FIRE INSURANCE

SEC. 169. As used in this Code, the term fire

insurance shall include insurance against loss by
fire, lightning, windstorm, tornado or earthquake
and other allied risks, when such risks are covered
by extension to fire insurance policies or under
separate policies.
SEC. 170. 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.
SEC. 171. An alteration in the use or condition of a
thing insured from that to which it is limited by the
policy, which does not increase the risk, does not
affect a contract of fire insurance.
SEC. 172. A contract of fire insurance is not
affected by any act of the insured subsequent to
the execution of the policy, which does not violate
its provisions, even though it increases the risk and
is the cause of the loss.
SEC. 173. If there is no valuation in the policy, the
measure of indemnity in an insurance against fire is
the expense it would be to the insured at the time
of the commencement of the fire to replace the
thing lost or injured in the condition in which it was
at the time of the injury; but if there is a valuation
in a policy of fire insurance, the effect shall be the
same as in a policy of marine insurance.
SEC. 174. Whenever the insured desires to have a
valuation named in his policy, insuring any building
or structure against fire, he may require such
building or structure to be examined by an
independent appraiser and the value of the
insureds interest therein may then be fixed as
between the insurer and the insured. The cost of
such examination shall be paid for by the insured. A
clause shall be inserted in such policy stating
substantially that the value of the insureds interest
in such building or structure has been thus fixed. In
the absence of any change increasing the risk
without the consent of the insurer or of fraud on
the part of the insured, then in case of a total loss
under such policy, the whole amount so insured
upon the insureds interest in such building or
structure, as stated in the policy upon which the
insurers have received a premium, shall be paid,
and in case of a partial loss the full amount of the
partial loss shall be so paid, and in case there are
two (2) or more policies covering the insureds

interest therein, each policy shall contribute pro

rata to the payment of such whole or partial loss.
But in no case shall the insurer be required to pay
more than the amount thus stated in such policy.
This section shall not prevent the parties from
stipulating in such policies concerning the
repairing, rebuilding or replacing of buildings or
structures wholly or partially damaged or
destroyed.
SEC. 175. No policy of fire insurance shall be
pledged, hypothecated, or transferred to any
person, firm or company who acts as agent for or
otherwise represents the issuing company, and any
such pledge, hypothecation, or transfer hereafter
made shall be void and of no effect insofar as it
may affect other creditors of the insured.
NOTICE OF LOSS
SEC. 90. In case of loss upon an insurance against
fire, an insurer is exonerated, if written notice
thereof be not given to him by an insured, or some
person entitled to the benefit of the insurance,
without unnecessary delay. For other non-life
insurance, the Commissioner may specify the
period for the submission of the notice of loss.
SEC. 91. When a preliminary proof of loss is
required by a policy, the insured is not bound to
give such proof as would be necessary in a court of
justice; but it is sufficient for him to give the best
evidence which he has in his power at the time.
SEC. 92. All defects in a notice of loss, or in
preliminary proof thereof, which the insured might
remedy, and which the insurer omits to specify to
him, without unnecessary delay, as grounds of
objection, are waived.
SEC. 93. Delay in the presentation to an insurer of
notice or proof of loss is waived if caused by any
act of him, or if he omits to take objection promptly
and specifically upon that ground.
SEC. 94. If the policy requires, by way of
preliminary proof of loss, the certificate or
testimony of a person other than the insured, it is
sufficient for the insured to use reasonable
diligence to procure it, and in case of the refusal of
such person to give it, then to furnish reasonable
evidence to the insurer that such refusal was not
induced by any just grounds of disbelief in the facts
necessary to be certified or testified.

Violation of the other insurer clause avoids

contract without further action if provided for.
(Pioneer v Yap)
With regard to other insurer clause, notification
to the agent is not notification to the insurer.
(New Life Enterprises v CA)
Condition that filing of claim before filing of case is
valid and binding upon parties.
(Pacific Banking v CA)
Knowing that there are only 2 fire e xtinguishers
despite the warranty of 11 and yet issuing the
policy nonetheless constitutes a waiver on the
part of the insurer. (Qua Chee Gan v Law
Union)
Storing excludes small quantities intended for
daily use or consumption. To place 3 boxes of
fireworks in the bodega for future sale is storing.
The fact that the fireworks did not cause the fire
does not affect the right to rescind the contract.
(oung v Midland Textile Insurance)
Fire Insurance
Sec 167 As used in this Code, the term fire
insurance shall include insurance against loss by
fire, lightning, windstorm, tornado or earthquake
and other allied risks, when such risks are covered
by extension to fire insurance policies or under
separate policies. Fire in our jurisdiction is not
considered a fortuitous event unless caused by
lightning, natural disaster, or causality
independent of human agency. More often it is
caused by some act of man or human means. In
this case, the acetylene cylinder
caught fire due to the crews negligent acts.
Nonetheless, the carrier could have still asked for
general averages had it
complied with the notice requirements under Art
813 and 814 of Code of Commerce. (Phil Home
Assurance v CA)
Motor Vehicle Insurance
All vehicles must have insurance against death,
bodily injury, and/or damage to property of a thirdparty or passenger
arising from the vehicles use. (Sec 374)
The authorized driver clause is not applicable to
the theft clause and the absence of a valid license
is immaterial to the payment of a claim grounded
on theft. There is an unjust refusal on the part of
Perla for denying the claim making them liable for
moral and exemplary damages. (Perla Compania
de Seguros v CA)
Motor vehicle liability insurer may be impleaded as
third-party defendant in a criminal case because

the cause of action against it arises from the

moment of injury and also the civil aspect being
instituted in the criminal action: the criminal case
involves matters related to the policy. (Shafer v
Judge)
The liability of the insurer is direct and primary as
to the victim but it cannot be held solidarily liable
with the insured. (Vda
de Maglana v Consolacion)
Taxi company liable for damages due to estoppel
because of sign on cabs that says passengers are
insured from accident. However the insurer cannot
be held liable because there was no physical
damage caused by the use of the taxi since it was
the gravel trucks fault. (Far Eastern Surety v
Misa)
The validity of the confiscation of the drivers
license is immaterial to the authorized driver clause
since at the time
of the accident the driver did not have a license
and his temporary operators permit had already
expired. (Peza v
Alikpala)
Supra case, refer to previous entry. (Western
Guaranty v CA)
A claim in motor vehicle liability insurance for
death or physical injury need not prove fault or
negligence if:
1. Claim is below P5,000
2. The following proofs are submitted:
-police report
-death certificate and evidence
sufficient to establish proper payee
-medical report or medical/hospital
disbursement in respect of which refund is claimed
3. The claim is only for one motor vehicle. The
passenger sues insurer of vehicle hes riding, for all
else claim with the insurer of
the vehicle at fault. (Sec 378)
There is no option of insurer to claim no fault
liability from. The use of the word shall means that
the passengers/occupants can only sue the insurer
of the vehicle they were riding. (Perla v Ancheta)
CASES:
PHILIPPINE HOME ASSURANCE
CORPORATION, petitioner,
vs. COURT OF APPEALS and EASTERN
SHIPPING LINES, INC., respondents.
Eastern Shipping Lines, Inc. (ESLI) loaded on board
SS Eastern Explorer in Kobe, Japan, the following
shipment for carriage to Manila and Cebu, freight
pre-paid and in good order and condition, viz: (a)

two (2) boxes internal combustion engine parts,

consigned to William Lines, Inc. under Bill of Lading
No. 042283; (b) ten (l0) metric ton. (334 bags)
ammonium chloride, consigned to Orca's Company
under Bill of Lading No. KCE-I2; (c) two hundred
(200) bags Glue 300, consigned to Pan Oriental
Match Company under Bill of Lading No. KCE-8; and
(d) garments, consigned to Ding Velayo under Bills
of Lading Nos. KMA-73 and KMA-74.
While the vessel was off Okinawa, Japan, a small
flame was detected on the acetylene cylinder
located in the accommodation area near the engine
room on the main deck level. As the crew was
trying to extinguish the fire, the acetylene cylinder
suddenly exploded sending a flash of flame
throughout the accommodation area, thus causing
death and severe injuries to the crew and instantly
setting fire to the whole superstructure of the
vessel. The incident forced the master and the crew
to abandon the ship.
Thereafter, SS Eastern Explorer was found to be a
constructive total loss and its voyage was declared
abandoned.
Several hours later, a tugboat under the control of
Fukuda Salvage Co. arrived near the vessel and
commenced to tow the vessel for the port of Naha,
Japan.
Fire fighting operations were again conducted at
the said port. After the fire was extinguished, the
cargoes which were saved were loaded to another
vessel for delivery to their original ports of
destination. ESLI charged the consignees several
amounts corresponding to additional freight and
salvage charges, as follows: (a) for the goods
covered by Bill of Lading No. 042283, ESLI charged
the consignee the sum of P1,927.65, representing
salvage charges assessed against the goods; (b) for
the goods covered by Bill of Lading No. KCE-12,
ESLI charged the consignee the sum of P2,980.64
for additional freight and P826.14 for salvage
charges against the goods; (c) for the goods
covered by Bill of Lading No. KCE-8, ESLI charged
the consignee the sum of P3,292.26 for additional
freight and P4,130.68 for salvage charges against
the goods; and
(d) for the goods under Bills of Lading Nos. KMA-73
and KMA-74, ESLI charged the consignee the sum
of P8,337.06 for salvage charges against the
goods.
The charges were all paid by Philippine Home
Assurance Corporation (PHAC) under protest for
and in behalf of the consignees.

PHAC, as subrogee of the consignees, thereafter

filed a complaint before the Regional Trial Court of
Manila, Branch 39, against ESLI to recover the sum
paid under protest on the ground that the same
were actually damages directly brought about by
the fault, negligence, illegal act and/or breach of
contract of ESLI.
In its answer, ESLI contended that it exercised the
diligence required by law in the handling, custody
and carriage of the shipment; that the fire was
caused by an unforeseen event; that the additional
freight charges are due and demandable pursuant
to the Bill of Lading; 1 and that salvage charges are
properly collectible under Act No. 2616, known as
the Salvage Law.
The trial court dismissed PHAC's complaint and
ruled in favor of ESLI ratiocinating thus:
The question to be resolved is whether or not
the fire on the vessel which was caused by the
explosion of an acetylene cylinder loaded on
the same was the fault or negligence of the
defendant.
Evidence has been presented that the SS
"Eastern Explorer" was a seaworthy vessel
(Deposition of Jumpei Maeda, October 23, 1980,
p. 3) and before the ship loaded the Acetylene
Cylinder No. NCW 875, the same has been tested,
checked and examined and was certified to have
complied with the required safety measures and
standards (Deposition of Senjei Hayashi, October
23, 1980, pp. 2-3). When the fire was detected by
the crew, fire fighting operations was
immediately conducted but due to the explosion
of the acetylene cylinder, the crew were unable
to contain the fire and had to abandon the ship to
save their lives and were saved from drowning by
passing vessels in the vicinity. The burning of the
vessel rendering it a constructive total loss and
incapable of pursuing its voyage to the
Philippines was, therefore, not the fault or
negligence of defendant but a natural disaster or
calamity which nobody would like to happen. The
salvage operations conducted by Fukuda Salvage
Company (Exhibits "4-A" and "6-A") was perfectly
a legal operation and charges made on the goods
recovered were legitimate charges.
Act No. 2616, otherwise known as the
Salvage Law, is thus applicable to the case
at bar. Section 1 of Act No. 2616 states:
Sec 1. When in case of shipwreck, the vessel
or its cargo shall be beyond the control of

the crew, or shall have been abandoned by

them, and picked up and conveyed to a safe
place by other persons, the latter shall be
entitled to a reward for the salvage.
Those who, not being included in the above
paragraph, assist in saving a vessel or its
cargo from shipwreck, shall be entitled to
like reward.
In relation to the above provision, the Supreme
Court has ruled in Erlanger & Galinger v. Swedish
East Asiatic Co., Ltd., 34 Phil. 178, that three
elements are necessary to a valid salvage claim,
namely (a)a marine peril (b) service voluntarily
rendered when not required as an existing duty or
from a special contract and (c) success in whole
or in part, or that the service rendered
contributed to such success.

