Gaisano v Insurance G.R. No.

147839 June 8, 2006

Facts: IMC and Levi Strauss (Phils.) Inc. (LSPI) separately obtained from respondent
fire insurance policies with book debt endorsements. The insurance policies provide
for coverage on "book debts in connection with ready-made clothing materials which
have been sold or delivered to various customers and dealers of the Insured
anywhere in the Philippines."
The policies defined book debts as the "unpaid account still appearing in the Book of
Account of the Insured 45 days after the time of the loss covered under this Policy."
The policies also provide for the following conditions:
1. Warranted that the Company shall not be liable for any unpaid account in respect
of the merchandise sold and delivered by the Insured which are outstanding at the
date of loss for a period in excess of six (6) months from the date of the covering
invoice or actual delivery of the merchandise whichever shall first occur.
2. Warranted that the Insured shall submit to the Company within twelve (12) days
after the close of every calendar month all amount shown in their books of accounts
as unpaid and thus become receivable item from their customers and dealers.
Gaisano is a customer and dealer of the products of IMC and LSPI. On February 25,
1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner,
was consumed by fire. Included in the items lost or destroyed in the fire were stocks
of ready-made clothing materials sold and delivered by IMC and LSPI.

Issues: 1. WON the CA erred in construing a fire insurance policy on book debts as
one covering the unpaid accounts of IMC and LSPI since such insurance applies to loss
of the ready-made clothing materials sold and delivered to petitioner
2. WON IMC bears the risk of loss because it expressly reserved ownership of the
goods by stipulating in the sales invoices that "[i]t is further agreed that merely for
purpose of securing the payment of the purchase price the above described
merchandise remains the property of the vendor until the purchase price thereof is
fully paid."
3. WON petitioner is liable for the unpaid accounts
4. WON it has been established that petitioner has outstanding accounts with IMC
and LSPI.
Held: No. Yes. Yes. Yes but account with LSPI unsubstantiated. Petition partly granted.
Ratio: 1. Nowhere is it provided in the questioned insurance policies that the subject
of the insurance is the goods sold and delivered to the customers and dealers of the
insured.
Thus, what were insured against were the accounts of IMC and LSPI with petitioner
which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.
2. The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

Insurance of America filed a complaint for damages against Gaisano. It alleges that
IMC and LSPI were paid for their claims and that the unpaid accounts of petitioner on
the sale and delivery of ready-made clothing materials with IMC was P2,119,205.00
while with LSPI it was P535,613.00.

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has
been made or not, except that:

The RTC rendered its decision dismissing Insurance's complaint. It held that the fire
was purely accidental; that the cause of the fire was not attributable to the
negligence of the petitioner. Also, it said that IMC and LSPI retained ownership of the
delivered goods and must bear the loss.

(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been retained
by the seller merely to secure performance by the buyer of his obligati ons under the
contract, the goods are at the buyer's risk from the time of such delivery

The CA rendered its decision and set aside the decision of the RTC. It ordered Gaisano
to pay Insurance the P 2 million and the P 500,000 the latter paid to IMC and Levi
Strauss.

Thus, when the seller retains ownership only to insure that the buyer will pay its debt,
the risk of loss is borne by the buyer. Petitioner bears the risk of loss of the goods
delivered.

Hence this petition.

IMC and LSPI had an insurable interest until full payment of the value of the delivered
goods. Unlike the civil law concept of res perit domino, where ownership is the basis
for consideration of who bears the risk of loss, in property i nsurance, one's interest

is not determined by concept of title, but whether insured has substantial economic
interest in the property.
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property
may consist in: (a) an existing interest; (b) an inchoate interest founded on existing
interest; or (c) an expectancy, coupled with an existing interest in that out of which
the expectancy arises.
Anyone has an insurable interest in property who derives a benefit from its existence
or would suffer loss from its destruction. Indeed, a vendor or seller retains an
insurable interest in the property sold so long as he has any interest therein, in other
words, so long as he would suffer by its destruction, as where he has a vendor's lien.
In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts
appearing in their Books of Account 45 days after the time of the loss covered by the
policies.
3. Petitioner's argument that it is not liable because the fire is a fortuitous even t
under Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears
the loss under Article 1504 (1) of the Civil Code.
Moreover, it must be stressed that the insurance in this case is not for loss of goods
by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days
after the fire. Accordingly, petitioner's obligation is for the payment of money. As
correctly stated by the CA, where the obligation consists in the payment of money,
the failure of the debtor to make the payment even by reason of a fortuitous event
shall not relieve him of his liability. The rationale for this is that the rule that an obligor
should be held exempt from liability when the loss occurs thru a fortuitous event only
holds true when the obligation consists in the delivery of a determinate thing and
there is no stipulation holding him liable even in case of fortuitous event. It does not
apply when the obligation is pecuniary in nature.
Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the
loss or destruction of anything of the same kind does not extinguish the obligation."
This rule is based on the principle that the genus of a thing can never perish. An
obligation to pay money is generic; therefore, it is not excused by fortuitous loss of
any specific property of the debtor.
4. With respect to IMC, the respondent has adequately established its claim. The P 3
m claim has been proven. The subrogation receipt, by itself, is sufficient to establish
not only the relationship of respondent as insurer and IMC as the insured, but also

the amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim Respondent's action
against petitioner is squarely sanctioned by Article 2207 of the Civil Code which
provides:
Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person who has violated the contract.
As to LSPI, respondent failed to present sufficient evidence to prove its cause of
action. There was no evidence that respondent has been subrogated to any right
which LSPI may have against petitioner. Failure to substantiate the claim of
subrogation is fatal to petitioner's case for recovery of P535,613.00.

FIRST
FIL-SIN
LENDING
PADILLO, respondent.

CORPORATION, petitioner, vs.

GLORIA

D.

attorneys fees in favor of appellee. Other claims and counterclaims are dismissed for
lack of sufficient causes. No pronouncement as to cost.

DE CI SIO N

SO ORDERED.[6]

YNARES-SANTIAGO, J.:

The appellate court ruled that, based on the disclosure statements executed by
respondent, the interest rates should be imposed on a monthly basis but only for the
3-month term of the loan. Thereafter, the legal interest rate will apply. The CA also
found the penalty charges pegged at 1% per day of delay highly unconscionable as it
would translate to 365% per annum. Thus, it was reduced to 1% per month or 12%
per annum.

Before us is a petition for review under Rule 45 of the Rules of Court, seeking a
reversal of the Court of Appeals decision in CA-G.R. CV No. 75183 [1] dated October
16, 2003, which reversed and set aside the decision of the Regional Trial Court of
Manila, Branch 21 in Civil Case No. 00-96235.
On July 22, 1997, respondent Gloria D. Padi llo obtained a P500,000.00 loan from
petitioner First Fil-Sin Lending Corp. On September 7, 1997, respondent obtained
another P500,000.00 loan from petitioner. In both instances, respondent executed a
promissory note and disclosure statement. [2]
For the first loan, respondent made 13 monthly interest payments of P22,500.00
each before she settled the P500,000.00 outstanding principal obligation on February
2, 1999. As regards the second loan, respondent made 11 monthly interest payments
of P25,000.00 each before paying the principal loan of P500,000.00 on February 2,
1999.[3] In sum, respondent paid a total of P792,500.00 for the first loan and
P775,000.00 for the second loan.
On January 27, 2000, respondent filed an action for sum of money against herein
petitioner before the Regional Trial Court of Manila. Alleging that she only agreed to
pay interest at the rates of 4.5% and 5% per annum, respectively, for the two loans,
and not 4.5% and 5% per month, respondent sought to recover the amounts she
allegedly paid in excess of her actual obligations.
On October 12, 2001,[4] the trial court dismissed respondents complaint, and on the
counterclaim, ordered her to pay petitioner P311,125.00 with legal interest from
February 3, 1999 until fully paid plus 10% of the amount due as attorneys fees and
costs of the suit.[5] The trial court ruled that by issuing checks representing interest
payments at 4.5% and 5% monthly interest rates, respondent is now estopped from
questioning the provisions of the promissory notes.
On appeal, the Court of Appeals (CA) reversed and set aside the decision of the court
a quo, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED and SET
ASIDE and a new one entered: (1) ordering First Fil -Sin Lending Corporation to return
the amount of P114,000.00 to Gloria D. Padillo, and (2) deleting the award of

Hence, the instant petition on the following assignment of errors:

I
THE COURT OF APPEALS ERRED IN FINDING THAT THE APPLICABLE INTEREST SHOULD
BE THE LEGAL INTEREST OF TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR
AGREEMENT OF THE PARTIES ON ANOTHER APPLICABLE RATE.
II
THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY COMPUTED AT THE RATE
OF TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR AGREEMENT OF THE
PARTIES ON ANOTHER APPLICABLE RATE.
III
THE COURT OF APPEALS ERRED IN DELETING THE ATTORNEYS FEES AWARDED BY THE
REGIONAL TRIAL COURT.[7]
Petitioner maintains that the trial court and the CA are correct in ruling that the
interest rates are to be imposed on a monthly and not on a per annum basis.
However, it insists that the 4.5% and 5% monthly interest shall be imposed until the
outstanding obligations have been fully paid.
As to the penalty charges, petitioner argues that the 12% per annum penalty imposed
by the CA in lieu of the 1% per day as agreed upon by the parties violates their
freedom to stipulate terms and conditions as they may deem proper.
Petitioner finally contends that the CA erred in deleting the trial courts award of
attorneys fees arguing that the same is anchored on sound and legal ground.
Respondent, on the other hand, avers that the interest on the loans is per annum as
expressly stated in the promissory notes and disclosure statements. The provision as
to annual interest rate is clear and requires no room for interpretation. Respondent

