Supreme Court of the Philippines

G.R. No. 95641

THIRD DIVISION
G.R. No. 95641, September 22, 1994
SANTOS B. AREOLA AND LYDIA D. AREOLA, PETITIONERS-
APPELLANTS, VS. COURT OF APPEALS AND PRUDENTIAL
GUARANTEE AND ASSURANCE, INC., RESPONDENTS-APPELLEES.

DECISION

ROMERO, J.:

On June 29, 1985, seven months after the issuance of petitioner Santos
Areola's Personal Accident Insurance Policy No. PA-20015, respondent
insurance company unilaterally cancelled the same since company records
revealed that petitioner-insured failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to reinstate same

policy it had previously cancelled and even proposed to extend its lifetime to
December 17, 1985, upon a finding that the cancellation was erroneous and
that the premiums were paid in full by petitioner-insured but were not
remitted by Teofilo M. Malapit, respondent insurance company's branch
manager.

These, in brief, are the material facts that gave rise to the action for damages
due to breach of contract instituted by petitioner-insured before Branch 40
RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act of cancelling subject insurance policy entitle
petitioner-insured to payment of damages?
(2) Did the subsequent act of reinstating the wrongfully cancelled insurance
policy by respondent insurance company, in an effort to rectify such error,
obliterate whatever liability for damages it may have to bear, thus absolving
it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured,
Santos Areola, a lawyer from Dagupan City, bought, through the Baguio City
branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as
Prudential), a personal accident insurance policy covering the one-year
period between noon of November 28, 1984 and noon of November 28,
1985. Under the terms of the statement of account issued by respondent
[1]

insurance company, petitioner-insured was supposed to pay the total amount

of P1,609.65 which included the premium of P1,470.00, documentary stamp
of P110.25 and 2% premium tax of P29.40. At the lower left-hand corner of
[2]

the statement of account, the following is legibly printed:

"This Statement of Account must not be considered a receipt. Official

Receipt will be issued to you upon payment of this account.
If payment is made to our representative, demand for a Provisional Receipt
and if our Official Receipts is (sic) not received by you within 7 days please
notify us.
If payment is made to our office, demand for an OFFICIAL RECEIPT."

On December 17, 1984, respondent insurance company issued collector's

provisional receipt No. 9300 to petitioner-insured for the amount of
P1,609.65. On the lower portion of the receipt the following is written in
[3]

capital letters:

"Note: This collector's provisional receipt will be confirmed by our official

receipt. If our official receipt is not received by you within 7 days, please
notify us."[4]

On June 29, 1985, respondent insurance company, through its Baguio City
manager, Teofilo M. Malapit, sent petitioner-insured Endorsement No. BG-
002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of
premium effective as of inception dated." The same endorsement also
[5]
credited "a return premium of P1,609.65 plus documentary stamps and
premium tax" to the account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted

Carlito Ang, agent of respondent insurance company, and demanded the
issuance of an official receipt. Ang told petitioner-insured that the
cancellation of the policy was a mistake but he would personally see to its
rectification. However, petitioner-insured failed to receive any official receipt
from Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent insurance

company a letter demanding that he be insured under the same terms and
conditions as those contained in Policy No. PA-BG-20015 commencing upon
its receipt of his letter, or that the current commercial rate of increase on the
payment he had made under provisional receipt No. 9300 be returned within
five days. Areola also warned that should his demands be unsatisfied, he
[6]

would sue for damages.

On July 17, 1985, he received a letter from production manager Malapit

informing him that the "partial payment" of P1,000.00 he had made on the
policy had been "exhausted pursuant to the provisions of the Short Period
Rate Scale" printed at the back of the policy. Malapit warned Areola that
should he fail to pay the balance, the company's liability would cease to
operate.[7]