legally or physically impossible without the fault

of the obligor."
The burning of "EASTERN EXPLORER" while off
Okinawa rendered it physically impossible for
defendant to comply with its obligation of
delivering the goods to their port of destination
pursuant to the contract of carriage. Under Article
1266 of the Civil Code, the physical impossibility
of the prestation extinguished defendant's
obligation..
It is but legal and equitable for the defendant
therefore, to demand additional freight from the
consignees for forwarding the goods from Naha,
Japan to Manila and Cebu City on board another
vessel, the "EASTERN MARS." This finds support
under Article 844 of the Code of Commerce which
provides as follows:

The above elements are all present in the instant

case. Salvage charges may thus be assessed on
the cargoes saved from the vessel. As provided
for in Section 13 of the Salvage Law, "The
expenses of salvage, as well as the reward for
salvage or assistance, shall be a charge on the
things salvaged or their value." In Manila Railroad
Co. v. Macondray Co., 37 Phil. 583, it was also
held that "when a ship and its cargo are saved
together, the salvage allowance should be
charged against the ship and cargo in the
proportion of their respective values, the same as
in a case of general average . . ." Thus, the
"compensation to be paid by the owner of the
cargo is in proportion to the value of the vessel
and the value of the cargo saved." (Atlantic Gulf
and Pacific Co. v. Uchida Kisen Kaisha, 42 Phil.
321). (Memorandum for Defendant, Records, pp.
212-213).

Art. 844. A captain who may have taken on board

the goods saved from the wreck shall continue his
course to the port of destination; and on arrival
should deposit the same, with judicial
intervention at the disposal of their legitimate
owners. . . .

With respect to the additional freight

charged by defendant from the
consignees of the goods, the same
are also validly demandable.

12. All storage, transshipment, forwarding or

other disposition of cargo at or from a port of
distress or other place where there has been a
forced interruption or abandonment of the
voyage shall be at the expense of the owner,
shipper, consignee of the goods or the holder of
this bill of lading who shall be jointly and
severally liable for all freight charges and
expenses of every kind whatsoever, whether
payable in advance or not that may be incurred
by the cargo in addition to the ordinary freight,
whether the service be performed by the named
carrying vessel or by carrier's other vessels or by
strangers. All such expenses and charges shall be
due and payable day by day immediately when
they are incurred.

As provided by the Civil Code:

Art. 1174. Except in cases expressly specified by
law, or when it is otherwise declared by
stipulation, or when the nature of the obligation
require the assumption of risk, no person shall be
responsible for those events which could not be
foreseen, or which though foreseen, were
inevitable.
Art 1266. The debtor in obligations to do shall
also be released when the prestation becomes

The owners of the cargo shall defray all the

expenses of this arrival as well as the payment of
the freight which, after taking into consideration
the circumstances of the case, may be fixed by
agreement or by a judicial decision.
Furthermore, the terms and conditions of the Bill
of Lading authorize the imposition of additional
freight charges in case of forced interruption or
abandonment of the voyage. At the dorsal portion
of the Bills of Lading issued to the consignees is
this stipulation:

The bill of lading is a contract and

the parties are bound by its terms
(Gov't of the Philippine Islands vs.
Ynchausti and Co., 40 Phil. 219). The
provision quoted is binding upon the
consignee.
Defendant therefore, can validly
require payment of additional freight
from the consignee. Plaintiff can not
thus recover the additional freight
paid by the consignee to defendant.
(Memorandum for Defendant,
Record, pp. 215-216). 2
On appeal to the Court of Appeals, respondent
court affirmed the trial court's findings and
conclusions, 3 hence, the present petition for
review before this Court on the following errors:
I. THE RESPONDENT COURT ERRONEOUSLY
ADOPTED WITH APPROVAL THE TRIAL COURT'S
FINDINGS THAT THE BURNING OF THE SS
"EASTERN EXPLORER", RENDERING ET A
CONSTRUCTIVE TOTAL LOSS, IS A NATURAL
DISASTER OR CALAMITY WHICH NOBODY
WOULD LIKE TO HAPPEN, DESPITE EXISTING
JURISPRUDENCE TO THE CONTRARY.
II. THE RESPONDENT COURT ARBITRARILY
RULED THAT THE BURNING OF THE SS
"EASTERN EXPLORER" WAS NOT THE FAULT AND
NEGLIGENCE OF RESPONDENT EASTERN
SHIPPING LINES.
III. THE RESPONDENT COURT COMMITTED
GRAVE ABUSE OF DISCRETION IN RULING THAT
DEFENDANT HAD EXERCISED THE
EXTRAORDINARY DILIGENCE IN THE VIGILANCE
OVER THE GOODS AS REQUIRED BY LAW.
IV. THE RESPONDENT COURT ARBITRARILY
RULED THAT THE MARINE NOTE OF PROTEST
AND STATEMENT OF FACTS ISSUED BY THE
VESSEL'S MASTER ARE NOT HEARSAY DESPITE
THE FACT THAT THE VESSEL'S MASTER, CAPT.
LICAYLICAY WAS NOT PRESENTED COURT,
WITHOUT EXPLANATION WHATSOEVER FOR HIS
NON-PRESENTATION, THUS, PETITIONER WAS
DEPRIVED OF ITS RIGHT TO CROSS- EXAMINE
THE AUTHOR THEREOF.
V. THE RESPONDENT COURT ERRONEOUSLY
ADOPTED WITH APPROVAL THE TRIAL COURT'S
CONCLUSION THAT THE EXPENSES OR
AVERAGES INCURRED IN SAVING THE CARGO
CONSTITUTE GENERAL AVERAGE.

VI. THE RESPONDENT COURT ERRONEOUSLY

ADOPTED THE TRIAL COURT'S RULING THAT
PETITIONER WAS LIABLE TO RESPONDENT
CARRIER FOR ADDITIONAL FREIGHT AND
SALVAGE CHARGES. 4
It is quite evident that the foregoing assignment of
errors challenges the findings of fact and the
appreciation of evidence made by the trial court
and later affirmed by respondent court. While it is a
well-settled rule that only questions of law may be
raised in a petition for review under Rule 45 of the
Rules of Court, it is equally well-settled that the
same admits of the following exceptions, namely:
(a) when the conclusion is a finding grounded
entirely on speculation, surmises or conjectures; (b)
when the inference made is manifestly mistaken,
absurd or impossible; (c) where there is a grave
abuse of discretion; (d) when the judgment is
based on a misapprehension of facts; (e) when the
findings of fact are conflicting; (f) when the Court of
Appeals, in making its findings, went beyond the
issues of the case and the same is contrary to the
admissions of both appellant and appellee; (g)
when the findings of the Court of Appeals are
contrary to those of the trial court; (h) when the
findings of fact are conclusions without citation of
specific evidence on which they are based;
(i) when the facts set forth in the petition as well as
in the petitioners' main and reply briefs are not
disputed by the respondents; and (j) when the
finding of fact of the Court of Appeals is premised
on the supposed absence of evidence and is
contradicted by the evidence on record. 5 Thus, if
there is a showing, as in the instant case, that the
findings complained of are totally devoid of support
in the records, or that they are so glaringly
erroneous as to constitute grave abuse of
discretion, the same may be properly reviewed and
evaluated by this Court.
It is worthy to note at the outset that the goods
subject of the present controversy were neither lost
nor damaged in transit by the fire that razed the
carrier. In fact, the said goods were all delivered to
the consignees, even if the transshipment took
longer than necessary. What is at issue therefore is
not whether or not the carrier is liable for the loss,
damage, or deterioration of the goods transported
by them but who, among the carrier, consignee or
insurer of the goods, is liable for the additional
charges or expenses incurred by the owner of the
ship in the salvage operations and in the
transshipment of the goods via a different carrier.
In absolving respondent carrier of any liability,
respondent Court of Appeals sustained the trial

court's finding that the fire that gutted the ship was
a natural disaster or calamity. Petitioner takes
exception to this conclusion and we agree.
In our jurisprudence, fire may not be considered a
natural disaster or calamity since it almost always
arises from some act of man or by human means.
It cannot be an act of God unless caused by
lightning or a natural disaster or casualty not
attributable to human agency. 6
In the case at bar, it is not disputed that a small
flame was detected on the acetylene cylinder and
that by reason thereof, the same exploded despite
efforts to extinguish the fire. Neither is there any
doubt that the acetylene cylinder, obviously fully
loaded, was stored in the accommodation area
near the engine room and not in a storage area
considerably far, and in a safe distance, from the
engine room. Moreover, there was no showing, and
none was alleged by the parties, that the fire was
caused by a natural disaster or calamity not
attributable to human agency. On the contrary,
there is strong evidence indicating that the
acetylene cylinder caught fire because of the fault
and negligence of respondent ESLI, its captain and
its crew.
First, the acetylene cylinder which was fully loaded
should not have been stored in the accommodation
area near the engine room where the heat
generated therefrom could cause the acetylene
cylinder to explode by reason of spontaneous
combustion. Respondent ESLI should have easily
foreseen that the acetylene cylinder, containing
highly inflammable material was in real danger of
exploding because it was stored in close proximity
to the engine room.
Second, respondent ESLI should have known that
by storing the acetylene cylinder in the
accommodation area supposed to be reserved for
passengers, it unnecessarily exposed its
passengers to grave danger and injury. Curious
passengers, ignorant of the danger the tank might
have on humans and property, could have handled
the same or could have lighted and smoked
cigarettes while repairing in the accommodation
area.
Third, the fact that the acetylene cylinder was
checked, tested and examined and subsequently
certified as having complied with the safety
measures and standards by qualified
experts 7 before it was loaded in the vessel only
shows to a great extent that negligence was

present in the handling of the acetylene cylinder

after it was loaded and while it was on board the
ship. Indeed, had the respondent and its agents not
been negligent in storing the acetylene cylinder
near the engine room, then the same would not
have leaked and exploded during the voyage.
Verily, there is no merit in the finding of the trial
court to which respondent court erroneously
agreed that the fire was not the fault or negligence
of respondent but a natural disaster or calamity.
The records are simply wanting in this regard.
Anent petitioner's objection to the admissibility of
Exhibits "4'' and ''5", the Statement of Facts and
the Marine Note of Protest issued by Captain
Tiburcio A. Licaylicay, we find the same impressed
with merit because said documents are hearsay
evidence. Capt. Licaylicay, Master of S.S. Eastern
Explorer who issued the said documents, was not
presented in court to testify to the truth of the facts
he stated therein; instead, respondent ESLI
presented Junpei Maeda, its Branch Manager in
Tokyo and Yokohama, Japan, who evidently had no
personal knowledge of the facts stated in the
documents at issue. It is clear from Section 36, Rule
130 of the Rules of Court that any evidence,
whether oral or documentary, is hearsay if its
probative value is not based on the personal
knowledge of the witness but on the knowledge of
some other person not on the witness stand.
Consequently, hearsay evidence, whether objected
to or not, has no probative value unless the
proponent can show that the evidence falls within
the exceptions to the hearsay evidence rule. 8 It is
excluded because the party against whom it is
presented is deprived of his right and opportunity
to cross-examine the persons to whom the
statements or writings are attributed.
On the issue of whether or not respondent court
committed an error in concluding that the expenses
incurred in saving the cargo are considered general
average, we rule in the affirmative. As a rule,
general or gross averages include all damages and
expenses which are deliberately caused in order to
save the vessel, its cargo, or both at the same
time, from a real and known risk 9 While the instant
case may technically fall within the purview of the
said provision, the formalities prescribed under
Articles 813 10 and 814 11 of the Code of Commerce
in order to incur the expenses and cause the
damage corresponding to gross average were not
complied with. Consequently, respondent ESLI's
claim for contribution from the consignees of the
cargo at the time of the occurrence of the average
turns to naught.