asserts that any ambiguity in the promissory notes and disclosure statements should
not favor petitioner since the loan documents were prepared by the latter.
We agree with respondent.
Perusal of the promissory notes and the disclosure statements pertinent to the July
22, 1997 and September 7, 1997 loan obligations of respondent clearly and
unambiguously provide for interest rates of 4.5% per annum and 5% per annum,
respectively. Nowhere was it stated that the interest rates shall be applied on a
monthly basis.
Thus, when the terms of the agreement are clear and explicit that they do not justify
an attempt to read into it any alleged intention of the parties, the terms are to be
understood literally just as they appear on the face of the contract. [8] It is only in
instances when the language of a contract is ambiguous or obscure that courts ought
to apply certain established rules of construction in order to ascertain the supposed
intent of the parties. However, these rules will not be used to make a new contract
for the parties or to rewrite the old one, even if the contract is inequitable or harsh.
They are applied by the court merely to resolve doubts and ambiguities within the
framework of the agreement.[9]
The lower court and the CA mistook the Loan Transactions Summary for the
Disclosure Statement. The former was prepared exclusively by petitioner and merely
summarizes the payments made by respondent and the income earned by petitioner.
There was no mention of any interest rates and having been prepared exclusively by
petitioner, the same is self serving. On the contrary, the Disclosure Statements were
signed by both parties and categorically stated that interest rates were to be imposed
annually, not monthly.
As such, since the terms and conditions contained in the promissory notes and
disclosure statements are clear and unambiguous, the same must be given fu ll force
and effect. The expressed intention of the parties as laid down on the loan documents
controls.
Also, reformation cannot be resorted to as the documents have not been assailed on
the ground of mutual mistake. When a party sues on a written contrac t and no
attempt is made to show any vice therein, he cannot be allowed to lay claim for more
than what its clear stipulations accord. His omission cannot be arbitrarily supplied by
the courts by what their own notions of justice or equity may dictate. [10]
Notably, petitioner even admitted that it was solely responsible for the preparation
of the loan documents, and that it failed to correct the pro forma note p.a. to per
month.[11] Since the mistake is exclusively attributed to petitioner, the same should

be charged against it. This unilateral mistake cannot be taken against respondent
who merely affixed her signature on the pro forma loan agreements. As between two
parties to a written agreement, the party who gave rise to the mistake or error in the
provisions of the same is estopped from asserting a contrary intention to that
contained therein. The checks issued by respondent do not clearly and convincingly
prove that the real intent of the parties is to apply the interest rates on a monthly
basis. Absent any proof of vice of consent, the promissory notes and di sclosure
statements remain the best evidence to ascertain the real intent of the parties.
The same promissory note provides that x x x any and all remaining amount due on
the principal upon maturity hereof shall earn interest at the rate of _____ from date
of maturity until fully paid. The CA thus properly imposed the legal interest of 12%
per annum from the time the loans matured until the same has been fully paid on
February 2, 1999. As decreed in Eastern Shipping Lines, Inc. v. Court of Appeals,[12] in
the absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default.
As regards the penalty charges, we agree with the CA in ruling that the 1% penalty
per day of delay is highly unconscionable. Applying Article 1229 of the Civil Code,
courts shall equitably reduce the penalty when the principal obligation has been
partly or irregularly complied with, or if it is iniquitous or unconscionable.
With regard to the attorneys fees, the CA correctly deleted the award in favor of
petitioner since the trial courts decision does not reveal any explicit basis for such an
award. Attorneys fees are not automatically awarded to every winning l itigant. It
must be shown that any of the instances enumerated under Art. 2208 [13] of the Civil
Code exists to justify the award thereof.[14] Not one of such instances exists here.
Besides, by filing the complaint, respondent was merely asserting her rights which,
after due deliberations, proved to be lawful, proper and valid.
WHEREFORE, in view of the foregoing, the October 16, 2003 decision of the Court of
Appeals in CA-G.R. CV No. 75183 is AFFIRMED with the MODIFICATION that the
interest rates on the July 22, 1997 and September 7, 1997 loan obligations of
respondent Gloria D. Padillo from petitioner First Fil -Sin Lending Corporation be
imposed and computed on a per annum basis, and upon their respective maturities,
the interest rate of 12% per annum shall be imposed until full payment. In addition,
the penalty at the rate of 12% per annum shall be imposed on the outstanding
obligations from date of default until full payment.
SO ORDERED.

Malayan Insurance Corp vs CA G.R. 119599 March 20, 1997

Facts:TKC Marketing imported 3,000 metric tons of soya from Brazil to Manila. It was
insured by Malayan at the value of almost 20 million pesos. The vessel, however, was
stranded on South Africa because of a lawsuit regarding the possession of the soya.
TKC consulted Malayan on recovery of the amount, but the latter claimed that it
wasnt covered by the policy. The soya was sold in Africa for Php 10 million, but TKC
wanted Malayan to shoulder the remaining value of 10 million as well.
Petitioner filed suit due to Malayans reticence to pay. Malayan claimed that arrest
by civil authorities wasnt covered by the policy. The trial court ruled in TKCs favor
with damages to boot. The appellate court affirmed the decision under the reason
that clause 12 of the policy regarding an excepted risk due to arrest by civil authorities
was deleted by Section 1.1 of the Institute War Clauses which covered ordinary
arrests by civil authorities. Failure of the cargo to arrive was also covered by the Theft,
Pilferage, and Non-delivery Clause of the contract. Hence this petition.
Issues: 1. WON the arrest of the vessel was a risk covered under the subject
insurance policies.
2. WON the insurance policies must strictly construed against the insurer.
Held: Yes. Yes. Petition dismissed.
Ratio: 1. Section 12 or the "Free from Capture & Seizure Cla use" states: "Warranted
free of capture, seizure, arrest, restraint or detainment, and the consequences
thereof or of any attempt thereat Should Clause 12 be deleted, the relevant current
institute war clauses shall be deemed to form part of this insurance.
This was really replaced by the subsection 1.1 of section 1 of Institute War Clauses
(Cargo) which included the risks excluded from the standard form of English Marine
Policy by the clause warranted free of capture, seizure, arrest, restraint or
detainment, and the consequences thereof of hostilities or warlike operations,
whether there be a declaration of war or not.
The petitioners claim that the Institute War Clauses can be operative in case of
hostilities or warlike operations on account of its heading "Institute War Clauses" is
not tenable. It reiterated the CAs stand that its interpretation in recent years to
include seizure or detention by civil authorities seems consistent with the general
purposes of the clause. This interpretation was regardless of the fact whether the
arrest was in war or by civil authorities.
The petitioner was said to have confused the Institute War clauses and the F.C.S. in
English law.

It stated that "the F.C. & S. Clause was "originally incorporated in insurance policies
to eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause
applies even if there be no war or warlike operations. In the same vein, it contended
that subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) "pertained
exclusively to warlike operations" and yet it also stated that "the deletion of the F.C.
& S. Clause and the consequent incorporation of subsection 1.1 of Section 1 of the
Institute War Clauses (Cargo) was to include "arrest, etc. even if it were not a result
of hostilities or warlike operations."
The court found that the insurance agency tried to interpret executive and political
acts as those not including ordinary arrests in the exceptions of the FCS clause , and
claims that the War Clauses now i ncluded executive and political acts without
including ordinary arrests in the new stipulation.
A strained interpretation which is unnatural and forced, as to lead to an absurd
conclusion or to render the policy nonsensical, should, by all means, be avoid ed.
2. Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the
contract or policy is prepared by the insurer. A contract of insurance, being a contr act
of adhesion, means that any ambiguity should be resolved against the insurer.

VERANDIA VS CA
The two consolidated cases involved herein stemmed from the issuance by Fidelity
and Surety Insurance Company of the Philippines (Fidelity for short) of its Fire
Insurance Policy No. F-18876 effective between June 23, 1980 and June 23, 1981
covering Rafael (Rex) Verendia's residential building located at Tulip Drive, Beverly
Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was the
Monte de Piedad & Savings Bank. Verendia also insured the same building with two
other companies, namely, The Country Bankers Insurance for P56,000.00 under
Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development Insurance
for P400,000.00 under Policy No. F-48867 expiring on June 30, 198l.
While the three fire insurance policies were in force, the insured property was
completely destroyed by fire on the early morning of December 28, 1980. Fidelity
was accordingly informed of the loss and despi te demands, refused payment under
its policy, thus prompting Verendia to file a complaint with the then Court of First
Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon,
plus attorney's fees and litigation expenses. The complaint was later amended to
include Monte de Piedad as an "unwilling defendant" (P. 16, Record).
Answering the complaint, Fidelity, among other things, averred that the policy was
avoided by reason of over-insurance; that Verendia maliciously represented that the
building at the time of the fire was leased under a contract executed on June 25, 1980
to a certain Roberto Garcia, when actually it was a Marcelo Garcia who was the
lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz,
ruling in favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial court
ruled that Paragraph 3 of the policy was also violated by Verendia in that the insured
failed to inform Fidelity of his other insurance coverages with Country Bankers
Insurance and Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision
promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa,
Bartolome, and Ejercito (P), JJ.), the appellate court reversed for the following
reasons: (a) there was no misrepresentation concerning the lease for the contract
was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of
the policy contract requiring Verendia to give notice to Fidelity of other contracts of
insurance was waived by Fidelity as shown by its conduct in attempting to settle the
claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead
of directly filing a motion for reconsideration within 15 days therefrom, Fidelity filed