In reply to the petitioner-insured's letter of July 15, 1985, respondent

insurance company, through its Assistant Vice-President Mariano M. Ampil
III, wrote Areola a letter dated July 25, 1985 stating that the company was
verifying whether the payment had in fact been remitted to said company and
why no official receipt had been issued therefor. Ampil emphasized that the
official receipt should have been issued seven days from the issuance of the
provisional receipt but because no official receipt had been issued in Areola's
name, there was reason to believe that no payment had been made.
Apologizing for the inconvenience, Ampil expressed the company's concern
by agreeing "to hold you cover (sic) under the terms of the referenced policy
until such time that this matter is cleared."
[8]
On August 3, 1985, Ampil wrote Areola another letter confirming that the
amount of P1,609.65 covered by provisional receipt No. 9300 was in fact
received by Prudential on December 17, 1984. Hence, Ampil informed
Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to
December 17, 1985 or one year from the date when payment was received."
Apologizing again for the inconvenience caused Areola, Ampil exhorted him
to indicate his conformity to the proposal by signing on the space provided
for in the letter.
[9]

The letter was personally delivered by Carlito Ang to Areola on August 13,
1985 but unfortunately, Areola and his wife, Lydia, as early as August 6,
[10]

1985 had filed a complaint for breach of contract with damages before the
lower court.

In its Answer, respondent insurance company admitted that the cancellation

of petitioner-insured's policy was due to the failure of Malapit to turn over the
premiums collected, for which reason no official receipt was issued to him.
However, it argued that, by acknowledging the inconvenience caused on
petitioner-insured and after taking steps to rectify its omission by reinstating
the cancelled policy prior to the filing of the complaint, respondent insurance
company had complied with its obligation under the contract. Hence, it
concluded that petitioner-insured no longer has a cause of action against it. It
insists that it cannot be held liable for damages arising from breach of
contract, having demonstrated fully well its fulfillment of its obligation.

The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-
insured, ordering respondent insurance company to pay the former the
following:

"a) P1,703.65 as actual damages;

b) P200,000.00 as moral damages; and
c) P50,000.00 as exemplary damages;
2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00;
and
3. To pay the costs."
In its decision, the court below declared that respondent insurance company
acted in bad faith in unilaterally cancelling subject insurance policy, having
done so only after seven months from the time that it had taken force and
effect and despite the fact of full payment of premiums and other charges on
the issued insurance policy. Cancellation from the date of the policy's
inception, explained the lower court, meant that the protection sought by
petitioner-insured from the risks insured against was never extended by
respondent insurance company. Had the insured met an accident at the time,
the insurance company would certainly have disclaimed any liability because
technically, the petitioner could not have been considered insured.
Consequently, the trial court held that there was breach of contract on the part
of respondent insurance company, entitling petitioner-insured to an award of
the damages prayed for.

This ruling was challenged on appeal by respondent insurance company,

denying bad faith on its part in unilaterally cancelling subject insurance
policy.

After consideration of the appeal, the appellate court issued a reversal of the
decision of the trial court, convinced that the latter had erred in finding
respondent insurance company in bad faith for the cancellation of petitioner-
insured's policy. According to the Court of Appeals, respondent insurance
company was not motivated by negligence, malice or bad faith in cancelling
subject policy. Rather, the cancellation of the insurance policy was based on
what the existing records showed, i.e., absence of an official receipt issued to
petitioner-insured confirming payment of premiums. Bad faith, said the Court
of Appeals, is some motive of self-interest or ill-will; a furtive design or
ulterior purpose, proof of which must be established convincingly. On the
contrary, it further observed, the following acts indicate that respondent
insurance company did not act precipitately or willfully to inflict a wrong on
petitioner-insured: (a) the investigation conducted by Alfredo Bustamante to
verify if petitioner-insured had indeed paid the premium; (b) the letter of
August 3, 1985 confirming that the premium had been paid on December 17,
1984; (c) the reinstatement of the policy with a proposal to extend its
effective period to December 17, 1985; and (d) respondent insurance
company's apologies for the "inconvenience" caused upon petitioner-insured.
The appellate court added that respondent insurance company even relieved
Malapit, its Baguio City manager, of his job by forcing him to resign.

Petitioner-insured moved for the reconsideration of the said decision which

the Court of Appeals denied. Hence, this petition for review on certiorari
anchored on these arguments:

"I

Respondent Court of Appeals is guilty of grave abuse of discretion and

committed a serious and reversible error in not holding Respondent
Prudential liable for the cancellation of the insurance contract which was
admittedly caused by the fraudulent acts and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error and

abused its discretion in ruling that the defenses of good faith and honest
mistake can co-exist with the admitted fraudulent acts and evident bad faith.