Prescinding from the foregoing premises, it

indubitably follows that the cargo consignees
cannot be made liable to respondent carrier for
additional freight and salvage charges.
Consequently, respondent carrier must refund to
herein petitioner the amount it paid under protest
for additional freight and salvage charges in behalf
of the consignees.
WHEREFORE, the judgment appealed from is
hereby REVERSED and SET ASIDE. Respondent
Eastern Shipping Lines, Inc. is ORDERED to return
to petitioner Philippine Home Assurance
Corporation the amount it paid under protest in
behalf of the consignees herein.
FORTUNE INSURANCE AND SURETY CO.,
INC., petitioner,
vs. COURT OF APPEALS and PRODUCERS BANK
OF THE PHILIPPINES, respondents.
The fundamental legal issue raised in this petition
for review on certiorari is whether the petitioner is
liable under the Money, Security, and Payroll
Robbery policy it issued to the private respondent
or whether recovery thereunder is precluded under
the general exceptions clause thereof. Both the trial
court and the Court of Appeals held that there
should be recovery. The petitioner contends
otherwise.
This case began with the filing with the Regional
Trial Court (RTC) of Makati, Metro Manila, by private
respondent Producers Bank of the Philippines
(hereinafter Producers) against petitioner Fortune
Insurance and Surety Co., Inc. (hereinafter Fortune)
of a complaint for recovery of the sum of
P725,000.00 under the policy issued by Fortune.
The sum was allegedly lost during a robbery of
Producer's armored vehicle while it was in transit to
transfer the money from its Pasay City Branch to its
head office in Makati. The case was docketed as
Civil Case No. 1817 and assigned to Branch 146
thereof.
After joinder of issues, the parties asked the trial
court to render judgment based on the following
stipulation of facts:

P725,000.00 under the custody of its teller,

Maribeth Alampay, from its Pasay Branch to its
Head Office at 8737 Paseo de Roxas, Makati,
Metro Manila on June 29, 1987, was robbed of
the said cash. The robbery took place while the
armored car was traveling along Taft Avenue in
Pasay City;
3. The said armored car was driven by Benjamin
Magalong Y de Vera, escorted by Security Guard
Saturnino Atiga Y Rosete. Driver Magalong was
assigned by PRC Management Systems with the
plaintiff by virtue of an Agreement executed on
August 7, 1983, a duplicate original copy of
which is hereto attached as Exhibit "B";
4. The Security Guard Atiga was assigned by
Unicorn Security Services, Inc. with the plaintiff
by virtue of a contract of Security Service
executed on October 25, 1982, a duplicate
original copy of which is hereto attached as
Exhibit "C";
5. After an investigation conducted by the
Pasay police authorities, the driver Magalong
and guard Atiga were charged, together with
Edelmer Bantigue Y Eulalio, Reynaldo Aquino
and John Doe, with violation of P.D. 532 (AntiHighway Robbery Law) before the Fiscal of
Pasay City. A copy of the complaint is hereto
attached as Exhibit "D";
6. The Fiscal of Pasay City then filed an
information charging the aforesaid persons with
the said crime before Branch 112 of the
Regional Trial Court of Pasay City. A copy of the
said information is hereto attached as Exhibit
"E." The case is still being tried as of this date;
7. Demands were made by the plaintiff upon
the defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as
the loss is excluded from the coverage of the
insurance policy, attached hereto as Exhibit "A,"
specifically under page 1 thereof, "General
Exceptions" Section (b), which is marked as
Exhibit "A-1," and which reads as follows:
GENERAL EXCEPTIONS

1. The plaintiff was insured by the defendants

and an insurance policy was issued, the
duplicate original of which is hereto attached as
Exhibit "A";

The company shall not be liable under this

policy in report of
xxx xxx xxx

2. An armored car of the plaintiff, while in the

process of transferring cash in the sum of

(b) any loss caused by any dishonest,

fraudulent or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representative of the Insured
whether acting alone or in conjunction with
others. . . .
8. The plaintiff opposes the contention of the
defendant and contends that Atiga and
Magalong are not its "officer, employee, . . .
trustee or authorized representative . . . at the
time of the robbery. 1
On 26 April 1990, the trial court rendered its
decision in favor of Producers. The dispositive
portion thereof reads as follows:
WHEREFORE, premises considered,
the Court finds for plaintiff and
against defendant, and
(a) orders defendant to pay plaintiff the net
amount of P540,000.00 as liability under Policy
No. 0207 (as mitigated by the P40,000.00
special clause deduction and by the recovered
sum of P145,000.00), with interest thereon at
the legal rate, until fully paid;
(b) orders defendant to pay plaintiff the sum of
P30,000.00 as and for attorney's fees; and
(c) orders defendant to pay costs of suit.
All other claims and counterclaims are
accordingly dismissed forthwith.SO ORDERED.

The trial court ruled that Magalong and Atiga were

not employees or representatives of Producers. It
Said:
The Court is satisfied that plaintiff may not be
said to have selected and engaged Magalong
and Atiga, their services as armored car driver
and as security guard having been merely
offered by PRC Management and by Unicorn
Security and which latter firms assigned them
to plaintiff. The wages and salaries of both
Magalong and Atiga are presumably paid by
their respective firms, which alone wields the
power to dismiss them. Magalong and Atiga are
assigned to plaintiff in fulfillment of agreements
to provide driving services and property
protection as such in a context which does
not impress the Court as translating into
plaintiff's power to control the conduct of any
assigned driver or security guard, beyond

perhaps entitling plaintiff to request are

replacement for such driver guard. The finding
is accordingly compelled that neither Magalong
nor Atiga were plaintiff's "employees" in
avoidance of defendant's liability under the
policy, particularly the general exceptions
therein embodied.
Neither is the Court prepared to accept the
proposition that driver Magalong and guard
Atiga were the "authorized representatives" of
plaintiff. They were merely an assigned armored
car driver and security guard, respectively, for
the June 29, 1987 money transfer from
plaintiff's Pasay Branch to its Makati Head
Office. Quite plainly it was teller Maribeth
Alampay who had "custody" of the P725,000.00
cash being transferred along a specified money
route, and hence plaintiff's then designated
"messenger" adverted to in the policy. 3
Fortune appealed this decision to the Court of
Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May
1994, it affirmed in toto the appealed decision.
The Court of Appeals agreed with the conclusion of
the trial court that Magalong and Atiga were
neither employees nor authorized representatives
of Producers and ratiocinated as follows:
A policy or contract of insurance is to be
construed liberally in favor of the insured and
strictly against the insurance company (New
Life Enterprises vs. Court of Appeals, 207 SCRA
669; Sun Insurance Office, Ltd. vs. Court of
Appeals, 211 SCRA 554). Contracts of
insurance, like other contracts, are to be
construed according to the sense and meaning
of the terms which the parties themselves have
used. If such terms are clear and unambiguous,
they must be taken and understood in their
plain, ordinary and popular sense (New Life
Enterprises Case, supra, p. 676; Sun Insurance
Office, Ltd. vs. Court of Appeals, 195 SCRA
193).
The language used by defendant-appellant in
the above quoted stipulation is plain, ordinary
and simple. No other interpretation is
necessary. The word "employee" must be taken
to mean in the ordinary sense.
The Labor Code is a special law specifically
dealing with/and specifically designed to
protect labor and therefore its definition as to
employer-employee relationships insofar as the

application/enforcement of said Code is

concerned must necessarily be inapplicable to
an insurance contract which defendantappellant itself had formulated. Had it intended
to apply the Labor Code in defining what the
word "employee" refers to, it must/should have
so stated expressly in the insurance policy.
Said driver and security guard cannot be
considered as employees of plaintiff-appellee
bank because it has no power to hire or to
dismiss said driver and security guard under the
contracts (Exhs. 8 and C) except only to ask for
their replacements from the contractors. 5
On 20 June 1994, Fortune filed this petition for
review on certiorari. It alleges that the trial court
and the Court of Appeals erred in holding it liable
under the insurance policy because the loss falls
within the general exceptions clause considering
that driver Magalong and security guard Atiga were
Producers' authorized representatives or
employees in the transfer of the money and payroll
from its branch office in Pasay City to its head
office in Makati.
According to Fortune, when Producers
commissioned a guard and a driver to transfer its
funds from one branch to another, they effectively
and necessarily became its authorized
representatives in the care and custody of the
money. Assuming that they could not be considered
authorized representatives, they were,
nevertheless, employees of Producers. It asserts
that the existence of an employer-employee
relationship "is determined by law and being such,
it cannot be the subject of agreement." Thus, if
there was in reality an employer-employee
relationship between Producers, on the one hand,
and Magalong and Atiga, on the other, the
provisions in the contracts of Producers with PRC
Management System for Magalong and with
Unicorn Security Services for Atiga which state that
Producers is not their employer and that it is
absolved from any liability as an employer, would
not obliterate the relationship.
Fortune points out that an employer-employee
relationship depends upon four standards: (1) the
manner of selection and engagement of the
putative employee; (2) the mode of payment of
wages; (3) the presence or absence of a power to
dismiss; and (4) the presence and absence of a
power to control the putative employee's conduct.
Of the four, the right-of-control test has been held
to be the decisive factor. 6 It asserts that the power
of control over Magalong and Atiga was vested in

and exercised by Producers. Fortune further insists

that PRC Management System and Unicorn Security
Services are but "labor-only" contractors under
Article 106 of the Labor Code which provides:
Art. 106. Contractor or subcontractor. There
is "labor-only" contracting where the person
supplying workers to an employer does not
have substantial capital or investment in the
form of tools, equipment, machineries, work
premises, among others, and the workers
recruited and placed by such persons are
performing activities which are directly related
to the principal business of such employer. In
such cases, the person or intermediary shall be
considered merely as an agent of the employer
who shall be responsible to the workers in the
same manner and extent as if the latter were
directly employed by him.
Fortune thus contends that Magalong and Atiga
were employees of Producers, following the ruling
in International Timber Corp. vs. NLRC 7 that a
finding that a contractor is a "labor-only" contractor
is equivalent to a finding that there is an employeremployee relationship between the owner of the
project and the employees of the "labor-only"
contractor.
On the other hand, Producers contends that
Magalong and Atiga were not its employees since it
had nothing to do with their selection and
engagement, the payment of their wages, their
dismissal, and the control of their conduct.
Producers argued that the rule in International
Timber Corp. is not applicable to all cases but only
when it becomes necessary to prevent any
violation or circumvention of the Labor Code, a
social legislation whose provisions may set aside
contracts entered into by parties in order to give
protection to the working man.
Producers further asseverates that what should be
applied is the rule in American President Lines vs.
Clave, 8 to wit:
In determining the existence of employeremployee relationship, the following elements
are generally considered, namely: (1) the
selection and engagement of the employee;
(2) the payment of wages; (3) the power of
dismissal; and (4) the power to control the
employee's conduct.
Since under Producers' contract with PRC
Management Systems it is the latter which
assigned Magalong as the driver of Producers'

