question
we agree with the court below that plaintiff's cause of action did not accrue until his
claim was finally rejected by the insurance company. This is because, before such
final rejection, there was no real necessity for bringing suit. As the policy provides
that the insured should file his claim, first, with the carrier and then with the insurer,
he had a right to wait for his claim to be finally decided before going to court. The
law does not encourage unnecessary litigation.
The discouraging of unnecessary litigation must be deemed a rule of public policy,
considering the unrelieved congestion in the courts.
As a consequence of the foregoing, condition eight of the Alpha bond is null and
void, and action may be brought within the statutory period of limitation for written
contracts (New Civil Code, Article 1144). The case of Ang vs. Fulton Fire Insurance
Co., 2 S.C.R.A. 945 (31 July 1961), relied upon by the Court a quo, is no authority
against the views herein expressed, since the effect of Section 61-A of the Insurance
Law on the terms of the Policy or contract was not there considered.
The condition of previous conviction (paragraph b, clause 4, of the contract) having
been deleted by express agreement and the surety having assumed solidary
liability, the other grounds of the motion to dismiss are equally untenable. A creditor
may proceed against any one of the solidary debtors, or some or all of them
simultaneously (Article 1216, New Civil Code).
WHEREFORE, the appealed order granting the motion to dismiss is reversed and set
aside, and the records are remanded to the Court of First Instance, with instructions
to require defendant to answer and thereafter proceed in conformity with the law
and the Rules of Court. Costs against appellee. So ordered.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and

Fernando, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION

G.R. No. 89741 March 13, 1991

SUN INSURANCE OFFICE, LTD., petitioner,
vs.
COURT OF APPEALS and EMILIO TAN, respondents.
Alfonso Felix, Jr., for petitioner.
William B. Devilles for private respondent.

PARAS, J.:p
This is a petition for review on certiorari of the June 20, 1989 decision 1 of the Court
of Appeals in CA-G.R. SP. Case No. 13848 affirming the November 3, 1987 and
January 14, 1988 orders of the Regional Trial Court 2 of Iloilo, Branch 27, in Civil Case
No. 16817, denying the motion to dismiss and the subsequent motion for
reconsideration; and the August 22, 1989 resolution of the same court denying the
motion for reconsideration.
On August 15, 1983, herein private respondent Emilio Tan took from herein
petitioner a P300,000.00 property insurance policy to cover his interest in the
electrical supply store of his brother housed in a building in Iloilo City. Four (4) days
after the issuance of the policy, the building was burned including the insured store.
On August 20, 1983, Tan filed his claim for fire loss with petitioner, but on February
29, 1984, petitioner wrote Tan denying the latter's claim. On April 3, 1984, Tan wrote
petitioner, seeking reconsideration of the denial of his claim. On September 3, 1985,
Tan's counsel wrote the Insurer inquiring about the status of his April 3, 1984
request for reconsideration. Petitioner answered the letter on October 11, 1985,
advising Tan's counsel that the Insurer's denial of Tan's claim remained unchanged,
enclosing copies of petitioners' letters of February 29, 1984 and May 17, 1985
(response to petition for reconsideration). On November 20, 1985, Tan filed Civil
Case No. 16817 with the Regional Trial Court of Iloilo, Branch 27 but petitioner filed
a motion to dismiss on the alleged ground that the action had already prescribed.
Said motion was denied in an order dated November 3, 1987; and petitioner's
motion for reconsideration was also denied in an order dated January 14, 1988.