on April 21, 1986, a motion for extension of 3 days within which to file a motion for
reconsideration. The motion for extension was not filed on April 19, 1986 which was
the 15th day after receipt of the decision because said 15th day was a Saturday and
of course, the following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The
motion for extension was granted by the appellate court on April 30, 1986 (p.
15. ibid.), but Fidelity had in the meantime filed its motion for reconsideration on
April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for
reconsideration on the ground that the motion for extension was filed out of time
because the 15th day from receipt of the decision which fell on a Saturday was
ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate
Court has personnel receiving pleadings even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion
for reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the
petition herein docketed as G.R. No. 75605 was initiated. Subsequently, or more
specifically on October 21, 1986, the appellate court denied Fidelity's motion for
reconsideration and account thereof. Fidelity filed on March 31, 1986, the petition
for review on certiorari now docketed as G.R. No. 76399. The two petitions, interrelated
as
they
are,
were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the
petition for review oncertiorari, we must first determine whether the decision of the
appellate court may still be reviewed, or whether the same is beyond further judicial
scrutiny. Stated otherwise, before anything else, inquiry must be made into the issue
of whether Fidelity could have legally asked for an extension of the 15 -day
reglementary period for appealing or for moving for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine
that the pendency of a motion for extension of time to perfect an appeal does not
suspend the running of the period sought to be extended (Garcia vs. Buenaventura
74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs vs. CFI of Manila (80
Phil. 160 [1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King(20 SCRA
1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly
prohibit the filing of a motion for extension of time to file a motion for
reconsideration in regard to a final order or judgment, magistrates, including those
in the Court of Appeals, held sharply divided opinions on whether the period for
appealing which also includes the period for moving to reconsider may be extended.
The matter was not definitely settled until this Court issued its Resolution

in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring that beginni ng
one month from the promulgation of the resolution on May 30, 1986
. . . the rule shall be strictly enforced that no motion for extension of time to file a
motion for new trial or reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30,
1986, although, of course, Verendia's motion to expunge the motion for
reconsideration was not finally disposed until July 22, 1986, or after the dictum
in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for
extension came before its formal proscription under Habaluyas, for which reason we
now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not
the contract of lease submitted by Verendia to support his claim on the fire insurance
policy constitutes a false declaration which would forfeit his benefits under Section
13 of the policy and (b) whether or not, in submitting the subrogation receipt in
evidence, Fidelity had in effect agreed to settle Verendia's claim in the amount stated
in said receipt. 1
Verging on the factual, the issue of the veracity or falsity of the lease contract could
have been better resolved by the appellate court for, in a petition for review
on certiorari under Rule 45, the jurisdiction of this Court is limited to the review of
errors of law. The appellate court's findings of fact are, therefore, conclusive upon
this Court except in the following cases: (1) when the conclusion i s a finding grounded
entirely on speculation, surmises, or conjectures; (2) when the inference made is
manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the judgment is premised o n a
misapprehension of facts; (5) when the findings of fact are conflicting; and (6) when
the Court of Appeals in making its findings went beyond the issues of the case and
the same are contrary to the admissions of both appellant and appellee (Ronquillo v.
Court of Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the trial
court and the appellate court on important issues in these consolidated cases and it
appearing that the appellate court judgment is based on a misapprehension of fac ts,
this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance
benefits, was entered into between him and one Robert Garcia, married to Helen
Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the
insurance policy. When the rented residential building was razed to the ground on
December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within
the premises. However, according to the investigation report prepared by Pat.
Eleuterio M. Buenviaje of the Antipolo police, the building appeared to have "no

occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic) portion of
said
compound"
(Exh. "E"). These pieces of evidence beli e Verendia's uncorroborated testimony that
Marcelo Garcia, whom he considered as the real lessee, was occupying the building
when it was burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an
adjuster was able to locate him. Robert Garcia then executed an affidavit before the
National Intelligence and Security Authority (NISA) to the effect that he was not the
lessee of Verendia's house and that his signature on the contract of lease was a
complete forgery. Thus, on the strength of these facts, the adjuster submitted a
report dated December 4, 1981 recommending the denial of Verendia's claim (Exh.
"2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who
signed the lease contract. According to Verendia, it was signed by Marcelo Garcia,
cousin of Robert, who had been paying the rentals all the while. Verendia, however,
failed to explain why Marcelo had to sign his cousin's name when he in fact was
paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse.
Fidelity's conclusions on these proven facts appear, therefore, to have sufficient
bases; Verendia concocted the lease contract to deflect responsibility for the fire
towards an alleged "lessee", inflated the value of the property by the alleged monthly
rental of P6,500 when in fact, the Provincial Assessor of Rizal had assessed the
property's fair market value to be only P40,300.00, insured the same property with
two other insurance companies for a total coverage of around P900,000, and created
a dead-end for the adjuster by the disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the
parties (Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms
and conditions constitute the measure of the insurer's liability and compliance
therewith is a condition precedent to the insured's right to recovery from the insurer
(Oriental Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991],
citing Perla Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]). As
it is also a contract of adhesion, an insurance contract should be liberally construed
in favor of the insured and strictly against the insurer company whi ch usually
prepares it (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA 652
[1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia
used a false lease contract to support his claim under Fire Insurance Policy No. F18876, the terms of the policy should be strictly construed against the insured.
Verendia failed to live by the terms of the policy, specifically Section 13 thereof which

is expressed in terms that are clear and unambiguous, that all benefits under the
policy shall be forfeited "If the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or devises
are used by the Insured or anyone acting in his behalf to obtain any benefit under the
policy". Verendia, having presented a false declaration to support his claim for
benefits in the form of a fraudulent lease contract, he forfeited all benefits therein
by virtue of Section 13 of the policy in the absence of proof that Fidelity waived such
provision (Pacific Banking Corporation vs. Court of Appeals , supra). Worse yet, by
presenting a false lease contract, Verendia, reprehensibly disregarded the principle
that insurance contracts are uberrimae fidae and demand the most abundant good
faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as
evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia's
claims in consideration of the amount of P142,685.77. While the said receipt appears
to have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It
is even incomplete as the blank spaces for a witness and his address are not filled up.
More significantly, the same receipt states that Verendia had received the aforesaid
amount. However, that Verendia had not received the amount stated therein, is
proven by the fact that Verendia himself filed the complaint for the full amount of
P385,000.00 stated in the policy. It might be that there had been efforts to settle
Verendia's claims, but surely, the subrogation receipt by itself does not prove that a
settlement had been arrived at and enforced. Thus, to interpret Fidelity's
presentation of the subrogation receipt in evidence as indicative of its accession to
its "terms" is not only wanting in rational basis but would be substituting the will of
the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No.
76399 is GRANTED and the decision of the then Intermediate Appellate Court under
review is REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED
and UPHELD.
SO ORDERED.

NEW
LIFE
ENTERPRISES
and
JULIAN
SY, petitioners,
vs.
HON. COURT OF APPEALS, EQUITABLE INSURANCE CORPORATION, RELIANCE
SURETY
AND
INSURANCE
CO.,
INC. and
WESTERN
GUARANTY
CORPORATION, respondents.

REGALADO, J.:
This appeal by certiorari seeks the nullification of the decision 1 of respondent Court
of Appeals in CA-G.R. CV No. 13866 which reversed the decision of the Regional Trial
Court, Branch LVII at Lucena City, jointly deciding Civil Cases Nos. 6-84, 7-84 and 8-84
thereof and consequently ordered the dismissal of the aforesaid actions filed by
herein petitioners.
The undisputed background of this case as found by the court a quo and adopted by
respondent court, being sustained by the evidence on record, we hereby reproduce
the same with approval. 2
The antecedents of this case show that Julian Sy and Jose Sy Bang have formed a
business partnership in the City of Lucena. Under the business name of New Life
Enterprises,
the
partnership
engaged
in the
sale of construction
materials at its place of business, a two storey building situated at Iyam, Lucena City.
The facts show that Julian Sy insured the stocks in trade of New Life Enterpriseswith
Western Guaranty Corporation, Reliance Surety and Insurance. Co., Inc., and
Equitable Insurance Corporation.
On May 15, 1981, Western Guaranty Corporation issued Fire Insurance Policy No.
37201 in the amount of P350,000.00. This policy was renewed on May, 13, 1982.
On July 30,1981, Reliance Surety and Insurance Co., Inc. issued Fire Insurance Policy
No. 69135 inthe amount of P300,000.00 (Renewed
under Renewal
Certificate No. 41997) An additional insurancewas issued by the same company on
November 12, 1981 under Fire Insurance Policy No. 71547 in the amount of
P700,000.00.
On February 8, 1982, Equitable Insurance
Corporation issued Fire Insurance Policy No. 39328 in the amount of P200,000.00.
Thus when the building occupied by the New
Life
Enterprises
was gutted by fire at about 2:00
o'clockin the morning of October 19, 1982, the
stocks in the
trade inside said building were insured
against
fire in the total amount of P1,550,000.00.

According to the certification issued by the Headquarters,Philippine Constabulary

/Integrated
National
Police,
Camp Crame, the cause of fire was
electrical innature. According to the plaintiffs,
the building and the stocks inside were burned.
After the fire,Julian Sy went to the agent of
Reliance Insurance whom he asked to accompany him
to
the
office ofthe company so that he can file his claim. He averred that in support of his
claim, he submitted thefire clearance, the
insurance policies and inventory
of stocks. He further testified that the three insurance companies are sister
companies, and as a matter of
fact when he was
following-up hisclaim with
Equitable Insurance, the Claims Manager told him to go first to Reliance
Insurance and ifsaid company agrees to pay, they would also pay. The same
treatment was given
him
by the otherinsurance
companies. Ultimately, the three insurance companies denied plaintiffs' claim for
payment.
In
its
letter of denial dated March 9, 1983,
(Exhibit
"C"
No. 884) Western Guaranty Corporationthrough Claims Manager Bernard S. Razon told t
he
plaintiff that
his
claim "is
denied for breach ofpolicy conditions." Reliance Insurance purveyed
the
same
message in its letter dated November 23, 1982 and signed by Executive VicePresident Mary
Dee
Co (Exhibit "C" No. 7-84) which said that
"plaintiff's
claim is denied for breach of policy conditions." The letter of denial received by the
plaintifffrom Equitable Insurance Corporation (Exhibit "C" No. 6-84) was of the same
tenor, as said letter dated February 22, 1983, and signed by Vice-President
Elma R. Bondad, said "we find that certain
policy conditions were violated, therefore, we regret, we have to deny your claim,
as it is hereby denied in its entirety."
In relation to the case against Reliance
Surety and Insurance Company, a certain Atty. Serafin D.Dator, acting in behalf of
the
plaintiff, sent a letter dated February 13, 1983
(Exhibit
"G-l" No
784) toExecutive Vice-President Mary Dee Co asking that he be informed as to
the specific policy conditions allegedly violated by the plaintiff. In her reply-letter
dated March 30, 1983, Executive Vice-PresidentMary Dee Co informed Atty.
Dator that Julian Sy violated Policy Condition No. "3" which requires theinsured
to give notice of any insurance or insurances already effected covering the stocks in
trade. 3
Because of the denial of their claims for payment by the three (3) insurance
companies, petitioner filed separate
civil actions against the former before the Regional Trial