armored car and was responsible for his faithful

discharge of his duties and responsibilities, and
since Producers paid the monthly compensation of
P1,400.00 per driver to PRC Management Systems
and not to Magalong, it is clear that Magalong was
not Producers' employee. As to Atiga, Producers
relies on the provision of its contract with Unicorn
Security Services which provides that the guards of
the latter "are in no sense employees of the
CLIENT."
There is merit in this petition.
It should be noted that the insurance policy entered
into by the parties is a theft or robbery insurance
policy which is a form of casualty insurance.
Section 174 of the Insurance Code provides:
Sec. 174. Casualty insurance is insurance
covering loss or liability arising from accident or
mishap, excluding certain types of loss which by
law or custom are considered as falling
exclusively within the scope of insurance such
as fire or marine. It includes, but is not limited
to, employer's liability insurance, public liability
insurance, motor vehicle liability insurance,
plate glass insurance, burglary and theft
insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar
kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle
liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or
to robbery insurance in particular. These contracts
are, therefore, governed by the general provisions
applicable to all types of insurance. Outside of
these, the rights and obligations of the parties
must be determined by the terms of their contract,
taking into consideration its purpose and always in
accordance with the general principles of insurance
law. 9
It has been aptly observed that in burglary,
robbery, and theft insurance, "the opportunity to
defraud the insurer the moral hazard is so
great that insurers have found it necessary to fill up
their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the
insurer assume the risk of all losses due to the
hazards insured against." 10 Persons frequently
excluded under such provisions are those in the
insured's service and employment. 11 The purpose
of the exception is to guard against liability should
the theft be committed by one having unrestricted
access to the property. 12 In such cases, the terms

specifying the excluded classes are to be given

their meaning as understood in common
speech. 13 The terms "service" and "employment"
are generally associated with the idea of selection,
control, and compensation. 14
A contract of insurance is a contract of adhesion,
thus any ambiguity therein should be resolved
against the insurer,15 or it should be construed
liberally in favor of the insured and strictly against
the insurer. 16 Limitations of liability should be
regarded with extreme jealousy and must be
construed
in such a way, as to preclude the insurer from noncompliance with its obligation. 17 It goes without
saying then that if the terms of the contract are
clear and unambiguous, there is no room for
construction and such terms cannot be enlarged or
diminished by judicial construction. 18
An insurance contract is a contract of indemnity
upon the terms and conditions specified
therein. 19 It is settled that the terms of the policy
constitute the measure of the insurer's liability. 20 In
the absence of statutory prohibition to the
contrary, insurance companies have the same
rights as individuals to limit their liability and to
impose whatever conditions they deem best upon
their obligations not inconsistent with public policy.
With the foregoing principles in mind, it may now
be asked whether Magalong and Atiga qualify as
employees or authorized representatives of
Producers under paragraph (b) of the general
exceptions clause of the policy which, for easy
reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in
respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent
or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representative of the Insured whether
acting alone or in conjunction with others. . . .
(emphases supplied)
There is marked disagreement between the parties
on the correct meaning of the terms "employee"
and "authorized representatives."

It is clear to us that insofar as Fortune is concerned,

it was its intention to exclude and exempt from
protection and coverage losses arising from
dishonest, fraudulent, or criminal acts of persons
granted or having unrestricted access to Producers'
money or payroll. When it used then the term
"employee," it must have had in mind any person
who qualifies as such as generally and universally
understood, or jurisprudentially established in the
light of the four standards in the determination of
the employer-employee relationship, 21 or as
statutorily declared even in a limited sense as in
the case of Article 106 of the Labor Code which
considers the employees under a "labor-only"
contract as employees of the party employing them
and not of the party who supplied them to the
employer. 22
Fortune claims that Producers' contracts with PRC
Management Systems and Unicorn Security
Services are "labor-only" contracts.
Producers, however, insists that by the
express terms thereof, it is not the employer
of Magalong. Notwithstanding such express
assumption of PRC Management Systems
and Unicorn Security Services that the
drivers and the security guards each shall
supply to Producers are not the latter's
employees, it may, in fact, be that it is
because the contracts are, indeed, "laboronly" contracts. Whether they are is, in the
light of the criteria provided for in Article
106 of the Labor Code, a question of fact.
Since the parties opted to submit the case
for judgment on the basis of their stipulation
of facts which are strictly limited to the
insurance policy, the contracts with PRC
Management Systems and Unicorn Security
Services, the complaint for violation of P.D.
No. 532, and the information therefor filed
by the City Fiscal of Pasay City, there is a
paucity of evidence as to whether the
contracts between Producers and PRC
Management Systems and Unicorn Security
Services are "labor-only" contracts.
But even granting for the sake of argument that
these contracts were not "labor-only" contracts,
and PRC Management Systems and Unicorn
Security Services were truly independent
contractors, we are satisfied that Magalong and
Atiga were, in respect of the transfer of Producer's
money from its Pasay City branch to its head office
in Makati, its "authorized representatives" who
served as such with its teller Maribeth Alampay.
Howsoever viewed, Producers entrusted the three

with the specific duty to safely transfer the money

to its head office, with Alampay to be responsible
for its custody in transit; Magalong to drive the
armored vehicle which would carry the money; and
Atiga to provide the needed security for the money,
the vehicle, and his two other companions. In short,
for these particular tasks, the three acted as agents
of Producers. A "representative" is defined as one
who represents or stands in the place of another;
one who represents others or another in a special
capacity, as an agent, and is interchangeable with
"agent." 23
In view of the foregoing, Fortune is exempt from
liability under the general exceptions clause of the
insurance policy.
WHEREFORE , the instant petition is hereby
GRANTED. The decision of the Court of Appeals in
CA-G.R. CV No. 32946 dated 3 May 1994 as well as
that of Branch 146 of the Regional Trial Court of
Makati in Civil Case No. 1817 are REVERSED and
SET ASIDE. The complaint in Civil Case No. 1817 is
DISMISSED.
No pronouncement as to costs.

MOTOR VEHICLE LIABILITY INSURANCE

LAW
What is Compulsory Motor Vehicle
Liability Insurance?
The Insurance Code (as amended) requires this
coverage for the registration of motor vehicles.
This insurance covers passengers or third
parties who may be killed or injured as a result
of accidents arising from the use of operation of
such vehicles. The maximum amount of benefit
under this policy is P100,000.00

What is the meaning of Authorized

Driver in a motor vehicle policy?
An authorized driver within the meaning of the
policy is any of the following:
+ The insured; or
+ Any person driving on the Insureds order or
with his permission.

What is the purpose of the errors and

omissions insurance policy (professional

liability or professional indemnity policy)

required of insurance or reinsurance
broker before a license could be issued.

compensation, including persons expressly

authorized by law or by the vehicles operator or
his agents to ride without fare.

To indemnify the applicant against any claim for

breach of duty as insurance broker or
reinsurance broker, as the case may be, which
may be available against such applicant by
reason of any negligent act, error or omission.

(c)
Third-Party is any person other than a
passenger as defined in this section & shall also
exclude a member of the household, or a member
of the family within the second degree of
consanguinity or affinity, of a motor vehicle owner
or land transportation operator, as likewise defined
herein, or his employee in respect of death, bodily
injury, or damage to property arising out of & in the
course of employment. (As amended by
Presidential Decree No. 1814 & 1981)

What do you understand by the no fault

claim?
An insurance company issuing the cover shall
pay any claim for death or bodily injuries
sustained by a passenger or third party without
the necessity of proving fault or negligence of
any kind. Immediate payment shall be made
provided that the total indemnity shall not
exceed P10,000.00 upon presentation of the
following proofs of loss, namely:
1. police report of accident, and
2. death certificate and evidence sufficient to
establish the proper payee, or medical report
and evidence of medical or hospital
disbursement in respect of which refund is being
claimed.

Does the no fault claim apply to claims

on property wherein the insurance
company is under obligation to make
payment immediately?
No, because the no fault claim applies only to
death or bodily injuries and does not respond to
claims for third party property damage.

CHAPTER VI COMPULSORY MOTOR VEHICLE

LIABILITY INSURANCE
SECTION 373.

For purposes of this chapter:

(a)
Motor Vehicle is any vehicle as defined
in section three, paragraph (a) of Republic Act
Numbered Four Thousand One Hundred Thirty-Six,
Otherwise known as the Land Transportation &
Traffic Code.
(b)
Passenger is any fare paying person
being transported & conveyed in & by a motor
vehicle for transportation of passengers for

(d)
Owner or Motor vehicle owner means
the actual legal owner of a motor vehicle, in whose
name such vehicle is duly registered w/ the Land
Transportation Commission;
(e)
Land transportation operator means
the owner or owners of motor vehicles for
transportation of passengers for compensation,
including school buses;
(f)
Insurance policy or Policy refers to a
contract of insurance against passenger &
thirty-party liability for death or bodily injuries &
damaged to property arising fr. motor vehicle
accidents. (As amended by Presidential Decree No.
1455 & 1814)
SECTION 374.
It shall be unlawful for any land
transportation operator or owner of a motor vehicle
to operate the same in the public highways unless
there is in force in relation thereto a policy of
insurance or guaranty in cash or surety bond issued
in accordance w/ the provisions of this chapter to
indemnify the death, bodily injury, &/or damage to
property of a third-party or passenger, as the case
may be, arising fr. the use thereof. (As amended by
Presidential Decree No. 1455 & 1814)
SECTION 375.
The Commissioner shall furnish
the Land Transportation Commissioner w/ a list of
insurance companies authorized to issue the policy
of insurance or surety bond required by this
chapter. (As amended by Presidential Decree No.
1814)

SECTION 376.
The Land Transportation
Commission shall not allow the registration or
renewal of registration of any motor vehicle without
first requiring fr. the land transportation operator or

motor vehicle owner concerned the presentation &

filing of a substantiating documentation in a form
approved by the Commissioner evidencing that the
policy of insurance or guaranty in cash or surety
bond required by this chapter is in effect. (As
amended by Presidential Decree No. 1455)

SECTION 377.
Every land transportation
operator & every owner of a motor vehicle shall,
before applying for the registration or renewal of
registration of any motor vehicle, at his option,
either secure an insurance policy or surety bond
issued by any insurance company authorized by
the Commissioner or make a cash deposit in such
amount as herein required as limit of liability for
purposes specified in section three hundred
seventy-four.
(1)
In the case of a land transportation
operator the insurance guaranty in cash or surety
bond shall cover liability for death or bodily injuries
of third-parties &/or passengers arising out of the
use of such vehicle in the amount not less than
twelve thousand pesos per passenger or third party
& an amount, for each of such categories, in any
one accident of not less than that set forth in the
following scale
(a)
Motor vehicles w/ an authorized capacity
of twenty-six or more passengers: Fifty thousand
pesos;
(b)
Motor vehicles w/ an authorized capacity
of fr. twelve to twenty-five passengers: Forty
thousand pesos;
(c)
Motor vehicles w/ an authorized capacity
of fr. six to eleven passengers: Thirty thousand
pesos;
(d)
Motor vehicles w/ an authorized capacity
of five or less passengers: Five thousand pesos
multiplied by the authorized capacity.
Provided, however, That such cash deposit made
to, or surety bond posted w/, the Commissioner
shall be resorted to by him in cases of accidents
the indemnities for w/c to third-parties &/or
passengers are not settled accordingly by the land
transportation operator &, in that event, the said
cash deposit shall be replenished or such surety
bond shall be restored w/ sixty days after
impairment or expiry, as the case may be, by such
land transportation operator, otherwise, he shall

secure the insurance policy required by this

chapter. The aforesaid cash deposit may be
invested by the Commissioner in readily
marketable government bonds &/or securities.
(2)
In the case of an owner of a motor
vehicle, the insurance or guaranty in cash or surety
bond shall cover liability for death or injury to third
parties in an amount not less than that set forth in
the following scale in any one accident:
I.