Petitioner went to the Court of Appeals and sought the nullification of the said Nov.
3, 1987 and January 14, 1988 orders, but the Court of Appeals, in its June 20, 1989
decision denied the petition and held that the court a quomay continue until its final
termination.
A motion for reconsideration was filed, but the same was denied by the Court of
Appeals in its resolution of August 22, 1989 (Rollo, pp. 42-43).
Hence, the instant petition.
The Second Division of this Court, in its resolution of December 18, 1989 resolved to
give due course to the petition and to require the parties to submit simultaneous
memoranda (Ibid., p. 56).
Petitioner raised two (2) issues which may be stated in substance, as follows:
I
WHETHER OR NOT THE FILING OF A MOTION FOR RECONSIDERATION INTERRUPTS
THE TWELVE (12) MONTHS PRESCRIPTIVE PERIOD TO CONTEST THE DENIAL OF THE
INSURANCE CLAIM; and
II
WHETHER OR NOT THE REJECTION OF THE CLAIM SHALL BE DEEMED FINAL ONLY IF
IT CONTAINS WORDS TO THE EFFECT THAT THE DENIAL IS FINAL.
The answer to the first issue is in the negative.
While it is a cardinal principle of insurance law that a policy or contract of insurance
is to be construed liberally in favor of the insured and strictly against the insurer
company, yet, contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves
have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary and popular sense (Pacific Banking Corp. v. Court
of Appeals, 168 SCRA 1 [1988]).
Condition 27 of the Insurance Policy, which is the subject of the conflicting
contentions of the parties, reads:
27. Action or suit clause If a claim be made and rejected and an action or suit be
not commenced either in the Insurance Commission or in any court of competent
jurisdiction within twelve (12) months from receipt of notice of such rejection, or in
case of arbitration taking place as provided herein, within twelve (12) months after
due notice of the award made by the arbitrator or arbitrators or umpire, then the
claim shall for all purposes be deemed to have been abandoned and shall not
thereafter be recoverable hereunder.

As the terms are very clear and free from any doubt or ambiguity whatsoever, it
must be taken and understood in its plain, ordinary and popular sense pursuant to
the above-cited principle laid down by this Court.
Respondent Tan, in his letter addressed to the petitioner insurance company dated
April 3, 1984 (Rollo, pp. 50-52), admitted that he received a copy of the letter of
rejection on April 2, 1984. Thus, the 12-month prescriptive period started to run
from the said date of April 2, 1984, for such is the plain meaning and intention of
Section 27 of the insurance policy.
While the question of whether or not the insured was definitely advised of the
rejection of his claim through the letter (Rollo, pp. 48-49) of petitioner dated
February 29, 1984, may arise, the certainty of the denial of Tan's claim was clearly
manifested in said letter, the pertinent portion of which reads:
We refer to your claim for fire loss of 20th August, 1983 at Huervana St., La Paz,
Iloilo City.
We now have the report of our adjusters and after a thorough and careful review of
the same and the accompanying documents at hand, we are rejecting, much to our
regrets, liability for the claim under our policies for one or more of the following
reasons:
1. xxx xxx xxx
2. xxx xxx xxx
For your information, we have referred all these matters to our lawyers for their
opinion as to the compensability of your claim, particularly referring to the above
violations. It is their opinion and in fact their strong recomendation to us to deny
your claim. By this letter, we do not intend to waive or relinquish any of our rights or
defenses under our policies of insurance.
It is also important to note the principle laid down by this Court in the case of Ang
v. Fulton Fire Insurance Co., (2 SCRA 945 [1961]), to wit:
The condition contained in an insurance policy that claims must be presented within
one year after rejection is not merely a procedural requirement but an important
matter essential to a prompt settlement of claims against insurance companies as it
demands that insurance suits be brought by the insured while the evidence as to
the origin and cause of destruction have not yet disappeared.
In enunciating the above-cited principle, this Court had definitely settled the
rationale for the necessity of bringing suits against the Insurer within one year from
the rejection of the claim. The contention of the respondents that the one-year
prescriptive period does not start to run until the petition for reconsideration had
been resolved by the insurer, runs counter to the declared purpose for requiting