Court of Lucena City, which cases were consolidated for

trial,
and thereafter the court below rendered its decision on December 19, l986 with the
following disposition:
WHEREFORE, judgment in the above-entitled cases is rendered in the following
manner, viz:
1.
In
Civil
Case No. 6-84, judgment
is rendered
for
the
plaintiff New Life Enterprises and against the defendant Equitable Insurance
Corporation
ordering the latter to pay the former
the
sum
of
TwoHundred Thousand (P200,000.00) Pesos
and
considering that payment of the claim of the insuredhas been unreasonably denied,
pursuant to Sec. 244 of the Insurance Code, defendant is furtherordered to pay the
plaintiff attorney's fees in the amount of Twenty Thousand (P20,000.00)
Pesos. Allsums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant
to Sec.244 of the Insurance Code) from
February 14, 1983, (91st day from November 16,
1982, whenSworn Statement of
Fire Claim was received from the insured) until they are fully paid;
2. In Civil Case No. 7-84, judgment is rendered for the plaintiff Julian Sy and against
the defendantReliance Surety and Insurance
Co.,
Inc., ordering the latter to pay the former the
sum
ofP1,000,000.00 (P300,000.00 under Policy
No. 69135 and P700,000.00 under Policy No. 71547)
andconsidering that payment of the claim of the
insured has been unreasonably denied, pursuant to
Sec.244 of the Insurance Code, defendant is
further
ordered
to pay the plaintiff the amount of P100,000.00 as attorney's fees.
All sums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of the Insurance Code) from February 14, 1983,
(91st day from November 16,
1982 whenSworn Statement of Fire Claim was received from the insured) until they
are fully paid;
3.
In
Civil
Case
No. 8-84,
judgment
is
rendered
for
the plaintiff New Life Enterprises and against thedefendant Western Guaranty Corp
oration
ordering
the latter to pay the sum of P350,000.00
to theConsolidated Bank and Trust Corporation,
Lucena Branch, Lucena City, as stipulated on the
face ofPolicy No. 37201, and considering that
payment
of
the
aforementioned sum of money has been
unreasonably denied, pursuant to Sec. 244 of the Insurance
Code,

defendant is further ordered topay

P35,000.00.

the

plaintiff attorney's fees in the amount of

All sums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of the Insurance Code) from February 5, 1982, (91st day
from 1st week of November 1983when insured filed formal claim for full indemnity
according to adjuster Vetremar Dela Merced) until they are fully paid. 4
As aforestated, respondent Court of Appeals reversed said judgment of the trial
court, hence this petition the cruxwherein is whether or not Conditions Nos. 3
and 27 of the insurance contracts were violated by petitionersthereby resulting in
their forfeiture of all the benefits thereunder.
Condition No. 3 of said insurance policies, otherwise
the "Other Insurance Clause," is uniformlycontained
insurance contracts of herein petitioners, as follows:

known
as
in all the aforestated

3.
The
insured
shall give notice to the Company
of any insurance or insurances already
effected, orwhich
may subsequently be effected,
covering any of the property or properties
consisting of stocksin trade, goods in process
and/or inventories only hereby insured, and unless
such notice be givenand the particulars of such
insurance or insurances be stated therein or endorsed on this policy pursuant to
Section
50
of
the
Insurance
Code, by or on behalf of the Company
before the occurrenceof any loss or damage, all benefits under this policy shall be
deemed forfeited, provided however, that this condition shall not apply when the
total insurance or insurances in force at the time of loss ordamage not more than
P200,000.00. 5
Petitioners admit that the respective insurance policies
issued by private respondents did not state or endorse
thereon
the other insurance coverage obtained or subsequently effected on the same stocks
in trade for the loss of which compensation is claimed by petitioners. 6 The policy
issued by respondent Western Guaranty Corporation(Western)
did
not
declare respondent Reliance Surety and Insurance Co.,
Inc.
(Reliance) and
respondent
Equitable
Insurance
Corporation (Equitable) as coinsurers on the same stocks,
while Reliance's Policies covering the same stocksdid not
likewise declare Western and Equitable as such co-insurers.
It
is
further admitted by petitioners that Equitable'spolicy stated "nil" in the space
thereon requiring indication of any co-insurance although there were three (3)
policies subsisting on the same stocks in trade at the time of the loss, namely, that of

Western in the amount of P350,000.00 andtwo (2) policies of Reliance in the total
amount of P1,000,000.00. 7

commonpractice in the insurance business and

such
do not warrant the speculative conclusion of the trial court.

In other words, the coverage by other insurance or co-insurance effected

or subsequently arranged by petitioners were neither stated nor endorsed in the
policies of the three (3) private respondents, warranting forfeiture of all benefits
thereunder if we are to follow the express stipulation in the aforequoted Policy
Condition No. 3.

Furthermore, when the words and language of documents are clear and plain
or readily understandable by an ordinary reader thereof, there is absolutely no room
for interpretation or construction anymore. 9 Courts are not allowed to make
contracts
for the parties; rather, they will
intervene
only when the terms of the policy are ambiguous,
equivocal,
or uncertain. 10 The parties must abide by the
terms of the contract because such terms constitute the
measureof the insurer's liability and compliance therewith
is
a
condition precedent to the insured's right of recovery from the insurer.11

Petitioners contend that they are not to be blamed for the omissions,
alleging that insurance agent Leon Alvarez (for Western) and Yap Kam Chuan (for
Reliance and Equitable) knew about the existence of the additional
insurance coverage and that they were not informed about the requirement that
such
other
or
additional
insurance
should be stated in the
8
policy, as they have not even read policies. These contentions cannot pass judicial
muster.
The
terms
of the contract are clear and unambiguous.
The insured is specifically required to disclose to the insurer any other insurance and
its
particulars which he may
have
effected
on
the
same subject matter. Theknowledge of
such
insurance
by the insurer's agents, even assuming the acquisition thereof by the former,
is notthe "notice" that would estop the insurers from denying the claim. Besides, the
so-called theory of imputed knowledge, that is, knowledge of the agent is
knowledge of the principal, aside from being
of dubious applicabilityhere has likewise been roundly
refuted by respondent court whose factual findings we find acceptable.
Thus, it points
out that while
petitioner Julian Sy
claimed that he had informed insurance agent Alvarez regarding the co-insurance on
the
property,
he
contradicted
himself by inexplicably claiming that he had not read the termsof the policies; that
Yap Dam Chuan could not likewise
have
obtained
such
knowledge for the same reason, asidefrom
the
fact
that
the insurance with Western was obtained before
those
of
Reliance and Equitable; and that theconclusion of
the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawnfrom the mere fact that Yap Kam
Chuan
was
an agent for both companies which
also
had
the
same insuranceclaims adjuster. Availment of
the
services of the same agents and adjusters by different
companies
is
a

facts

While it is a cardinal principle of insurance law that a policy or contract

of insurance is to be construed liberally
infavor of the insured and strictly against the insurer
company, yet contracts of insurance, like other contracts, are to be construed
according
to
the sense and meaning of the
terms
which
the parties themselves have used. Ifsuch terms
are
clear
and
unambiguous, they must be taken and understood in their plain, ordinary and
popular sense. 12 Moreover, obligations arising from contracts have the force of law
between the contracting parties and should becomplied with in good faith. 13
Petitioners should be aware of the fact that a party is not relieved of the duty to
exercise the ordinary care and prudence that would be exacted in relation to other
contracts. The conformity of the insured to the terms
of the
policy is implied from his failure to
express any
disagreement
with
what is provided for. 14 It may be true
that
themajority rule,
as
cited
by petitioners, is that injured
persons may accept policies without reading them, and
that this
is
not
negligence per se. 15 But, this is not without any exception. It is and was incumbent
upon petitioner Sy to read the insurance contracts, and this can be reasonably
expected of him considering that he has been a businessman since 1965 16 and the
contract concerns indemnity in case ofloss in his money-making trade of which
important consideration he could not have been unaware as it was pre-in case of
loss in his money-making trade of which important consideration he could not have
been unaware as it was precisely the reason for his procuring the same.
We reiterate our pronouncement in Pioneer Insurance and Surety Corporation vs.
Yap: 17
.
.
.
And considering the terms of the policy which required the insured to declare other

insurances,the statement in question must be deemed to be a statement (warranty)