Private Cars

(a)
pesos;

Bantam :

Twenty thousand

(b)
pesos;

Light

Twenty thousand

(c)
pesos;

Heavy

Thirty thousand

II.

Other Private Vehicles

(a)
Tricycles, motorcycles, & scooters :
Twelve thousand pesos;
(b)
Vehicles w/ an unladen weight of 2,600
kilos or less : Twenty thousand pesos;
(c)
Vehicles w/ an unladen weight of
between 2,601 kilos & 3,930 kilos : Thirty thousand
pesos;
(d)
Vehicles w/ an unladen weight over 3,930
kilos : Fifty thousand pesos.
The Commissioner may, if warranted, set forth
schedule of indemnities for the payment of claims
for death or bodily injuries w/ the coverages set
forth herein. (As amended by Presidential Decree
No. 1455 & 1814)
SECTION 378.
Any claim for death or injury to
any passenger or third party pursuant to the
provisions of this chapter shall be paid without the
necessity of proving fault or negligence of any kind;
Provided, That for purposes of this section
(a)
The total indemnity in respect of any
person shall not exceed five thousand pesos;
(ii)
The following proofs of loss, when
submitted under oath, shall be sufficient evidence
to substantiate the claim:

(a)

Police report of accident; &

(b)
Death certificate & evidence sufficient to
establish the proper payee; or
(c)
Medical report & evidence of medical or
hospital disbursement in respect of w/c refund is
claimed.
(iii)
Claim may be made against one motor
vehicle only. In the case of an occupant of a
vehicle, claim shall lie against the insurer of the
vehicle in w/c the occupant is riding, mounting or
dismounting fr.. In any other case, claim shall lie
against the insurer of the directly offending vehicle.
In all cases, the right of the party paying the claim
to recover against the owner of the vehicle
responsible for the accident shall be maintained.
SECTION 379.
No land transportation operator
or owner of motor vehicle shall be unreasonably
denied the policy of insurance or surety bond
required by this chapter by the insurance
companies authorized to issue the same,
otherwise, the Land Transportation Commission
shall require fr. said land transportation operator or
owner of the vehicle, in lieu of a policy of insurance
or surety bond, a certificate that a cash deposit has
been made w/ the Commissioner in such amount
required as limits of indemnity in section three
hundred seventy-seven to answer for the
passenger &/or third-party liability of such land
transportation operator or owner of the vehicle.
No insurance company may issue the policy of
insurance or surety bond required under this
chapter unless so authorized under existing laws.
The authority to engage in the casualty &/or surety
lines of business of an insurance company that
refuses to issue or renew, without just cause, the
insurance policy or surety bond therein required
shall be withdrawn immediately. (As amended by
Presidential Decree No. 1455 & 1814)
SECTION 380.
No cancellation of the policy
shall be valid unless written notice thereof is given
to the land transportation operator or owner of the
vehicle & to the Land Transportation Commission at
least fifteen days prior to the intended effective
date thereof.
Upon receipt of such notice, the Land
Transportation Commission, unless it receives
evidence of a new valid insurance or guaranty in
cash or surety bond as prescribed in this chapter,

or an endorsement of revival of the cancelled one,

shall order the immediate confiscation of the plates
of the motor vehicle covered by such cancelled
policy. The same may be re-issued only upon
presentation of a new insurance policy or that a
guaranty in cash or surety band has been made or
posted w/ the Commissioner & w/c meets the
requirements of this chapter, or an endorsement or
revival of the cancelled one. (As amended by
Presidential Decree No. 1455)
SECTION 381.
If the cancellation of the policy
or surety bond is contemplated by the land
transportation operator or owner of the vehicle, he
shall, before the policy or surety bond ceases to be
effective, secure a similar policy of insurance or
surety bond to replace the policy or surety bond to
be cancelled or make a cash deposit in sufficient
amount w/ the Commissioner & without any gap,
file the required documentation w/ the Land
Transportation Commission, & notify the insurance
company concerned of the cancellation of its policy
or surety bond. (As amended by Presidential
Decree No. 1455)

SECTION 382.
In case of change of ownership
of a motor vehicle, or change of the engine of an
insured vehicle, there shall be no need of issuing a
new policy until the next date of registration or
renewal of registration of such vehicle, & provided
that the insurance company shall agree to continue
the policy, such change of ownership or such
change of the engine shall be indicated in a
corresponding endorsement by the insurance
company concerned, & a signed duplicate of such
endorsement shall, within a reasonable time, be
filed w/ the Land Transportation Commission.

SECTION 383.
In the settlement & payment of
claims, the indemnity shall not be availed of by any
accident victim or claimant as an instrument of
enrichment by reason of an accident, but as an
assistance or restitution insofar as can fairly be
ascertained.

SECTION 384.
Any person having any claim
upon the policy issued pursuant to this Chapter
shall, without any unnecessary delay, present to
the insurance company concerned a written notice
of claim setting forth the nature, extent & duration
of the injuries sustained as certified by a duly

licensed physician. Notice of claim must be filed

within six months fr. date of accident, otherwise,
the claim shall be deemed waived. Action or suit for
recovery of damage due to loss or injury must be
brought, in proper cases, w/ the Commissioner or
the Courts within one year fr. denial of the claim,
otherwise, the claimants right of action shall
prescribe. (As amended by Presidential Decree
1814 & Batasang Pambansa Blg. 874)

SECTION 385.
The insurance company
concerned shall forthwith ascertain the truth &
extent of the claim & make payment within five
working days after reaching an agreement. If no
agreement is reached, the insurance company shall
pay only the no-fault indemnity provided in
section three hundred seventy-eight without
prejudice to the claimant fr. pursuing his claim
further, in w/c case, he shall not be required or
compelled by the insurance company to execute
any quit claim or document releasing it fr. liability
under the policy of insurance or surety bond
issued. (As amended by Presidential Decree No.
1455)
In case of any dispute in the enforcement of the
provisions of any policy issued pursuant to this
chapter, the adjudication of such dispute shall be
within the original & exclusive jurisdiction of the
Commissioner, subject to the limitations provided
in section four hundred sixteen.
SECTION 386.
It shall be unlawful for a land
transportation operator or owner of motor vehicle
to require his or its drivers or other employees to
contribute in the payment of premiums.

SECTION 387.
No government office or agency
having the duty of implementing the provisions of
this chapter nor any official or employee thereof
shall act as agent in procuring the insurance policy
or surety bond provided for herein. The commission
of an agent procuring the said policy or bond shall
in no case exceed ten per centum of the amount of
the premiums therefor.

SECTION 388.
Any land transportation
operator or owner of motor vehicle or any other
person violating any of the provisions of the
preceding sections shall be punished by a fine of

not less than five hundred pesos but not more than
one thousand pesos &/or imprisonment for not
more than six months. The violation of section
three hundred seventy-seven by a land
transportation operator shall be a sufficient cause
for the revocation of the certificate of public
convenience issued by the Board of Transportation
covering the vehicle concerned.

SECTION 389.
Whenever any violation of the
provisions of this chapter is committed by a
corporation or association, or by a government
office or entity, the executive officer or officers of
said corporation, association or government office
or entity who shall have knowingly permitted, or
failed to prevent, said violation shall be held liable
as principals.

PERIOD OF FILING AND ACTION TO RECOVER

DAMAGES: SEC. 397. Any person having any claim
upon the policy issued pursuant to this chapter
shall, without any unnecessary delay, present to
the insurance company concerned a written notice
of claim setting forth the nature, extent and
duration of the injuries sustained as certified by a
duly licensed physician. Notice of claim must be
filed within six (6) months from the date of
accident, otherwise, the claim shall be deemed
waived. Action or suit for recovery of damage due
to loss or injury must be brought, in proper cases,
with the Commissioner or the courts within one (1)
year from denial of the claim, otherwise, the
claimants right of action shall prescribe.
NATURE OF LIABILITY OF INSURER : SEC. 398.
The insurance company concerned shall forthwith
ascertain the truth and extent of the claim and
make payment within five (5) working days after
reaching an agreement. If no agreement is
reached, the insurance company shall pay only the
no-fault indemnity provided in Section 391 without
prejudice to the claimant from pursuing his claim
further, in which case, he shall not be required or
compelled by the insurance company to execute
any quit claim or document releasing it from
liability under the policy of insurance or surety
bond issued.
In case of any dispute in the enforcement of the
provisions of any policy issued pursuant to this
chapter, the adjudication of such dispute shall be
within the original and exclusive jurisdiction of the
Commissioner, subject to the limitations provided
in Section 439.
CASES:

PERLA V. ANCHETA
The instant petition for certiorari and prohibition
with preliminary injunction concerns the ability of
insurers under the "no fault indemnity" provision of
the Insurance Code. *
On December 27, 1977, in a collision between the
IH Scout in which private respondents were riding
and a Superlines bus along the national highway in
Sta. Elena, Camarines Norte, private respondents
sustained physics injuries in varying degrees of
gravity. Thus, they filed with the Court of First
Instance of Camarines Norte on February 23,1978 a
complaint for damages against Superlines, the bus
driver and petitioner, the insurer of the bus [Rollo,
pp. 27-39.] The bus was insured with petitioner for
the amount of P50,000.00 as and for passenger
liability and P50,000.00 as and for third party
liability. The vehicle in which private respondents
were riding was insured with Malayan Insurance Co.
Even before summons could be served, respondent
judge issued an order dated March 1, 1978 [Rollo,
pp. 40-41], the pertinent portion of which stated:
The second incident is the prayer for an order of
this court for the Insurance Company, Perla
Compania de Seguros, Inc., to pay immediately
the P5,000.00 under the "no fault clause" as
provided for under Section 378 of the Insurance
Code, and finding that the requisite documents
to be attached in the record, the said Insurance
Company is therefore directed to pay the
plaintiffs (private respondents herein) within
five (5) days from receipt of this order.
Petitioner denied in its Answer its alleged liability
under the "no fault indemnity" provision [Rollo, p.
44] and likewise moved for the reconsideration of
the order. Petitioner held the position that under
Sec. 378 of the Insurance Code, the insurer liable to
pay the P5,000.00 is the insurer of the vehicle in
which private respondents were riding, not
petitioner, as the provision states that "[i]n the
case of an occupant of a vehicle, claim shall lie
against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from."
Respondent judge, however, denied
reconsideration. A second motion for
reconsideration was filed by petitioner. However, in
an order dated January 3, 1979, respondent judge
denied the second motion for reconsideration and
ordered the issuance of a writ of execution [Rollo,
p. 69.] Hence, the instant petition praying
principally for the annulment and setting aside of