that an action or suit be filed in the Insurance Commission or in a court of

competent jurisdiction from the denial of the claim. To uphold respondents'
contention would contradict and defeat the very principle which this Court had laid
down. Moreover, it can easily be used by insured persons as a scheme or device to
waste time until any evidence which may be considered against them is destroyed.
It is apparent that Section 27 of the insurance policy was stipulated pursuant to
Section 63 of the Insurance Code, which states that:
Sec. 63. A condition, stipulation or agreement in any policy of insurance, limiting the
time for commencing an action thereunder to a period of less than one year from
the time when the cause of action accrues, is void.
The crucial issue in this case is: When does the cause of action accrue?
In support of private respondent's view, two rulings of this Court have been cited,
namely, the case of Eagle Star Insurance Co. vs. Chia Yu (96 Phil. 696 (1955]), where
the Court held:
The right of the insured to the payment of his loss accrues from the happening of
the loss. However, the cause of action in an insurance contract does not accrue until
the insured's claim is finally rejected by the insurer. This is because before such final
rejection there is no real necessity for bringing suit.
and the case of ACCFA vs. Alpha Insurance & Surety Co., Inc. (24 SCRA 151 [1968],
holding that:
Since "cause of action" requires as essential elements not only a legal right of the
plaintiff and a correlated obligation of the defendant in violation of the said legal
right, the cause of action does not accrue until the party obligated (surety) refuses,
expressly or impliedly, to comply with its duty (in this case to pay the amount of the
bond).
Indisputably, the above-cited pronouncements of this Court may be taken to mean
that the insured's cause of action or his right to file a claim either in the Insurance
Commission or in a court of competent jurisdiction commences from the time of the
denial of his claim by the Insurer, either expressly or impliedly.
But as pointed out by the petitioner insurance company, the rejection referred to
should be construed as the rejection, in the first instance, for if what is being
referred to is a reiterated rejection conveyed in a resolution of a petition for
reconsideration, such should have been expressly stipulated.
Thus, to allow the filing of a motion for reconsideration to suspend the running of
the prescriptive period of twelve months, a whole new body of rules on the matter
should be promulgated so as to avoid any conflict that may be brought by it, such
as:

a) whether the mere filing of a plea for reconsideration of a denial is sufficient or

must it be supported by arguments/affidavits/material evidence;
b) how many petitions for reconsideration should be permitted?
While in the Eagle Star case (96 Phil. 701), this Court uses the phrase "final
rejection", the same cannot be taken to mean the rejection of a petition for
reconsideration as insisted by respondents. Such was clearly not the meaning
contemplated by this Court. The Insurance policy in said case provides that the
insured should file his claim, first, with the carrier and then with the insurer. The
"final rejection" being referred to in said case is the rejection by the insurance
company.
PREMISES CONSIDERED, the questioned decision of the Court of Appeals is
REVERSED and SET ASIDE, and Civil Case No. 16817 filed with the Regional Trial
Court is hereby DISMISSED.
SO ORDERED.
Melencio-Herrera, Padilla, Sarmiento and Regalado, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-27932 October 30, 1972

UNION MANUFACTURING CO., INC. and the REPUBLIC BANK, plaintiffs,
REPUBLIC BANK, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY CO., INC., defendant-appellee.
Armando L. Abad, Sr. for plaintiff-appellant.
Gamelo, Francisco and Aquino for defendant-appellee.

FERNANDO, J.:p
In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co.,
Inc., defendant in the lower court and now appellee, was able to avoid liability upon
proof that there was a violation of a warranty. There was no denial thereof from the