binding on both insurer and insured, that there were no other insurance on the
property. . . .
The annotation then, must be deemed to be a warranty that the property was not
insured by any other policy. Violation thereof entitled the insurer to rescind (Sec. 69,
Insurance Act). Suchmisrepresentation is fatal in the light of our views in Santa Ana
vs. Commercial Union Assurance Company, Ltd., 55 Phil. 329. The materiality of nondisclosure of other insurance policies is not open to doubt.
xxx xxx xxx
The obvious purpose of the aforesaid requirement in the policy is to prevent overinsurance and thus avert the perpetration of fraud. The public, as well as the insurer,
is interested in preventing the situation in which a fire would be profitable to
the insured. According to Justice Story: "The insured has no right to complain, for he
assents
to
comply
with all the stipulations on
his side, in order toentitle himself to the
benefit of the contract, which, upon reason or
principle,
he
has no right to askthe court to dispense with the performance of his own part of the
agreement,
and
yet
to
bind theother party to
obligations, which, but for those stipulations, would not have been entered into."
Subsequently, in the case of Pacific Banking Corporation vs. Court of Appeals, et
al., 18 we held:
It is not
disputed that the insured failed to reveal
before
the
loss three other insurances. As
found
by
the
Court
of Appeals, by reason of said unrevealed insurances, the insured had been guilty of a
falsedeclaration; a clear misrepresentation and a vital one because where
the insured had been asked to reveal but did not, that was deception. Otherwise
stated, had the insurer known that there were many co-insurances, it could
have hesitated or
plainly
desisted
from
entering into such contract.
Hence, theinsured was guilty of clear fraud (Rollo, p. 25).
Petitioner's contention that the allegation of
fraud
is
but
a mere inference or suspicion is untenable. In fact, concrete evidence of fraud or
false declaration by the insured was furnished by the petitioner itself when the facts
alleged in the
policy
under clauses "Co-Insurances Declared" and
"OtherInsurance Clause" are materially different from the actual number of coinsurances taken over thesubject property. Consequently, "the whole foundation of
the contract fails, the risk does not attachand the policy never becomes a contract
between
the
parties." Representations of facts are
the

foundation of the contract and

if
the foundation
does
not
exist, the superstructure does
not arise.Falsehood in such representations is not
shown to vary or add to the contract, or to terminate a contract which has
once been made, but
to
show that no contract has
ever
existed (Tolentino,Commercial Laws of the Philippines,
p.
991, Vol. II, 8th Ed.,) A void or inexistent contract is one which has no
force and effect from the very beginning, as if it had never been entered into, and
which
cannot
be
validated either by time or
by
ratification
(Tongoy vs. C.A., 123 SCRA 99 (1983); Avila v. C.A., 145 SCRA, 1986).
As the insurance policy against fire expressly required that notice should be given by
the insured ofother insurance upon the same property, the total absence of such
notice nullifies the policy.
To further warrant and justify the forfeiture of the
benefits under the insurance contracts involved, we need
merelyto turn to Policy Condition No. 15 thereof, which reads in part:
15. . . . if any false declaration be made or used
. all benefits under this Policy shall be forfeited . . . . 19

in support thereof, .

Additionally, insofar as the liability of respondent

Reliance is concerned, it is not denied that the complaint for recovery was filed in
court by petitioners only on January 31, 1984, or after more than one (1) year had
elapsedfrom petitioners' receipt of the insurers' letter of
denial on November 29, 1982. Policy Condition No. 27 of their insurance contract
with Reliance provides:
27.
Action
or
suit
clause. If a claim be made and rejected and an action or suit be not commenced
either in the Insurance Commission or any court of competent jurisdiction of notice
of such
rejection,or in case of arbitration taking place
as provided herein, within twelve (12) months after
due
notice ofthe award made by the arbitrator or arbitrators
or umpire, then the claim shall for all
purposes
be
deemed to have been abandoned and shall not
thereafter
be
recoverable
hereunder. 20
On this point, the trial court ruled:
. . . However, because of the peculiar circumstances of this case, we hesitate
in concluding thatplaintiff's right to ventilate his claim in court has been barred by r
eason of the time constraintprovided in the insurance contract.
It
is

evident that after the plaintiff had received

the letter of denial,he still found it necessary to be informed of the specific causes o
r reasons for the denial of his claim,reason for which his lawyer, Atty. Dator
deemed it wise to send a letter of inquiry to the defendantwhich was answered by
defendant's Executive Vice-President in a letter dated March 30, 1983, . . .
.Assuming, gratuitously, that the letter of Executive Vice-President Mary Dee Co
dated March 30, 1983, was received by plaintiff on the same date, the period
of limitation should start to run only fromsaid date in the spirit of fair play and equity.
. . . 21
We have perforce to reject this theory of the court below for being contrary to what
we have heretofore declared:
It is important to note the principle laid down by this Court in the case of Ang vs.
Fulton Fire Insurance Co. (2 SCRA 945 [1961]) to wit:
The condition contained in an insurance policy that claims must be presented within
one
year
after rejection is not merely a procedural requirement but an important matter
essential to a prompt settlement of claims against insurance companies as it
demandsthat insurance suits be brought by the insured while the evidence as to the
origin andcause of destruction have not yet disappeared.
In enunciating the above-cited principle,
this
Court had definitely
settled the rationale for the
necessity of bringing suits against the Insurer
within one year from the rejection of the claim.
The
contention
of the respondents that the one-year prescriptive
period does
not start to run until thepetition for reconsideration had been resolved by the insur
er, runs counter to the declared purpose
for requiring that an
action or suit be filed in the
Insurance Commission or in a court of competent
jurisdiction from the denial of the claim. To uphold respondents' contention would
contradict anddefeat the very principle which this Court had laid down. Moreover,
it can easily be used by insured persons as a scheme or device to waste time
until any evidence which may be considered againstthem is destroyed.
xxx xxx xxx
While
in
the
Eagle
Star
case
(96
Phil. 701),
this Court uses the phrase "final rejection", the
samecannot be taken to mean the rejection of a petition for reconsideration as
insisted
by
respondents.
Such was clearly not the meaning contemplated by this Court. The insurance policy i
n said caseprovides that the insured should file his claim first, with

the carrier and then with the insurer. The"final rejection" being referred to in said
case is the rejection by the insurance company. 22
Furthermore,
assuming arguendo that petitioners felt the
legitimate need to be clarified as to the policy condition violated, there was a
considerable lapse of time from their receipt of the insurer's clarificatory letter dated
March 30, 1983, up to the time the complaint was filed in court on
January 31, 1984. The one-year prescriptive periodwas yet
to expire on November 29, 1983, or about eight (8) months
from
the
receipt of the clarificatory letter, butpetitioners
let
the
period lapse without bringing their action in court.
We accordingly find no "peculiarcircumstances" sufficient
to
relax the enforcement of the one-year prescriptive period
and
we, therefore, hold thatpetitioners' claim was definitely filed out of time.
WHEREFORE,
finding
no
cogent reason to disturb the
of respondent Court of Appeals, the same ishereby AFFIRMED.
SO ORDERED.

judgment

DIOSDADO
C.
TY, plaintiff-appellant,
vs.
FILIPINAS COMPAIA DE SEGUROS, et al., defendants-appellees.
BARRERA, J.:
These are appeals instituted by Diosdado C. Ty from a single decision of the Court of
First Instance of Manila (in Civ. Cases Nos. 26343, 26344, 26404, 26405, 26406,
26442, which were tried together), dismissing the six separa te complaints he filed
against six insurance companies (Filipinas Compaia de Seguros, People's Surety &
Insurance Co., Inc., South Sea Surety & Insurance Co., Inc., The Philippine Guaranty
Company, Inc., Universal Insurance & Indemnity Co., and Plaridel Surety & Insurance
Co., Inc.) for collection from each of them, of the sum of P650.00, as compensation
for the disability of his left hand.
The facts of these cases are not controverted:
Plaintiff-appellant was an employee of Broadway Cotton Factory at Grac e Park,
Caloocan City, working as mechanic operator, with monthly salary of P185.00. In the
latter part of 1953, he took Personal Accident Policies from several insurance
companies, among which are herein defendants -appellees, on different
dates,1 effective for 12 months. During the effectivity of these policies, or on
December 24, 1953, a fire broke out in the factory where plaintiff was working. As he
was trying to put out said fire with the help of a fire extinguisher, a heavy object fell
upon his left hand. Plaintiff received treatment at the National Orthopedic Hospital
from December 26, 1953 to February 8, 1954, for the following injuries, to wit:
(1) Fracture, simple, oraximal phalanx, index finger, left;
(2) Fracture, compound, communite proximal pha lanx, middle finger, left and 2nd
phalanx simple;
(3) Fracture, compound, communite phalanx, 4th finger, left;
(4) Fracture, simple, middle phalanx, middle finger, left;
(5) Lacerated wound, sutured, volar aspect, small finger, left;
(6) Fracture, simple, chip, head, 1st phalanx 5th digit, left.
which injuries, the attending surgeon certified, would cause temporary total
disability of appellant's left hand.
As the insurance companies refused to pay his claim for compensation under the
policies by reason of the said disability of his left hand, Ty filed motions in the

Municipal Court of Manila, which rendered favorable decision. On appeal to the

Court of First Instance by the insurance companies, the cases were dismissed on the
ground that under the uniform terms of the insurance policies, partial disability of
the insured caused by loss of either hand to be compensable, the loss must result in
the amputation of that hand. Hence, these appeals by the insured.1wph1.t
Plaintiff-appellant is basing his claim for indemnity under the provision of the
insurance contract, uniform in all the cases, which reads:
"INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through violent,
external, visible and accidental means, and which shall not prove fatal but shall result,
independently of all other causes and within sixty (60) days from the occurrence,
thereof, in Total or Partial Disability of the Insured, the Company shall pay, subject to
the exceptions as provi ded for hereinafter, the amount set opposite such injury.
PARTIAL DISABILITY
LOSS OF:
Either Hand P650.00
The loss of a hand shall mean the loss, by amputation through the bones of the wrist.
Appellant contends that to be entitled to indemnification under the foregoing
provision, it is enough that the insured is disabled to such an extent that he cannot
substantially perform all acts or duties of the kind necessary in the prosecution of his
business. It is argued that what is compensable is the disability a nd not the
amputation of the hand. The definition of what constitutes loss of hand, placed in the
contract, according to appellant, consequently, makes the provision ambiguous and
calls for the interpretation thereof by this Court.
This is not the first ti me that the proper construction of this provision, which is
uniformly carried in personal accident policies, has been questioned. Herein
appellant himself has already brought this matter to the attention of this Court in
connection with the other accident policies which he took and under which he had
tried to collect indemnity, for the identical injury that is the basis of the claims in
these cases. And, we had already ruled:
While we sympathize with the plaintiff or his employer, for whose benefit the policies
were issued, we can not go beyond the clear and express conditions of the insurance
policies, all of which definite partial disability as loss of either hand
by amputation through the bones of the wrist. There was no such amputation in the

case at bar. All that was found by the trial court, which is not disputed on appeal, was
that the physical injuries "caused temporary total disability of plaintiff's left hand."
Note that the disability of plaintiff's hand was merely temporary, having been caused
by fractures of the index, the middle and the fourth fingers of the left hand.
We might add that the agreement contained in the insurance policies is the law
between the parties. As the terms of the policies are clear, express and specific that
only amputation of the left hand should be considered as a loss thereof, an
interpretation that would include the mere fracture or other temporary disability not
covered by the policies would certainly be unwarranted. 2
We find no reason to depart from the foregoing ruli ng on the matter.
Plaintiff-appellant cannot come to the courts and claim that he was misled by the
terms of the contract. The provision is clear enough to inform the party entering into
that contract that the loss to be considered a disability entitled to indemnity, must
be severance or amputation of that affected member from the body of the insured.
Wherefore, finding no error in the decision appealed from, the same is hereby
affirmed, without costs. So ordered.
Concepcion, Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and
Sanchez, JJ., concur.