respondent judge's orders dated March 1, 1978 and

January 3, 1979.
The Court issued a temporary restraining order on
January 24,1979 [Rollo pp. 73-74.]
The sole issue raised in this petition is whether or
not petitioner is the insurer liable to indemnify
private respondents under Sec. 378 of the
Insurance Code.
The key to the resolution of the issue is of courts e
Sec. 378, which provides:
Sec. 378. Any claim for death or injury to any
passenger or third party pursuant to the
provision of this chapter shall be paid without
the necessity of proving fault or negligence of
any kind. Provided, That for purposes of this
section
(i) The indemnity in respect of any one person
shall not exceed five thousand pesos;
(ii) The following proofs of loss, when submitted
under oath, shall be sufficient evidence to
substantiate the claim:
(a) Police report of accident, and
(b) Death certificate and evidence
sufficient to establish the proper payee, or
(c) Medical report and evidence of medical
or hospital disbursement in respect of
which refund is claimed;
(iii) Claim may be made against one
motor vehicle only. In the case of an
occupant of a vehicle, claim shall lie
against the insurer of the vehicle in
which the occupant is riding,
mounting or dismounting from. In
any other case, claim shall lie
against the insurer of the directly
offending vehicle. In all cases, the
right of the party paying the claim to
recover against the owner of the
vehicle responsible for the accident
shall be maintained. [Emphasis
supplied.]
From a reading of the provision, which is couched in
straight-forward and unambiguous language, the
following rules on claims under the "no fault
indemnity" provision, where proof of fault or

negligence is not necessary for payment of any

claim for death Or injury to a passenger or a third
party, are established:
1. A claim may be made against one motor vehicle
only.
2. If the victim is an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle. in
which he is riding, mounting or dismounting from.
3. In any other case (i.e. if the victim is not an
occupant of a vehicle), the claim shall lie against
the insurer of the directly offending vehicle.
4. In all cases, the right of the party paying the
claim to recover against the owner of the vehicle
responsible for the accident shall be maintained.
The law is very clear the claim shall lie against
the insurer of the vehicle in which the
"occupant" ** is riding, and no other. The claimant
is not free to choose from which insurer he will
claim the "no fault indemnity," as the law, by using
the word "shall, makes it mandatory that the claim
be made against the insurer of the vehicle in which
the occupant is riding, mounting or dismounting
from.
That said vehicle might not be the one that caused
the accident is of no moment since the law itself
provides that the party paying the claim under Sec.
378 may recover against the owner of the vehicle
responsible for the accident. This is precisely the
essence of "no fault indemnity" insurance which
was introduced to and made part of our laws in
order to provide victims of vehicular accidents or
their heirs immediate compensation, although in a
limited amount, pending final determination of who
is responsible for the accident and liable for the
victims'injuries or death. In turn, the "no fault
indemnity" provision is part and parcel of the
Insurance Code provisions on compulsory motor
vehicle ability insurance [Sec. 373-389] and should
be read together with the requirement for
compulsory passenger and/or third party liability
insurance [Sec. 377] which was mandated in order
to ensure ready compensation for victims of
vehicular accidents.
Irrespective of whether or not fault or negligence
lies with the driver of the Superlines bus, as private
respondents were not occupants of the bus, they
cannot claim the "no fault indemnity" provided in
Sec. 378 from petitioner. The claim should be made
against the insurer of the vehicle they were riding.
This is very clear from the law. Undoubtedly, in

ordering petitioner to pay private respondents the

'no fault indemnity,' respondent judge gravely
abused his discretion in a manner that amounts to
lack of jurisdiction. The issuance of the corrective
writ of certiorari is therefore warranted.
WHEREFORE, the petition is GRANTED and
respondent judge's order dated March 1, 1978,
requiring petitioner to pay private respondents the
amount of P5,000.00 as "no fault indemnity' under
Sec. 378 of the Insurance Code, and that of January
3, 1979, denying the second motion for
reconsideration and issuing a writ of execution, are
ANNULLED and SET ASIDE. The temporary
restraining order issued by the Court on January 24,
1979 is made permanent.
SO ORDERED.
PERLA COMPANIA DE SEGUROS, INC. V. CA
These are two petitions for review on certiorari, one
filed by Perla Compania de Seguros, Inc. in G.R. No.
96452, and the other by FCP Credit Corporation in
G.R. No. 96493, both seeking to annul and set
aside the decision dated July 30, 1990 1 of the
Court of Appeals in CA-G.R. No. 13037, which
reversed the decision of the Regional Trial Court of
Manila, Branch VIII in Civil Case No. 83-19098 for
replevin and damages. The dispositive portion of
the decision of the Court of Appeals reads, as
follows:
WHEREFORE, the decision appealed from is
reversed; and appellee Perla Compania de
Seguros, Inc. is ordered to indemnify appellants
Herminio and Evelyn Lim for the loss of their
insured vehicle; while said appellants are
ordered to pay appellee FCP Credit Corporation
all the unpaid installments that were due and
payable before the date said vehicle was
carnapped; and appellee Perla Compania de
Seguros, Inc. is also ordered to pay appellants
moral damages of P12,000.00 for the latter's
mental sufferings, exemplary damages of
P20,000.00 for appellee Perla Compania de
Seguros, Inc.'s unreasonable refusal on sham
grounds to honor the just insurance claim of
appellants by way of example and correction for
public good, and attorney's fees of P10,000.00
as a just and equitable reimbursement for the
expenses incurred therefor by appellants, and
the costs of suit both in the lower court and in
this appeal. 2
The facts as found by the trial court are as follows:

On December 24, 1981, private respondents

spouses Herminio and Evelyn Lim executed a
promissory note in favor Supercars, Inc. in the sum
of P77,940.00, payable in monthly installments
according to the schedule of payment indicated in
said note, 3 and secured by a chattel mortgage
over a brand new red Ford Laser 1300 5DR
Hatchback 1981 model with motor and serial No.
SUPJYK-03780, which is registered under the name
of private respondent Herminio Lim 4and insured
with the petitioner Perla Compania de Seguros, Inc.
(Perla for brevity) for comprehensive coverage
under Policy No. PC/41PP-QCB-43383. 5
On the same date, Supercars, Inc., with notice to
private respondents spouses, assigned to petitioner
FCP Credit Corporation (FCP for brevity) its rights,
title and interest on said promissory note and
chattel mortgage as shown by the Deed of
Assignment. 6
At around 2:30 P.M. of November 9, 1982, said
vehicle was carnapped while parked at the back of
Broadway Centrum along N. Domingo Street,
Quezon City. Private respondent Evelyn Lim, who
was driving said car before it was carnapped,
immediately called up the Anti-Carnapping Unit of
the Philippine Constabulary to report said incident
and thereafter, went to the nearest police
substation at Araneta, Cubao to make a police
report regarding said incident, as shown by the
certification issued by the Quezon City police. 7
On November 10, 1982, private respondent Evelyn
Lim reported said incident to the Land
Transportation Commission in Quezon City, as
shown by the letter of her counsel to said
office, 8 in compliance with the insurance
requirement. She also filed a complaint with the
Headquarters, Constabulary Highway Patrol
Group. 9
On November 11, 1982, private respondent filed a
claim for loss with the petitioner Perla but said
claim was denied on November 18, 1982 10 on the
ground that Evelyn Lim, who was using the vehicle
before it was carnapped, was in possession of an
expired driver's license at the time of the loss of
said vehicle which is in violation of the authorized
driver clause of the insurance policy, which states,
to wit:
AUTHORIZED DRIVER:
Any of the following: (a) The Insured (b) Any
person driving on the Insured's order, or with
his permission. Provided that the person driving

is permitted, in accordance with the licensing or

other laws or regulations, to drive the
Scheduled Vehicle, or has been permitted and is
not disqualified by order of a Court of Law or by
reason of any enactment or regulation in that
behalf. 11
On November 17, 1982, private respondents
requests from petitioner FCP for a suspension of
payment on the monthly amortization agreed upon
due to the loss of the vehicle and, since the
carnapped vehicle insured with petitioner Perla,
said insurance company should be made to pay the
remaining balance of the promissory note and the
chattel mortgage contract.
Perla, however, denied private respondents' claim.
Consequently, petitioner FCP demanded that
private respondents pay the whole balance of the
promissory note or to return the vehicle 12 but the
latter refused.
On July 25, 1983, petitioner FCP filed a complaint
against private respondents, who in turn filed an
amended third party complaint against petitioner
Perla on December 8, 1983. After trial on the
merits, the trial court rendered a decision, the
dispositive portion which reads:
WHEREFORE, in view of the
foregoing, judgment is hereby
rendered as follows:
1. Ordering defendants Herminio Lim
and Evelyn Lim to pay, jointly and
severally, plaintiff the sum of
P55,055.93 plus interest thereon at
the rate of 24% per annum from July
2, 1983 until fully paid;
2. Ordering defendants to pay
plaintiff P50,000.00 as and for
attorney's fees; and the costs of suit.
Upon the other hand, likewise,
ordering the DISMISSAL of the ThirdParty Complaint filed against ThirdParty Defendant. 13
Not satisfied with said decision, private
respondents appealed the same to the Court of
Appeals, which reversed said decision.
After petitioners' separate motions for
reconsideration were denied by the Court of
Appeals in its resolution of December 10, 1990,

petitioners filed these separate petitions for review

on certiorari.
Petitioner Perla alleged that there was grave abuse
of discretion on the part of the appellate court in
holding that private respondents did not violate the
insurance contract because the authorized driver
clause is not applicable to the "Theft" clause of said
Contract.
For its part, petitioner FCP raised the issue of
whether or not the loss of the collateral exempted
the debtor from his admitted obligations under the
promissory note particularly the payment of
interest, litigation expenses and attorney's fees.
We find no merit in Perla's petition.
The comprehensive motor car insurance policy
issued by petitioner Perla undertook to indemnify
the private respondents against loss or damage to
the car (a) by accidental collision or overturning, or
collision or overturning consequent upon
mechanical breakdown or consequent upon wear
and tear; (b) by fire, external explosion, self-ignition
or lightning or burglary, housebreaking
or theft; and (c) by malicious act. 14
Where a car is admittedly, as in this case,
unlawfully and wrongfully taken without the
owner's consent or knowledge, such taking
constitutes theft, and, therefore, it is the "THEFT"'
clause, and not the "AUTHORIZED DRIVER" clause
that should apply. As correctly stated by the
respondent court in its decision:
. . . Theft is an entirely different legal
concept from that of accident. Theft
is committed by a person with the
intent to gain or, to put it in another
way, with the concurrence of the
doer's will. On the other hand,
accident, although it may proceed or
result from negligence, is the
happening of an event without the
concurrence of the will of the person
by whose agency it was caused.
(Bouvier's Law Dictionary, Vol. I,
1914 ed., p. 101).
Clearly, the risk against accident is
distinct from the risk against theft.
The "authorized driver clause" in a
typical insurance policy is in
contemplation or anticipation of
accident in the legal sense in which it
should be understood, and not in