insured, Union Manufacturing Co., Inc. With such a legally crippling blow, the effort
of the Republic Bank, the main plaintiff and now the sole appellant, to recover on
such policy as mortgagee, by virtue of the cover note in the insurance policy
providing that it is entitled to the payment of loss or damages as its interest may
appear, was in vain. The defect being legally incurable, its appeal is likewise futile.
We affirm.
As noted in the decision, the following facts are not disputed: "(1) That on January
12, 1962, the Union Manufacturing Co., Inc. obtained certain loans, overdrafts and
other credit accommodations from the Republic Bank in the total sum of
P415,000.00 with interest at 9% per annum from said date and to secure the
payment thereof, said Union Manufacturing Co., Inc. executed a real and chattel
mortgages on certain properties, which are more particularly described and listed at
the back of the mortgage contract ...; (2) That as additional condition of the
mortgage contract, the Union Manufacturing Co., Inc. undertook to secure insurance
coverage over the mortgaged properties for the same amount of P415,000.00
distributed as follows: (a) Buildings, P30,000.00; (b) Machineries, P300,000.00; and
(c) Merchandise Inventory, P85,000.00, giving a total of P415,000.00; (3) That as
Union Manufacturing Co., Inc. failed to secure insurance coverage on the mortgaged
properties since January 12, 1962, despite the fact that Cua Tok, its general
manager, was reminded of said requirement, the Republic Bank procured from the
defendant, Philippine Guaranty Co., Inc. an insurance coverage on loss against fire
for P500,000.00 over the properties of the Union Manufacturing Co., Inc., as
described in defendant's 'Cover Note' dated September 25, 1962, with the
annotation that loss or damage, if any, under said Cover Note is payable to Republic
Bank as its interest may appear, subject however to the printed conditions of said
defendant's Fire Insurance Policy Form; (4) That on September 27, 1962, Fire
Insurance Policy No. 43170 ... was issued for the sum of P500,000.00 in favor of the
assured, Union Manufacturing Co., Inc., for which the corresponding premium in the
sum of P8,328.12, which was reduced to P6,688.12, was paid by the Republic Bank
to the defendant, Philippine Guaranty Co., Inc. ...; (5) That upon the expiration of
said fire policy on September 25, 1963, the same was renewed by the Republic
Bank upon payment of the corresponding premium in the same amount of
P6,663.52 on September 26, 1963; (6) That in the corresponding voucher ..., it
appears that although said renewal premium was paid by the Republic Bank, such
payment was for the account of Union Manufacturing Co., Inc. and that the cash
voucher for the payment of the first premium was paid also by the Republic Bank
but for the account Union Manufacturing Co., Inc.; (7) That sometime on September
6, 1964, a fire occurred in the premises of the Union Manufacturing Co., Inc.; (8)
That on October 6, 1964, the Union Manufacturing Co., Inc. filed its fire claim with
the defendant Philippine Guaranty Co., Inc., thru its adjuster, H. H. Bayne
Adjustment Co., which was denied by said defendant in its letter dated November
27, 1964 ..., on the following grounds: 'a. Policy Condition No. 3 and/or the 'Other
Insurance Clause' of the policy violated because you did not give notice to us the

other insurance which you had taken from New India for P80,000.00, Sincere
Insurance for P25,000.00 and Manila Insurance for P200,000.00 with the result that
these insurances, of which we became aware of only after the fire, were not
endorsed on our policy; and (b) Policy Condition No. 11 was not complied with
because you have failed to give to our representatives the required documents and
other proofs with respect to your claim and matters touching on our liability, if any,
and the amount of such liability'; (9) That as of September, 1962, when the
defendant Philippine Guaranty Co., issued Fire Insurance Policy No. 43170 ... in the
sum of P500,000.00 to cover the properties of the Union Manufacturing Co., Inc., the
same properties were already covered by Fire Policy No. 1533 of the Sincere
Insurance Company for P25,000.00 for the period from October 7, 1961 to October
7, 1962 ...; and by insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic
Insurance Agency for the total sum of P300,000.00 and for periods respectively,
from January 27, 1962 to January 27, 1963, and from June 1, 1962 to June 1, 1963;
and (10) That when said defendant's Fire Insurance Policy No. 43170 was already in
full force and effect, the Union Manufacturing Co., Inc. without the consent of the
defendant, Philippine Guaranty Co., Inc., obtained other insurance policies totalling
P305,000.00 over the same properties prior to the fire, to wit: (1) Fire Policy No. 250
of New India Assurance Co., Ltd., for P80,000.00 for the period from May 27, 1964 to
May 27, 1965 ...; (2) Fire Policy No. 3702 of the Sincere Insurance Company for
P25,000.00 for the period from October 7, 1963 to October 7, 1964 ...; and (3) Fire
Policy No. 6161 of Manila Insurance Co. for P200,000.00 for the period from May 15,
1964 to May 15, 1965 ... ." 1 There is in the cover note 2 and in the fire insurance
policy 3 the following warranty: "[Co- Insurance Declared]: Nil." 4
Why the appellant Republic Bank could not recover, as payee, in case of loss as its
"interest may appear subject to the terms and conditions, clauses and warranties"
of the policy was expressed in the appealed decision thus: "However, inasmuch as
the Union Manufacturing Co., Inc. has violated the condition of the policy to the
effect that it did not reveal the existence of other insurance policies over the same
properties, as required by the warranty appearing on the face of the policy issued
by the defendant and that on the other hand said Union Manufacturing Co., Inc.
represented that there were no other insurance policies at the time of the issuance
of said defendant's policy, and it appearing furthermore that while the policy of the
defendant was in full force and effect the Union Manufacturing Co., Inc. secured
other fire insurance policies without the written consent of the defendant endorsed
on the policy, the conclusion is inevitable that both the Republic Bank and Union
Manufacturing Co., Inc. cannot recover from the same policy of the defendant
because the same is null and void." 5 The tone of confidence apparent in the above
excerpts from the lower court decision is understandable. The conclusion reached
by the lower court finds support in authoritative precedents. It is far from easy,
therefore, for appellant Republic Bank to impute to such a decision a failure to abide
by the law. Hence, as noted at the outset, the appeal cannot prosper. An affirmance
is indicated.