GULF RESORTS,
INC., petitioner, vs.
CORPORATION, respondent.

PHILIPPINE

CHARTER

INSURANCE

DE CI SIO N
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of
Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER
INSURANCE CORPORATION. Petitioner assails the appellate court decision [1] which
dismissed its two appeals and affirmed the judgment of the trial court.

1,500,000.00 - on the furniture, etc.

contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%

For review are the warring interpretations of petitioner and respondent on the scope
of the insurance companys liability for earthquake damage to petitioners properties.
Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance
Policy No. 31944 covers all damages to the properties within its resort caused by
earthquake. Respondent contends that the rider limits its liability for loss to the two
swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are
as follows:

116,600.00- other buildings include

as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%

[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its
properties in said resort insured originally with the American Home Assurance
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from
1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3 and
4 respectively), the risk of loss from earthquake shock was extended only to plaintiffs
two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and
E and two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies
referred to the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that
subsequently AHAC(AIU) issued in plaintiffs favor Policy No. 206 -4182383-0 covering
the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1) and in said policy the
earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and F-1
was deleted and the entry under Endorsements/Warranties at the time of issue read
that plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to
March 14, 1990 under Policy No. 206-4568061-9 (Exh. H) which carri ed the entry
under Endorsement/Warranties at Time of Issue, which read Endorsement to Include
Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00 and paid P42,658.14
(Exhs. 6-A and 6-B) as premium thereof, computed as follows:

P100,000.00 for furniture, fixtures,

Item -P7,691,000.00 - on the Clubhouse only

1,030.76 EC

@ .392%;

393.00 ES

lines air-con and

operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
Policy No. 206-4568061-9 (Exh. H) provided that the policy wording and rates in said
policy be copied in the policy to be issued by defendant; that defendant issued Policy
No. 31944 to plaintiff covering the period of March 14, 1990 to Marc h 14, 1991
for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy
in question, contained on the right-hand upper portion of page 7 thereof, the
following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon

Doc. Stamps 3,068.10

F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against earthquake shock (ES); that in all the six insurance policies (Exhs. C,
D, E, F, G and H), the premium against the peril of earthquake shock is the same, that
is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and 3-B-2; F-02 and 4-A-1; G-2 and 5-C-1;
6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy No. 31944 issued by
defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this policy due to the contrary, that this insurance
covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. 1 -D, 2-D, 3-A, 4-B,
5-A, 6-D and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that
on July 16, 1990 an earthquake struck Central Luzon and Northern Luzon and
plaintiffs properties covered by Policy No. 31944 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged. [2]
After the earthquake, petitioner advised respondent that it would be making a claim
under its Insurance Policy No. 31944 for damages on its properties. Respondent
instructed petitioner to file a formal claim, then assigned the investigation of the
claim to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc. [3] On
July 30, 1990, respondent, through its adjuster, requested petitioner to submit
various documents in support of its claim. On August 7, 1990, Bayne Adjusters and
Surveyors, Inc., through its Vice-President A.R. de Leon,[4] rendered a preliminary
report[5] finding extensive damage caused by the earthquake to the clubhouse and to
the two swimming pools. Mr. de Leon stated that except for the swimming pools, all
affected items have no coverage for earthquake shocks. [6] On August 11, 1990,
petitioner filed its formal demand [7] for settlement of the damage to all its properties
in the Agoo Playa Resort. On August 23, 1990, respondent denied petitioners claim
on the ground that its insurance policy only afforded earthquake shock coverage to
the two swimming pools of the resort.[8] Petitioner and respondent failed to arrive at
a settlement.[9] Thus, on January 24, 1991, petitioner filed a complaint[10] with the
regional trial court of Pasig praying for the payment of the following:

1.) The sum of P5,427,779.00, representing losses sustained by the insured

properties, with interest thereon, as computed under par. 29 of the policy (Annex B)
until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by
plaintiff on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory
Counterclaims.[12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00
against the peril of earthquake shock, the same premium it paid against earthquake
shock only on the two swimming pools i n all the policies issued by AHAC(AIU)
(Exhibits C, D, E, F and G). From this fact the Court must consequently agree with the
position of defendant that the endorsement rider (Exhibit 7-C) means that only the
two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence,
where the language used in an insurance contract or application is such as to create
ambiguity the same should be resolved against the party responsible therefor, i.e.,
the insurance company which prepared the contract. To the mind of [the] Court, the
language used in the policy in litigation is clear and unambiguous hence there is no
need for interpretation or construction but only application of the provi sions therein.
From the above observations the Court finds that only the two (2) swimming pools
had earthquake shock coverage and were heavily damaged by the earthquake which
struck on July 16, 1990. Defendant having admitted that the damage to the swimmin g
pools was appraised by defendants adjuster atP386,000.00, defendant must, by
virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding
paragraph that defendant is liable only for the damage caused to the two (2)
swimming pools and that defendant has made known to plaintiff its willingness and
readiness to settle said liability, there is no basis for the grant of the other damages
prayed for by plaintiff. As to the counterclaims of defendant, the Court does not
agree that the action filed by plaintiff is baseless and highly speculative since such

action is a lawful exercise of the plaintiffs right to come to Court in the honest belief
that their Complaint is meritorious. The prayer, therefore, of defendant for damages
is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of
THREE HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage
to the two (2) swimming pools, with interest at 6% per annum from the date of the
filing of the Complaint until defendants obligation to plaintiff is fully paid.
No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal
with the Court of Appeals based on the following assigned errors: [14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY
NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING
THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT
TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure
to award it attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decisi on of the trial court and ruled,
thus:
However, after carefully perusing the documentary evidence of both parties, We are
not convinced that the last two (2) insurance contracts (Exhs. G and H), which the
plaintiff-appellant had with AHAC (AIU) and upon which the subject insurance
contract with Philippine Charter Insurance Corporation is said to have been based
and copied (Exh. I), covered an extended earthquake shock insurance on all the
insured properties.
xxx

We also find that the Court a quo was correct in not granting the plaintiff-appellants
prayer for the imposition of interest 24% on the insurance claim and 6% on loss of
income allegedly amounting to P4,280,000.00. Since the defendant-appellant has
expressed its willingness to pay the damage caused on the two (2) swimming pools,
as the Court a quo and this Court correctly found it to be liable only, it then cannot
be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the
rule that the award thereof is subject to the sound discretion of the court. Thus, if
such discretion is well -exercised, it will not be disturbed on appeal (Castro et al. v.
CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the award thereof an
exception rather than a rule, it is necessary for the court to make findings of facts and
law that would bring the case within the exception and justify the grant of such award
(Country Bankers Insurance Corp. v. Lianga Bay and Community Mul ti-Purpose Coop.,
Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiffappellants action is not baseless and highly speculative, We find that the Court a quo
did not err in granting the same.
WHEREFORE, in view of all the foregoi ng, both appeals are hereby DISMISSED and
judgment of the Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues:[16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS
INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER
THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST THE RISK
OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR
DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND
EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the
properties insured and not only the swimming pools. It used the words any property
insured by this policy, and it should be interpreted as all incl usive.
Second, the unqualified and unrestricted nature of the earthquake shock
endorsement is confirmed in the body of the insurance policy itself, which states that
it is [s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On
Long Term Policies.[17]

Third, that the qualification referring to the two swimming pools had already been
deleted in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over
the wording of the insurance policy, because the rider is the more deliberate
expression of the agreement of the contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the
endorsements/warranties enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in
favor of petitioner and against respondent. It was respondent which caused the
ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock
endorsement should be interpreted as a caveat on the standard fire insurance policy,
such as to remove the two swimming pools from the coverage for the risk of fire. It
should not be used to limit the respondents liability for earthquake shock to the two
swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium
was not paid under the extended coverage. The premium for the earthquake shock
coverage was already included in the premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended
to extend earthquake shock coverage to all insured properties. When it secured an
insurance policy from respondent, petitioner told respondent that it wanted an exact
replica of its latest insurance policy from American Home Assurance Company (AHACAIU), which covered all the resorts properties for earthquake shock damage and
respondent agreed. After the July 16, 1990 earthquake, respondent assured
petitioner that it was covered for earthquake shock. Respondents insurance adjuster,
Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the
necessary documents for its building claims and other repair costs. Thu s, under the
doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to
petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under
Rule 45 of the Revised Rules of Court as its remedy, and there is no need for
calibration of the evidence in order to establish the facts upon which this petition is
based.