contemplation or anticipation of an
event such as theft. The distinction
often seized upon by insurance
companies in resisting claims from
their assureds between death
occurring as a result of accident and
death occurring as a result of intent
may, by analogy, apply to the case
at bar. Thus, if the insured vehicle
had figured in an accident at the
time she drove it with an expired
license, then, appellee Perla
Compania could properly resist
appellants' claim for indemnification
for the loss or destruction of the
vehicle resulting from the accident.
But in the present case. The loss of
the insured vehicle did not result
from an accident where intent was
involved; the loss in the present case
was caused by theft, the commission
of which was attended by intent. 15
It is worthy to note that there is no causal
connection between the possession of a valid
driver's license and the loss of a vehicle. To rule
otherwise would render car insurance practically a
sham since an insurance company can easily
escape liability by citing restrictions which are not
applicable or germane to the claim, thereby
reducing indemnity to a shadow.
We however find the petition of FCP meritorious.
This Court agrees with petitioner FCP that private
respondents are not relieved of their obligation to
pay the former the installments due on the
promissory note on account of the loss of the
automobile. The chattel mortgage constituted over
the automobile is merely an accessory contract to
the promissory note. Being the principal contract,
the promissory note is unaffected by whatever
befalls the subject matter of the accessory
contract. Therefore, the unpaid balance on the
promissory note should be paid, and not just the
installments due and payable before the
automobile was carnapped, as erronously held by
the Court of Appeals.
However, this does not mean that private
respondents are bound to pay the interest,
litigation expenses and attorney's fees stipulated in
the promissory note. Because of the peculiar
relationship between the three contracts in this
case, i.e., the promissory note, the chattel
mortgage contract and the insurance policy, this
Court is compelled to construe all three contracts

as intimately interrelated to each other, despite the

fact that at first glance there is no relationship
whatsoever between the parties thereto.
Under the promissory note, private respondents are
obliged to pay Supercars, Inc. the amount stated
therein in accordance with the schedule
provided for. To secure said promissory note,
private respondents constituted a chattel mortgage
in favor of Supercars, Inc. over the automobile the
former purchased from the latter. The chattel
mortgage, in turn, required private respondents to
insure the automobile and to make the proceeds
thereof payable to Supercars, Inc. The promissory
note and chattel mortgage were assigned by
Supercars, Inc. to petitioner FCP, with the
knowledge of private respondents. Private
respondents were able to secure an insurance
policy from petitioner Perla, and the same was
made specifically payable to petitioner FCP. 16
The insurance policy was therefore meant to be an
additional security to the principal contract, that is,
to insure that the promissory note will still be paid
in case the automobile is lost through accident or
theft. The Chattel Mortgage Contract provided that:
THE SAID MORTGAGOR COVENANTS AND
AGREES THAT HE/IT WILL CAUSE THE
PROPERTY/IES HEREIN-ABOVE MORTGAGED TO
BE INSURED AGAINST LOSS OR DAMAGE BY
ACCIDENT, THEFT AND FIRE FOR A PERIOD OF
ONE YEAR FROM DATE HEREOF AND EVERY
YEAR THEREAFTER UNTIL THE MORTGAGE
OBLIGATION IS FULLY PAID WITH AN INSURANCE
COMPANY OR COMPANIES ACCEPTABLE TO THE
MORTGAGEE IN AN AMOUNT NOT LESS THAN
THE OUTSTANDING BALANCE OF THE
MORTGAGE OBLIGATION; THAT HE/IT WILL
MAKE ALL LOSS, IF ANY, UNDER SUCH POLICY
OR POLICIES, PAYABLE TO THE MORTGAGE OR
ITS ASSIGNS AS ITS INTERESTS MAY APPEAR
AND FORTHWITH DELIVER SUCH POLICY OR
POLICIES TO THE MORTGAGEE, . . . . 17
It is clear from the abovementioned provision that
upon the loss of the insured vehicle, the insurance
company Perla undertakes to pay directly to the
mortgagor or to their assignee, FCP, the
outstanding balance of the mortgage at the time of
said loss under the mortgage contract. If the claim
on the insurance policy had been approved by
petitioner Perla, it would have paid the proceeds
thereof directly to petitioner FCP, and this would
have had the effect of extinguishing private
respondents' obligation to petitioner FCP. Therefore,
private respondents were justified in asking

petitioner FCP to demand the unpaid installments

from petitioner Perla.
Because petitioner Perla had unreasonably denied
their valid claim, private respondents should not be
made to pay the interest, liquidated damages and
attorney's fees as stipulated in the promissory
note. As mentioned above, the contract of
indemnity was procured to insure the return of the
money loaned from petitioner FCP, and the
unjustified refusal of petitioner Perla to recognize
the valid claim of the private respondents should
not in any way prejudice the latter.
Private respondents can not be said to have unduly
enriched themselves at the expense of petitioner
FCP since they will be required to pay the latter the
unpaid balance of its obligation under the
promissory note.
In view of the foregoing discussion, We hold that
the Court of Appeals did not err in requiring
petitioner Perla to indemnify private respondents
for the loss of their insured vehicle. However, the
latter should be ordered to pay petitioner FCP the
amount of P55,055.93, representing the unpaid
installments from December 30, 1982 up to July 1,
1983, as shown in the statement of account
prepared by petitioner FCP, 18 plus legal interest
from July 2, 1983 until fully paid.
As to the award of moral damages, exemplary
damages and attorney's fees, private respondents
are legally entitled to the same since petitioner
Perla had acted in bad faith by unreasonably
refusing to honor the insurance claim of the private
respondents. Besides, awards for moral and
exemplary damages, as well as attorney's fees are
left to the sound discretion of the Court. Such
discretion, if well exercised, will not be disturbed on
appeal. 19
WHEREFORE, the assailed decision of the Court of
Appeals is hereby MODIFIED to require private
respondents to pay petitioner FCP the amount of
P55,055.93, with legal interest from July 2, 1983
until fully paid. The decision appealed from is
hereby affirmed as to all other respects. No
pronouncement as to costs.
SO ORDERED.
SHERMAN SHAFER, V. JUDGE
This is a petition for review on certiorari of the
Order * of the Regional Trial Court, Olongapo City,

Branch 75, dated 24 April 1986 dismissing

petitioner's third party complaint filed in Criminal
Case No. 381-85, a prosecution for reckless
imprudence resulting in damage to property and
serious physical injuries. 1

damages. Instead, in the course of the trial in the

criminal case, Poblete, Sr. testified on his claim for
damages for the serious physical injuries which he
claimed to have sustained as a result of the
accident.

On 2 January 1985, petitioner Sherman Shafer

obtained a private car policy, GA No. 0889, 2 over
his Ford Laser car with Plate No. CFN-361 from
Makati Insurance Company, Inc., for third party
liability (TPL).<re||an1w> During the
effectivity of the policy, an information 3 for
reckless imprudence resulting in damage to
property and serious physical injuries was filed
against petitioner. The information reads as follows:

Upon motion, petitioner was granted leave by the

former presiding judge of the trail court to file a
third party complaint against the herein private
respondent, Makati Insurance Company, Inc. Said
insurance company, however, moved to vacate the
order granting leave to petitioner to file a third
party complaint against it and/or to dismiss the
same. 5

That on or about the seventeeth (17th) day of

May 1985, in the City of Olongapo, Philippines,
and within the jurisdiction of this Honorable
Court, the above-named accused, being then
the driver and in actual physical control of a
Ford Laser car bearing Plate No. CFN-361, did
then and there wilfully, unlawfully and
criminally drive, operate and manage the said
Ford Laser car in a careless, reckless and
imprudent manner without exercising
reasonable caution, diligence and due care to
avoid accident to persons and damage to
property and in disregard of existing traffic rules
and regulations, causing by such carelessness,
recklessness and imprudence the said Ford
Laser car to hit and bump a Volkswagen car
bearing Plate No. NJE-338 owned and driven by
Felino llano y Legaspi, thereby causing damage
in the total amount of P12,345.00 Pesos,
Philippine Currency, and as a result thereof one
Jovencio Poblete, Sr. who was on board of the
said Volkswagen car sustained physical injuries,
to wit:
1. 2 cm. laceration of left side of tongue.
2. 6 cm. laceration with partial transection
of muscle (almost full thickness) left side of
face.
3. Full thickness laceration of lower lip and
adjacent skin.
which injuries causing [sic] deformity on the face.

The owner of the damaged Volkswagen car filed a

separate civil action against petitioner for
damages, while Jovencio Poblete, Sr., who was a
passenger in the Volkswagen car when allegedly hit
and bumped by the car driven by petitioner, did not
reserve his right to file a separate civil action for

On 24 April 1987, the court a quo issued an order

dismissing the third party complaint on the ground
that it was premature, based on the premise that
unless the accused (herein petitioner) is found
guilty and sentenced to pay the offended party
(Poblete Sr.) indemnity or damages, the third party
complaint is without cause of action. The court
further stated that the better procedure is for the
accused (petitioner) to wait for the outcome of the
criminal aspect of the case to determine whether or
not the accused, also the third party plaintiff, has a
cause of action against the third party defendant
for the enforcement of its third party liability (TPL)
under the insurance contract. 6Petitioner moved for
reconsideration of said order, but the motion was
denied; 7 hence, this petition.
It is the contention of herein petitioner that the
dismissal of the third party complaint amounts to a
denial or curtailment of his right to defend himself
in the civil aspect of the case. Petitioner further
raises the legal question of whether the accused in
a criminal action for reckless imprudence, where
the civil action is jointly prosecuted, can legally
implead the insurance company as third party
defendant under its private car insurance policy, as
one of his modes of defense in the civil aspect of
said proceedings.
On the other hand, the insurance company submits
that a third party complaint is, under the rules,
available only if the defendant has a right to
demand contribution, indemnity, subrogation or
any other relief in respect of plaintiff's claim, to
minimize the number of lawsuits and avoid the
necessity of bringing two (2) or more suits involving
the same subject matter. The insurance company
further contends that the contract of motor vehicle
insurance, the damages and attorney's fees
claimed by accused/third party plaintiff are matters
entirely different from his criminal liability in the
reckless imprudence case, and that petitioner has

no cause of action against the insurer until

petitioner's liability shall have been determined by
final judgment, as stipulated in the contract of
insurance. 8
Compulsory Motor Vehicle Liability Insurance (third
party liability, or TPL) is primarily intended to
provide compensation for the death or bodily
injuries suffered by innocent third parties or
passengers as a result of a negligent operation and
use of motor vehicles. 9 The victims and/or their
dependents are assured of immediate financial
assistance, regardless of the financial capacity of
motor vehicle owners.
The liability of the insurance company under the
Compulsory Motor Vehicle Liability Insurance is for
loss or damage. Where an insurance policy insures
directly against liability, the insurer's liability
accrues immediately upon the occurrence of the
injury or event upon which the liability depends,
and does not depend on the recovery of judgment
by the injured party against the insured. 10
The injured for whom the contract of insurance is
intended can sue directly the insurer. The general
purpose of statutes enabling an injured person to
proceed directly against the insurer is to protect
injured persons against the insolvency of the
insured who causes such injury, and to give such
injured person a certain beneficial interest in the
proceeds of the policy, and statutes are to be
liberally construed so that their intended purpose
may be accomplished. It has even been held that
such a provision creates a contractual relation
which inures to the benefit of any and every person
who may be negligently injured by the named
insured as if such injured person were specifically
named in the policy. 11
In the event that the injured fails or refuses to
include the insurer as party defendant in his claim
for indemnity against the insured, the latter is not
prevented by law to avail of the procedural rules
intended to avoid multiplicity of suits. Not even a
"no action" clause under the policy-which requires
that a final judgment be first obtained against the
insured and that only thereafter can the person
insured recover on the policy can prevail over the
Rules of Court provisions aimed at avoiding
multiplicity of suits. 12
In the instant case, the court a quo erred in
dismissing petitioner's third party complaint on the
ground that petitioner had no cause of action yet
against the insurance company (third party
defendant). There is no need on the part of the