III

Respondent Court of Appeals committed a reversible error in not finding that

even without considering the fraudulent acts of its own officer in
misappropriating the premium payment, the act itself in cancelling the
insurance policy was done with bad faith and/or gross negligence and wanton
attitude amounting to bad faith, because among others, it was Mr. Malapit -
the person who committed the fraud - who sent and signed the notice of
cancellation.

IV

Respondent Court of Appeals has decided a question of substance contrary to

law and applicable decision of the Supreme Court when it refused to award
damages in favor of herein Petitioner-Appellants."

It is petitioner-insured's submission that the fraudulent act of Malapit,

manager of respondent insurance company's branch office in Baguio, in
misappropriating his premium payments is the proximate cause of the
cancellation of the insurance policy. Petitioner-insured theorized that
Malapit's act of signing and even sending the notice of cancellation himself,
notwithstanding his personal knowledge of petitioner-insured's full payment
of premiums, further reinforces the allegation of bad faith. Such fraudulent
act committed by Malapit, argued petitioner-insured, is attributable to
respondent insurance company, an artificial corporate being which can act
only through its officers or employees. Malapit's actuation, concludes
petitioner-insured, is therefore not separate and distinct from that of
respondent-insurance company, contrary to the view held by the Court of
Appeals. It must, therefore, bear the consequences of the erroneous
cancellation of subject insurance policy caused by the non-remittance by its
own employee of the premiums paid. Subsequent reinstatement, according to
petitioner-insured, could not possibly absolve respondent insurance company
from liability, there being an obvious breach of contract. After all, reasoned
out petitioner-insured, damage had already been inflicted on him and no
amount of rectification could remedy the same.

Respondent insurance company, on the other hand, argues that where

reinstatement, the equitable relief sought by petitioner-insured was granted at
an opportune moment i.e. prior to the filing of the complaint, petitioner-
insured is left without a cause of action on which to predicate his claim for
damages. Reinstatement, it further explained, effectively restored petitioner-
insured to all his rights under the policy. Hence, whatever cause of action
there might have been against it, no longer exists and the consequent award
of damages ordered by the lower court is unsustainable.

We uphold petitioner-insured's submission. Malapit's fraudulent act of

misappropriating the premiums paid by petitioner-insured is beyond doubt
directly imputable to respondent insurance company. A corporation, such as
respondent insurance company, acts solely thru its employees. The latters'
acts are considered as its own for which it can be held to account. The facts
[11]

are clear as to the relationship between private respondent insurance

company and Malapit. As admitted by private respondent insurance company
in its answer, Malapit was the manager of its Baguio branch. It is beyond
[12]

doubt that he represented its interests and acted in its behalf. His act of
receiving the premiums collected is well within the province of his authority.
Thus, his receipt of said premiums is receipt by private respondent insurance
company who, by provision of law, particularly under Article 1910 of the
Civil Code, is bound by the acts of its agent.

Article 1910 thus reads:

"ART. 1910. The principal must comply with all the obligations which the
agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal
is not bound except when he ratifies it expressly or tacitly."

Malapit's failure to remit the premiums he received cannot constitute a

defense for private respondent insurance company; no exoneration from
liability could result therefrom. The fact that private respondent insurance
company was itself defrauded due to the anomalies that took place in its
Baguio branch office, such as the non-accrual of said premiums to its
account, does not free the same from its obligation to petitioner Areola. As
held in Prudential Bank v. Court of Appeals citing the ruling in McIntosh v.
[13]

Dakota Trust Co.: [14]

"A bank is liable for wrongful acts of its officers done in the interests of the
bank or in the course of dealings of the officers in their representative
capacity but not for acts outside the scope of their authority. A bank holding
out its officers and agent as worthy of confidence will not be permitted to
profit by the frauds they may thus be enabled to perpetrate in the apparent
scope of their employment; nor will it be permitted to shirk its responsibility
for such frauds, even though no benefit may accrue to the bank therefrom.
Accordingly, a banking corporation is liable to innocent third persons where
the representation is made in the course of its business by an agent acting
within the general scope of his authority even though, in the particular case,
the agent is secretly abusing his authority and attempting to perpetrate a fraud
upon his principal or some other person, for his own ultimate benefit."