On the other hand, respondent made the following counter arguments: [18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock to petitioners insured properties other
than on the two swimming pools. Petitioner admitted that from 1984 to 1988, only
the two swimming pools were insured against earthquake shock. From 1988 until
1990, the provisions in its policy were practically identical to its earlier policies, and
there was no increase in the premium paid. AHAC-AIU, in a letter [19] by its
representative Manuel C. Quijano, categorically stated that its previous policy, from
which respondents policy was copied, covered only earthquake shock for the two
swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows
that the policy only covered earthquake shock damage on the two swimming pools.
The amount was the same amount paid by petitioner for earthquake shock coverage
on the two swimming pools from 1990-1991. No additional premium was paid to
warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the l imitation of the earthquake shock
endorsement to the two swimming pools in the policy schedule did not expand the
earthquake shock coverage to all of petitioners properties. As per its agreement with
petitioner, respondent copied its policy from the AHAC-AIU policy provided by
petitioner. Although the first five policies contained the said qualification in their
riders title, in the last two policies, this qualification in the title was deleted. AHACAIU, through Mr. J. Baranda III, stated that such deletion was a mere inadvertence.
This inadvertence did not make the policy incomplete, nor did it broaden the scope
of the endorsement whose descriptive title was merely enumerated. Any ambiguity
in the policy can be easily resolved by looking at the other provi sions, specially the
enumeration of the items insured, where only the two swimming pools were noted
as covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through
1988, the phrase Item 5 P393,000.00 on the two swimming pools only (against the
peril of earthquake shock only) meant that only the swimming pools were insured for
earthquake damage. The same phrase is used in toto in the policies from 1989 to
1990, the only difference being the designation of the two swimming pools as Item
3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must
be paid for all the properties covered. In all of its seven insurance policies, petitioner
only paid P393.00 as premium for coverage of the swimming pools against
earthquake shock. No other premium was paid for earthquake shock coverage on the
other properties. In addition, the use of the qualifier ANY instead of ALL to describe

the property covered was done deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties
must be included in the earthquake shock coverage. Petitioners own evidence shows
that it only required respondent to follow the exact provisions of its previous policy
from AHAC-AIU. Respondent complied with this requirement. Respondents only
deviation from the agreement was when it modified the provisions regarding the
replacement cost endorsement. With regard to the issue under litigation, the riders
of the old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would
estop it from maintaining that only the two swimming pools were covered for
earthquake shock. The adjusters letter notifying petitioner to present certain
documents for its building claims and repair costs was given to petitioner before the
adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5
Only after the descriptive name or title of the Earthquake Shock Endorsement.
However, the words of the policy reflect the parties clear intention to limit
earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It
did not object to any deficiency nor did it institute any action to reform the policy.
The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation
expenses. Since respondent was willing and able to pay for the damage caused on
the two swimming pools, it cannot be considered to be in default, and therefore, it is
not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the
case at bar.
First, in the designation of location of risk, only the two swimming pools were
specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of
earthquake shock only) [20]
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION

ITEM NOS. AMOUNT RATES PREMIUM

xxx
3 393,000.00 0.100%-E/S 393.00 [22]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in
consequence, directly or indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To
Include the Perils of Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED
IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7
% OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . .
. . . . . . . . . . . . . additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this Policy to the contrary, that this insurance
covers loss or damage (including loss or damage by fire) to any of the property
insured by this Policy occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as
they may be hereby expressly varied) and that any reference therein to loss or
damage by fire should be deemed to apply also to loss or damage occasioned by or
through or in consequence of Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the
scope of the earthquake shock coverage. Thus, the policy extended earthquake shock
coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and
interpreted in consonance with each other.[25] All its parts are reflective of the true
intent of the parties. The policy cannot be construed piecemeal. Certain stipulations
cannot be segregated and then made to control; neither do particular words or

phrases necessarily determine its character. Petitioner cannot focus on the

earthquake shock endorsement to the exclusion of the other provisions. All the
provisions and riders, taken and interpreted together, indubitably show the intention
of the parties to extend earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear
intent of the parties to extend earthquake shock coverage only to the two swimming
pools. Section 2(1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. Thus, an
insurance contract exists where the following elements concur:
1. The insured has an insurable interest;

A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally
arrange for the procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?

2. The insured is subject to a risk of loss by the happening of the designated peril;

A. If you are referring to Forte Insurance Agency, yes.

3. The insurer assumes the ri sk;

Q. Is Forte Insurance Agency a department or division of your company?

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

among a large group of persons bearing a similar risk; and
5. In consideration of the
premium.[26] (Emphasis ours)

Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the

two swimming pools only?

insurer's

promise,

the

insured

pays

An insurance premium is the consideration paid an insurer for undertaking to

indemnify the insured against a specified peril. [27] In fire, casualty, and marine
insurance, the premium payable becomes a debt as soon as the risk attaches. [28] In
the subject policy, no premium payments were made with regard to earthquake
shock coverage, except on the two swimming pools. There is no mention of any
premium payable for the other resort properties with regard to earthquake shock.
This is consistent with the history of petitioners previous insurance policies from
AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance
policy during the period from March 4, 1984 to March 4, 1985 the coverage on
earthquake shock was limited to the two swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty,
there is a provision here that it was only for item 5.

A. No, sir. They are our insurance agency.

Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the ins urance policy is concerned they are of
course subject to your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what
insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14,
1989, did you give written instruction to Forte Insurance Agency advising it that the
earthquake shock coverage must extend to all properties of Agoo Playa Resort in La
Union?
A. No, sir. We did not make any written instruction, although we made an oral
instruction to that effect of extending the coverage on (sic) the other properties of
the company.
Q. And that instruction, according to you, was very important because in April 1987
there was an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the
[future], is that correct?

A. Yes, sir.

Yes[,] I remember having gone over these policies at one point of time, sir.

Q. Now, after this policy was delivered to you did you bother to check the provisions
with respect to your instructions that all properties must be covered again by
earthquake shock endorsement?

Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H
respectively carries an earthquake shock endorsement[?] My question to you is, on
the basis on (sic) the wordings indicated in Exhibits C to H respectively what was the
extent of the coverage [against] the peril of earthquake shock as provided for in each
of the six (6) policies?

A. Are you referring to the insurance policy issued by American Home Assurance
Company marked Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock
endorsement has no more limitation referring to the two swimming pools only, I was
contented already that the previous limitation pertaining to the two swimming pools
was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other
Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement,
Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement on
Long Term Policies[29] to the insurance policy as proof of the intent of the parties to
extend the coverage for earthquake shock. However, this phrase is merely an
enumeration of the descriptive titles of the riders, clauses, warranties or
endorsements to which the policy is subject, as required under Section 50, paragraph
2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification
limiting the coverage to the two swimming pools. The earthquake shock
endorsement cannot stand alone. As explained by the testimony of Juan Baranda III,
underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III [30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously
marked by counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to
review of (sic) these six (6) pol icies issued by your company [in favor] of Agoo Playa
Resort?
WITNESS:

xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against ea rthquake shock as provided
for in each of the six (6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock
Endorsement, in the Clauses and Warranties: Item 5 only (Earthquake Shock
Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For
swimming pools we do cover earthquake shock. For building we covered it for full
earthquake coverage which includes earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for
other things other than swimming pool? You are covering building? They are covered
by a general insurance?
WITNESS:

Earthquake shock coverage could not stand alone. If we are covering building or
another we can issue earthquake shock solely but that the moment I see this, the
thing that comes to my mind is either insuring a swimming pool, foundations, they
are normally affected by earthquake but not by fire, sir.

Would you as a matter of practice [insure] swimming pools for fire insurance?

DIRECT EXAMINATION OF JUAN BARANDA III

Q. That is why the phrase earthquake shock to the two (2) swimming pools only was
placed, is it not?

TSN, August 11, 1992

pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E
and F inclusive [remained] its coverage against earthqua ke shock to two (2)
swimming pools only but that Exhibits G and H respectively entend the coverage
against earthquake shock to all the properties indicated in the respective schedules
attached to said policies, what can you say about that testimony of plai ntiffs witness?

WITNESS:
No, we dont, sir.

A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have
pointed to during your direct-examination, the phrase Item no. 5 only meaning to
(sic) the two (2) swimming pools was deleted from the policies issued by AIU, is it
not?

WITNESS:

xxx

As I have mentioned earlier, earthquake shock cannot stand alone without the other
half of it. I assure you that this one covers the two swimming pools with respect to
earthquake shock endorsement. Based on it, if we are going to l ook at the premium
there has been no change with respect to the rates. Everytime (sic) there is a renewal
if the intention of the insurer was to include the earthquake shock, I think there is a
substantial increase in the premium. We are not only going to consider the two (2)
swimming pools of the other as stated in the policy. As I see, there is no increase in
the amount of the premium. I must say that the coverage was not broaden (sic) to
include the other items.

ATTY. ANDRES:

COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going
to do some computation based on the rates you will arrive at the same premiums,
your Honor.

As an insurance executive will you not attach any significance to the deletion of the
qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent.
Being a company underwriter, we do not cover. . it was inadvertent because of the
previous policies that we have issued with no specific attachments, premium rates
and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous
and subsequent acts to the issuance of the insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake shock endorsement included all its
properties in the resort. Respondent only insured the properties as intended by the
petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC

CROSS-EXAMINATION OF JUAN BARANDA III

TSN, January 14, 1992

TSN, September 7, 1992

pp. 4-5

pp. 4-6

Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did
you tell Atty. Omlas (sic) to copy from Exhibit H for purposes of procuring the policy
from Philippine Charter Insurance Corporation?

ATTY. ANDRES:

A. I told him that the insurance that they will have to get will have the same provisions
as this American Home Insurance Policy No. 206-4568061-9.