insured to wait for the decision of the trial court

finding him guilty of reckless imprudence. The
occurrence of the injury to the third party
immediately gave rise to the liability of the insurer
under its policy.
A third party complaint is a device allowed by the
rules of procedure by which the defendant can
bring into the original suit a party against whom he
will have a claim for indemnity or remuneration as
a result of a liability established against him in the
original suit. 13 Third party complaints are allowed
to minimize the number of lawsuits and avoid the
necessity of bringing two (2) or more actions
involving the same subject matter. They are
predicated on the need for expediency and the
avoidance of unnecessary lawsuits. If it appears
probable that a second action will result if the
plaintiff prevails, and that this result can be
avoided by allowing the third party complaint to
remain, then the motion to dismiss the third party
complaint should be denied. 14
Respondent insurance company's contention that
the third party complaint involves extraneous
matter which will only clutter, complicate and delay
the criminal case is without merit. An offense
causes two (2) classes of injuries the first is the
social injury produced by the criminal act which is
sought to be repaired thru the imposition of the
corresponding penalty, and the second is the
personal injury caused to the victim of the crime,
which injury is sought to be compensated thru
indemnity, which is civil in nature. 15
In the instant case, the civil aspect of the offense
charged, i.e., serious physical injuries allegedly
suffered by Jovencio Poblete, Sr., was impliedly
instituted with the criminal case. Petitioner may
thus raise all defenses available to him insofar as
the criminal and civil aspects of the case are
concerned. The claim of petitioner for payment of
indemnity to the injured third party, under the
insurance policy, for the alleged bodily injuries
caused to said third party, arose from the offense
charged in the criminal case, from which the
injured (Jovencio Poblete, Sr.) has sought to recover
civil damages. Hence, such claim of petitioner
against the insurance company cannot be regarded
as not related to the criminal action.
WHEREFORE, the instant petition is GRANTED. The
questioned order dated 24 April 1987 is SET ASIDE
and a new one entered admitting petitioner's third
party complaint against the private respondent
Makati Insurance Company, Inc.

SO ORDERED.
FIGURACION VDA. DE MAGLANA, V.
CONSOLACION
The nature of the liability of an insurer sued
together with the insured/operator-owner of a
common carrier which figured in an accident
causing the death of a third person is sought to be
defined in this petition for certiorari.
The facts as found by the trial court are as follows:
. . . Lope Maglana was an employee
of the Bureau of Customs whose
work station was at Lasa, here in
Davao City. On December 20, 1978,
early morning, Lope Maglana was on
his way to his work station, driving a
motorcycle owned by the Bureau of
Customs. At Km. 7, Lanang, he met
an accident that resulted in his
death. He died on the spot. The PUJ
jeep that bumped the deceased was
driven by Pepito Into, operated and
owned by defendant Destrajo. From
the investigation conducted by the
traffic investigator, the PUJ jeep was
overtaking another passenger jeep
that was going towards the city
poblacion. While overtaking, the PUJ
jeep of defendant Destrajo running
abreast with the overtaken jeep,
bumped the motorcycle driven by
the deceased who was going towards
the direction of Lasa, Davao City. The
point of impact was on the lane of
the motorcycle and the deceased
was thrown from the road and met
his untimely death. 1
Consequently, the heirs of Lope Maglana, Sr., here
petitioners, filed an action for damages and
attorney's fees against operator Patricio Destrajo
and the Afisco Insurance Corporation (AFISCO for
brevity) before the then Court of First Instance of
Davao, Branch II. An information for homicide thru
reckless imprudence was also filed against Pepito
Into.
During the pendency of the civil case, Into was
sentenced to suffer an indeterminate penalty of
one (1) year, eight (8) months and one (1) day
of prision correccional, as minimum, to four (4)
years, nine (9) months and eleven (11) days
of prision correccional, as maximum, with all the
accessory penalties provided by law, and to

indemnify the heirs of Lope Maglana, Sr. in the

amount of twelve thousand pesos (P12,000.00)
with subsidiary imprisonment in case of insolvency,
plus five thousand pesos (P5,000.00) in the concept
of moral and exemplary damages with costs. No
appeal was interposed by accused who later
applied for probation. 2
On December 14, 1981, the lower court rendered a
decision finding that Destrajo had not exercised
sufficient diligence as the operator of the jeepney.
The dispositive portion of the decision reads:
WHEREFORE, the Court finds
judgment in favor of the plaintiffs
against defendant Destrajo, ordering
him to pay plaintiffs the sum of
P28,000.00 for loss of income; to pay
plaintiffs the sum of P12,000.00
which amount shall be deducted in
the event judgment in Criminal Case
No. 3527-D against the driver,
accused Into, shall have been
enforced; to pay plaintiffs the sum of
P5,901.70 representing funeral and
burial expenses of the deceased; to
pay plaintiffs the sum of P5,000.00
as moral damages which shall be
deducted in the event judgment (sic)
in Criminal Case No. 3527-D against
the driver, accused Into; to pay
plaintiffs the sum of P3,000.00 as
attorney's fees and to pay the costs
of suit.
The defendant insurance company is
ordered to reimburse defendant
Destrajo whatever amounts the latter
shall have paid only up to the extent
of its insurance coverage.
SO ORDERED.

Petitioners filed a motion for the reconsideration of

the second paragraph of the dispositive portion of
the decision contending that AFISCO should not
merely be held secondarily liable because the
Insurance Code provides that the insurer's liability
is "direct and primary and/or jointly and severally
with the operator of the vehicle, although only up
to the extent of the insurance coverage." 4 Hence,
they argued that the P20,000.00 coverage of the
insurance policy issued by AFISCO, should have
been awarded in their favor.
In its comment on the motion for reconsideration,
AFISCO argued that since the Insurance Code does

not expressly provide for a solidary obligation, the

presumption is that the obligation is joint.
In its Order of February 9, 1982, the lower court
denied the motion for reconsideration ruling that
since the insurance contract "is in the nature of
suretyship, then the liability of the insurer is
secondary only up to the extent of the insurance
coverage." 5
Petitioners filed a second motion for
reconsideration reiterating that the liability of the
insurer is direct, primary and solidary with the
jeepney operator because the petitioners became
direct beneficiaries under the provision of the
policy which, in effect, is a stipulation pour
autrui. 6 This motion was likewise denied for lack of
merit.
Hence, petitioners filed the instant petition
for certiorari which, although it does not seek the
reversal of the lower court's decision in its entirety,
prays for the setting aside or modification of the
second paragraph of the dispositive portion of said
decision. Petitioners reassert their position that the
insurance company is directly and solidarily liable
with the negligent operator up to the extent of its
insurance coverage.
We grant the petition.
The particular provision of the insurance policy on
which petitioners base their claim is as follows:

Sec. 1 LIABILITY TO THE PUBLIC

1. The Company will, subject to the Limits of
Liability, pay all sums necessary to discharge
liability of the insured in respect of
(a) death of or bodily injury to any THIRD PARTY
(b) . . . .
2. . . . .
3. In the event of the death of any person entitled
to indemnity under this Policy, the Company will,
in respect of the liability incurred to such person
indemnify his personal representatives in terms
of, and subject to the terms and conditions
hereof. 7

The above-quoted provision leads to no other

conclusion but that AFISCO can be held directly
liable by petitioners. As this Court ruled in Shafer
vs. Judge, RTC of Olongapo City, Br. 75, "[w]here an
insurance policy insures directly against liability,
the insurer's liability accrues immediately upon the
occurrence of the injury or even upon which the
liability depends, and does not depend on the
recovery of judgment by the injured party against
the insured." 8 The underlying reason behind the
third party liability (TPL) of the Compulsory Motor
Vehicle Liability Insurance is "to protect injured
persons against the insolvency of the insured who
causes such injury, and to give such injured person
a certain beneficial interest in the proceeds of the
policy . . ." 9 Since petitioners had received from
AFISCO the sum of P5,000.00 under the no-fault
clause, AFISCO's liability is now limited to
P15,000.00.
However, we cannot agree that AFISCO is likewise
solidarily liable with Destrajo. In Malayan Insurance
Co., Inc. v. Court of Appeals, 10 this Court had the
opportunity to resolve the issue as to the nature of
the liability of the insurer and the insured vis-avis the third party injured in an accident. We
categorically ruled thus:
While it is true that where the insurance
contract provides for indemnity against liability
to third persons, such third persons can directly
sue the insurer, however, the direct liability of
the insurer under indemnity contracts against
third party liability does not mean that the
insurer can be held solidarily liable with the
insured and/or the other parties found at
fault. The liability of the insurer is based on
contract; that of the insured is based on tort.
In the case at bar, petitioner as insurer of Sio
Choy, is liable to respondent Vallejos (the
injured third party), but it cannot, as incorrectly
held by the trial court, be made "solidarily"
liable with the two principal tortfeasors, namely
respondents Sio Choy and San Leon Rice Mill,
Inc. For if petitioner-insurer were solidarily
liable with said, two (2) respondents by reason
of the indemnity contract against third party
liability under which an insurer can be
directly sued by a third party this will result
in a violation of the principles underlying
solidary obligation and insurance contracts.
(emphasis supplied)
The Court then proceeded to distinguish the extent
of the liability and manner of enforcing the same in
ordinary contracts from that of insurance contracts.

While in solidary obligations, the creditor may

enforce the entire obligation against one of the
solidary debtors, in an insurance contract, the
insurer undertakes for a consideration to indemnify
the insured against loss, damage or liability arising
from an unknown or contingent event. 11 Thus,
petitioner therein, which, under the insurance
contract is liable only up to P20,000.00, can not be
made solidarily liable with the insured for the entire
obligation of P29,013.00 otherwise there would
result "an evident breach of the concept of solidary
obligation."
Similarly, petitioners herein cannot validly claim
that AFISCO, whose liability under the insurance
policy is also P20,000.00, can be held solidarily
liable with Destrajo for the total amount of
P53,901.70 in accordance with the decision of the
lower court. Since under both the law and the
insurance policy, AFISCO's liability is only up to
P20,000.00, the second paragraph of the
dispositive portion of the decision in question may
have unwittingly sown confusion among the
petitioners and their counsel. What should have
been clearly stressed as to leave no room for doubt
was the liability of AFISCO under the explicit terms
of the insurance contract.

In fine, we conclude that the liability of AFISCO

based on the insurance contract is direct, but not
solidary with that of Destrajo which is based on
Article 2180 of the Civil Code. 12 As such,
petitioners have the option either to claim the
P15,000 from AFISCO and the balance from
Destrajo or enforce the entire judgment from
Destrajo subject to reimbursement from AFISCO to
the extent of the insurance coverage.
While the petition seeks a definitive ruling only on
the nature of AFISCO's liability, we noticed that the
lower court erred in the computation of the
probable loss of income. Using the formula: 2/3 of
(80-56) x P12,000.00, it awarded
P28,800.00. 13 Upon recomputation, the correct
amount is P192,000.00. Being a "plain error," we
opt to correct the same.14 Furthermore, in
accordance with prevailing jurisprudence, the
death indemnity is hereby increased to
P50,000.00. 15
WHEREFORE, premises considered, the present
petition is hereby GRANTED. The award of
P28,800.00 representing loss of income is
INCREASED to P192,000.00 and the death
indemnity of P12,000.00 to P50,000.00.
SO ORDERED.