It is to Santa Ana v. Commercial Union Assurance Co., 6 a 1930 decision, that one
turns to for the first explicit formulation as to the controlling principle. As was made
clear in the opinion of this Court, penned by Justice Villa-Real: "Without deciding
whether notice of other insurance upon the same property must be given in writing,
or whether a verbal notice is sufficient to render an insurance valid which requires
such notice, whether oral or written, we hold that in the absolute absence of such
notice when it is one of the conditions specified in the fire insurance policy, the
policy is null and void." 7 The next year, in Ang Giok Chip v. Springfield Fire & Marine
Ins. Co., 8 the conformity of the insured to the terms of the policy, implied from the
failure to express any disagreement with what is provided for, was stressed in these
words of the ponente, Justice Malcolm: "It is admitted that the policy before us was
accepted by the plaintiff. The receipt of this policy by the insured without objection
binds both the acceptor and the insured to the terms thereof. The insured may not
thereafter be heard to say that he did not read the policy or know its terms, since it
is his duty to read his policy and it will be assumed that he did so." 9 As far back as
1915, in Young v. Midland Textile Insurance Company, 10 it was categorically set
forth that as a condition precedent to the right of recovery, there must be
compliance on the part of the insured with the terms of the policy. As stated in the
opinion of the Court through Justice Johnson: "If the insured has violated or failed to
perform the conditions of the contract, and such a violation or want of performance
has not been waived by the insurer, then the insured cannot recover. Courts are not
permitted to make contracts for the parties. The function and duty of the courts
consist simply in enforcing and carrying out the contracts actually made. While it is
true, as a general rule, that contracts of insurance are construed most favorably to
the insured, yet contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves
have used. If such terms are clear and unambiguous they must be taken and
understood in their plain, ordinary and popular sense." 11 More specifically, there
was a reiteration of this Santa Ana ruling in a decision by the then Justice, later
Chief Justice, Bengzon, in General Insurance & Surety Corp. v. Ng Hua. 12 Thus: "The
annotation then, must be deemed to be a warranty that the property was not
insured by any other policy. Violation thereof entitles the insurer to rescind. (Sec.
69, Insurance Act) Such misrepresentation is fatal in the light of our views in Santa
Ana v. Commercial Union Assurance Company, Ltd. ... . The materiality of nondisclosure of other insurance policies is not open to doubt." 13 As a matter of fact, in
a 1966 decision, Misamis Lumber Corp. v. Capital Ins. & Surety Co., Inc., 14 Justice
J.B.L. Reyes, for this Court, made manifest anew its adherence to such a principle in
the face of an assertion that thereby a highly unfavorable provision for the insured
would be accorded recognition. This is the language used: "The insurance contract
may be rather onerous ('one sided', as the lower court put it), but that in itself does
not justify the abrogation of its express terms, terms which the insured accepted or
adhered to and which is the law between the contracting parties." 15

There is no escaping the conclusion then that the lower court could not have
disposed of this case in a way other than it did. Had it acted otherwise, it clearly
would have disregarded pronouncements of this Court, the compelling force of
which cannot be denied. There is, to repeat, no justification for a reversal.
WHEREFORE, the decision of the lower court of March 31, 1967 is affirmed. No
costs.
Concepcion, C.J., Zaldivar, Barredo, Makasiar, Antonio and Esguerra, JJ., concur.
Castro and Teehankee, JJ., reserve their votes.
Makalintal, J., is on leave.