Consequently, respondent insurance company is liable by way of damages for

the fraudulent acts committed by Malapit that gave occasion to the erroneous
cancellation of subject insurance policy. Its earlier act of reinstating the
insurance policy can not obliterate the injury inflicted on petitioner-insured.
Respondent company should be reminded that a contract of insurance creates
reciprocal obligations for both insurer and insured. Reciprocal obligations are
those which arise from the same cause and in which each party is both a
debtor and a creditor of the other, such that the obligation of one is dependent
upon the obligation of the other.[15]

Under the circumstances of instant case, the relationship as creditor and

debtor between the parties arose from a common cause: i.e., by reason of
their agreement to enter into a contract of insurance under whose terms,
respondent insurance company promised to extend protection to petitioner-
insured against the risk insured for a consideration in the form of premiums
to be paid by the latter. Under the law governing reciprocal obligations,
particularly the second paragraph of Article 1191, the injured party,
[16]

petitioner-insured in this case, is given a choice between fulfillment or

rescission of the obligation in case one of the obligors, such as respondent
insurance company, fails to comply with what is incumbent upon him.
However, said article entitles the injured party to payment of damages,
regardless of whether he demands fulfillment or rescission of the obligation.
Untenable then is respondent insurance company's argument, namely, that
reinstatement being equivalent to fulfillment of its obligation, divests
petitioner-insured of a rightful claim for payment of damages. Such a claim
finds no support in our laws on obligations and contracts.

The nature of damages to be awarded, however, would be in the form of

nominal damages contrary to that granted by the court below. Although the
[17]

erroneous cancellation of the insurance policy constituted a breach of

contract, private respondent insurance company, within a reasonable time
took steps to rectify the wrong committed by reinstating the insurance policy
of petitioner. Moreover, no actual or substantial damage or injury was
inflicted on petitioner Areola at the time the insurance policy was cancelled.
Nominal damages are "recoverable where a legal right is technically violated
and must be vindicated against an invasion that has produced no actual
present loss of any kind, or where there has been a breach of contract and no
substantial injury or actual damages whatsoever have been or can be
shown." [18]

WHEREFORE, the petition for review on certiorari is hereby GRANTED

and the decision of the Court of Appeals in CA-GR. No. 16902 on May 31,
1990, REVERSED. The decision of Branch 40, RTC Dagupan City, in Civil
Case No. D-7972 rendered on June 30, 1987 is hereby REINSTATED subject
to the following modifications: (a) that nominal damages amounting to
P30,000.00 be awarded petitioner in lieu of the damages adjudicated by court
a quo; and (b) that in the satisfaction of the damages awarded therein,
respondent insurance company is ORDERED to pay the legal rate of interest
computed from date of filing of complaint until final payment thereof.

SO ORDERED.

Feliciano, J., (Chairman), concur.

Melo and Vitug, JJ., in the result.
Bidin, J., on leave.

[1]
Exh. "A."
[2]
Exh. "B."
[3]
Exh. "C."
[4]
Exh. "2."
[5]
Exh. "D."
[6]
Exh. "F."
[7]
Exh. "E."
[8]
Exh. "G."
[9]
Exh. "H."
[10]
Notation on upper right hand corner of Exh. "H."

Radio Communications of the Philippines v. Court of Appeals, et al., No.

[11]

L-44748, August 29, 1986, 143 SCRA 657.

[12]
Rollo, p. 35.
[13]
G.R. No. 108957, June 14, 1993, 223 SCRA 350.
[14]
52 ND 752, 204 NW 818, 40 ALR 1021.

Tolentino, Arturo, Civil Code of the Philippines Commentaries and

[15]

Jurisprudence, Vol. IV, p. 175.

ART. 1191. The power to rescind obligations is implied in reciprocal ones,

[16]

in case one of the obligors should not comply with what is incumbent upon
him.

The injured party may choose between the fulfillment and the rescission of
the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfillment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons

who have acquired the thing, in accordance with articles 1385 and 1388 and
the Mortgage Law.

Article 2221 (Civil Code) - Nominal damages are adjudicated in order that
[17]

a right of the plaintiff, which has been violated or invaded by the defendant,
may be vindicated or recognized and not for the purpose of indemnifying the
plaintiff for any loss suffered by him.
[18]
Algarra v. Sandejas, No. 8385, March 24, 1914, 27 Phil. 284.

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