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 CAG.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 19B 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. FHO/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 FiftyFive 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 allegedP50,000,000.00 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 worthP19,500,000.00 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 toP608,986.00 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 plaintiffappellee 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

Exhs.
P-DD,

Fuze Industries 19,550,400.00 January 20, 1996

inclusive

Manufacturer
Phils.

Amount
(pesos)

Dates Covered

January 31, 1996

February 12,
1996
February 20,
1996
February 23,
1996

Exhs. EE-HH Tomco

,
Commercial
Press
inclusive

1,712,000.00 December 19,

1995
January 24, 1996
February 21,
1996
November 24,
1995

Exhs.
II-QQ,
inclusive

Precious Belen 2,720,400.00 January 13, 1996

Trading

January 19, 1996

January 26, 1996
February 3, 1996
February 13,
1996
February 20,
1996
February 27,
1996

Exhs. RREEE,
inclusive

Wisdom
Manpower
Services

361,966.00

April 3, 1996
April 12, 1996
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. GGGNNN,
inclusive

Costs of Letters 15,159,144.71 May 29, 1995

of
June 15, 1995
Credit for
July 5, 1995
imported raw
September 4,
materials
1995
October 2, 1995
October 27, 1995
January 8, 1996
March 19, 1996

Exhs. GGG11
- GGG-24,

SCCFI
statements of
account

384,794.38

June 15, 1995

June 28, 1995
August 1, 1995

HHH-12,
HHH-22, III11, III-14,

September 4,
1995

JJJ-13, KKK11, LLL-5

September 8,
1995
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 plaintiffappellee 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 bybarangay officials, 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 wasfaulty
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] InVerendia 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
andP167,058.47 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.

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 Decision 2 of the Regional Trial Court,
Branch 15, Manila (RTC), and its February 24, 2012 Resolution 3 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 latters 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 dutybound 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 attorneys 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 (P15,000,000.00) 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 (PhP500,000.00) as
and by way of attorneys 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 PAPs 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 attorneys 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
(PhP15,000,000.00) 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 (PhP500,000.00)
awarded to PAP Co., Ltd. as attorneys 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
I

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
Malayans 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 Code8 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 Code 9 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 Malayans 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.
PAPs 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 Courts 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 renewed 11 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 insurers 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 Malayans authorized insurance agent,
Rodolfo Talusan, who procured the original policy from Malayan, not RCBC. This was
the reason why Talusans testimony was dispensed with.
Moreover, in the previous hearing held on November 17, 2005, 14 PAPs hostile
witness, Alexander Barrera, Administrative Assistant of Malayan, testified that he
was the one who procured Malayans 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, PAPs 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:
Q
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.
Q
To notify whom?
A
I told my Secretary to inform the bank.
Q
You are referring to RCBC?
A
Yes, sir.
xxxx
Q
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?
A
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.
Q

Who was the secretary you instructed to contact Malayan Insurance, the defendant
in this case?
A
Dory Ramos.
Q
How many secretaries do you have at that time in your office?
A
Only one, sir.
Q
Do you know a certain Maricar Jardiniano?
A
Yes, sir.
Q
Why do you know her?
A
Because she is my secretary.
Q
So how many secretaries did you have at that time?
A
Two, sir.
Q
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?
A
She informed me that the notification was already given to Malayan Insurance.
Q

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?
A
I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.
Q
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?
A
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?
A
I do not know, sir.
Q
How did you know that this person from Malayan Insurance came to your place?
A
It is according to the report given to me.
Q
Who gave that report to you?
A
Dory Ramos.
Q
Was that report in writing or verbally done?
A
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
Q
When did you transfer the machineries and equipments before the renewal or after
the renewal of the insurance?
A
After the renewal.
COURT
Q
You understand my question?
A
Yes, Your Honor.17 [Emphasis supplied]
This enfeebles PAPs 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 Malayans 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 PAPs 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 Malayans 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 insureds 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.