A. Yes, sir, to Exhibit H.

Finally, petitioner puts much stress on the letter of respondents independent claims
adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative
of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to
believe that the endorsement for earthquake shock covered properties other than
the two swimming pools, viz:

Q. So, all the provisions here will be the same except that of the premium rates?

DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne

A. Yes, sir. He assured me that with regards to the insurance premium rates that they
will be charging will be limited to this one. I (sic) can even be lesser.

Adjusters and Surveyors, Inc.)

Q. You are referring to Exhibit H of course?

CROSS EXAMINATION OF LEOPOLDO MANTOHAC

TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the
provisions and scope of coverage of Exhibits I and H sometime in the third week of
March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy
wordings as well as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already
that the policy wordings and rates were copied from the insurance policy I sent them
but it was only when this case erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any
discrepancy at any time between those indicated in Exhibit I and those indicated in
Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was ex actly
the same P393,000.00 on the two (2) swimming pools only against the peril of
earthquake shock which I understood before that this provision will have to be placed
here because this particular provision under the peril of earthquake shock only is
requested because this is an insurance policy and therefore cannot be insured against
fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas
were not proved. Atty. Umlas categorically denied having given such assurances.

TSN, January 26, 1993

pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent
of coverage of the policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a
photocopy of the insurance coverage policy and it was indicated under Item 3
specifically that the coverage is only for earthquake shock. Then, I remember I had a
talk with Atty. Umlas (sic), and I relayed to him what I had found out in the policy and
he confirmed to me indeed only Item 3 which were the two swimming pools have
coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that
except for the swimming pools all affected items have no coverage for earthquake
shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy
I found out that under Item 3 it was specific on the wordings that on the two
swimming pools only, then enclosed in parenthesis (against the peril[s] of earthquake
shock only), and secondly, when I examined the summary of premium payment only
Item 3 which refers to the swimming pools have a computation for premium payment
for earthquake shock and all the other items have no computation for payment of
premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner
cannot rely on the general rule that insurance contracts are contracts of adhesion
which should be liberally construed in favor of the insured and strictly against the
insurer company which us ually prepares it.[31] A contract of adhesion is one wherein
a party, usually a corporation, prepares the stipulations in the contract, while the

other party merely affixes his signature or his "adhesion" thereto. Through the years,
the courts have held that in these type of contracts, the parties do not bargain on
equal footing, the weaker party's participation being reduced to the alternative to
take it or leave it. Thus, these contracts are viewed as traps for the weaker party
whom the courts of justice must protect.[32] Consequently, any ambiguity therein is
resolved against the insurer, or construed liberally in favor of the insured. [33]
The case law will show that this Court will only rule out blind adherence to terms
where facts and circumstances will show that they are basically one-sided.[34] Thus,
we have called on lower courts to remain careful in scrutinizing the factual
circumstances behind each case to determine the efficacy of the claims of contending
parties. In Development Bank of the Philippines v. National Merchandising
Corporation, et al.,[35] the parties, who were acute businessmen of experience, were
presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar.
Petitioner cannot claim it did not know the provisions of the policy. From the
inception of the policy, petitioner had required the respondent to copy verbatim the
provisions and terms of its latest insurance policy from AHAC-AIU. The testimony of
Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of
petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC [36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those
facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine
Charter Insurance Corporation as long as it will follow the same or exact provisions
of the previous insurance policy we had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted
in the American Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I
specifically told him that the policy and wordings shall be copied fr om the AIU Policy
No. 206-4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy
No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was
variance in some terms, specifically in the replacement cost endorsement, but the
principal provisions of the policy remained essentially similar to AHAC-AIUs policy.
Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this
case as the parties intent to limit the coverage of the policy to the two swimming
pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition
for certiorari is dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

SIMON
DE
LA
CRUZ, plaintiff
and
appellee,
vs.
THE CAPITAL INSURANCE and SURETY CO., INC., defendant and appellant.

death of the insured. And, since his inclusion in the boxing card was voluntary on the
part of the insured, he cannot be considered to have met his death by "accidental
means".1wph1.t

Achacoso,
Nera
and
Ocampo
for
Agustin M. Gramata for plaintiff and appellee.

The terms "accident" and "accidental", as used in insurance contracts, have not
acquired any technical meaning, and are construed by the courts in their ordinary
and common acceptation. Thus, the terms have been taken to mean that which
happen by chance or fortuitously, without intention and design, and which is
unexpected, unusual, and unforeseen. An accident is an event that takes place
without one's foresight or expectation an event that proceeds from an unknown
cause, or is an unusual effect of a known cause and, therefore, not expected. 1

defendant

and

appellant.

BARRERA, J.:
This is an appeal by the Capital Insurance & Surety Company, Inc., from the decision
of the Court of First Instance of Pangasinan (in Civ Case No. U-265), ordering it to
indemnify therein plaintiff Simon de la Cruz for the death of the latter's son, to pay
the burial expenses, and attorney's fees.
Eduardo de la Cruz, employed as a mucker in the Itogon-Suyoc Mines, Inc. in Baguio,
was the holder of an accident insurance policy (No. ITO-BFE-170) underwritten by the
Capital Insurance & Surety Co., Inc., for the period beginning November 13, 1956 to
November 12, 1957. On January 1, 1957, in connection with the celebration of the
New Year, the Itogon-Suyoc Mines, Inc. sponsored a boxing contest for general
entertainment wherein the insured Eduardo de la Cruz, a non-professional boxer
participated. In the course of his bout with another person, likewise a non professional, of the same height, weight, and size, Eduardo slipped and was hit by his
opponent on the left part of the back of the head, causing Eduardo to fall, with his
head hitting the rope of the ring. He was brought to the Baguio General Hospital the
following day. The cause of death was reported as hemorrhage, intra cranial, left.
Simon de la Cruz, the father of the insured and who was named beneficiary under
the policy, thereupon filed a claim with the insurance company for payment of the
indemnity under the insurance policy. As the claim was denied, De la Cruz insti tuted
the action in the Court of First Instance of Pangasinan for specific performance.
Defendant insurer set up the defense that the death of the insured, caused by his
participation in a boxing contest, was not accidental and, therefore, not covered by
insurance. After due hearing the court rendered the decision in favor of the plaintiff
which is the subject of the present appeal.
It is not disputed that during the ring fight with another non-professional boxer,
Eduardo slipped, which was unintentional. At this opportunity, his opponent landed
on Eduardo's head a blow, which sent the latter to the ropes. That must have caused
the cranial injury that led to his death. Eduardo was insured "against death or
disability caused by accidental means". Appellant insurer now contends that while
the death of the insured was due to head injury, said injury was sustained because of
his voluntary participation in the contest. It is claimed that the participation in the
boxing contest was the "means" that produced the inj ury which, in turn, caused the

Appellant however, would like to make a distinction between "accident or

accidental" and "accidental means", which is the term used in the insurance policy
involved here. It is argued that to be considered within the protection of the policy,
what is required to be accidental is the means that caused or brought the death and
not the death itself. It may be mentioned in this connection, that the tendency of
court decisions in the United States in recent years is to eliminate the fine distinction
between the terms "accidental" and "accidental means" and to consider them as
legally synonymous.2 But, even if we take appellant's theory, the death of the insured
in the case at bar would still be entitled to indemnification under the policy. The
generally accepted rule is that, death or injury does not result from accident or
accidental
means
within
the
terms
of
an
accident-policy if it is the natural result of the insured's voluntary act, unaccompanied
by anything unforeseen except the death or injury. 3 There is no accident when a
deliberate act is performed unless some additional, unexpected, independent, and
unforeseen happening occurs which produces or brings about the result of injury or
death.4 In other words, where the death or injury is not the natural or probable result
of the insured's voluntary act, or if something unforeseen occurs in the doing of the
act which produces the injury, the resulting death is within the protection of policies
insuring against death or injury from accident.
In the present case, while the participation of the insured in the boxing contest is
voluntary, the injury was sustained when he slid, giving occasion to the infliction by
his opponent of the blow that threw him to the ropes of the ring. Without this
unfortunate incident, that is, the unintentional slipping of the deceased, perhaps he
could not have received that blow in the head and would not have died. The fact that
boxing is attended with some risks of external injuries does not make any injuries
received in the course of the game not accidental. In boxing as in other equally
physically rigorous sports, such as basketball or baseball, death is not ordinarily
anticipated to result. If, therefore, it ever does, the injury or death can only be

accidental or produced by some unforeseen happening or event as what occurred in

this case.
Furthermore, the policy involved herein specifically excluded from its coverage
(e) Death or disablement consequent upon the Insured engaging in football, hunting,
pigsticking, steeplechasing, polo-playing, racing of any kind, mountaineering, or
motorcycling.
Death or disablement resulting from engagement in boxing contests was not
declared outside of the protection of the insurance contract. Failure of the defendant
insurance company to include death resulting from a boxing match or other sports
among the prohibitive risks leads inevitably to the conclusion that it did not intend to
limit or exempt itself from liability for such death. 5
Wherefore, in view of the foregoing considerations, the deci sion appealed from is
hereby affirmed, with costs against appellant. so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and
Sanchez, JJ., concur.

HEIRS OF LORETO MARAMAG VS VERMA DE GUZMAN

This is a petition [1] for review on certiorari under Rule 45 of the Rules, seeking to
reverse and set aside the Resolution [2] dated January 8, 2008 of the Court of Appeals
(CA), in CA-G.R. CV No. 85948, dismissing petitioners appeal for lack of jurisdiction.

The case stems from a petition [3] filed against respondents with the Regional Trial
Court, Branch 29, for revocation and/or reduction of insurance proceeds for being
void and/or inofficious, with prayer for a temporary restraining order (TRO) and a
writ of preliminary injunction.
The petition alleged that: (1) petitioners were the legitimate wife and children of
Loreto Maramag (Loreto), while respondents were Loretos illegitimate family; (2) Eva
de Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the killing of
the latter, thus, she is disqualified to receive any proceeds from his insurance policies
from Insular Life Assurance Company, Ltd. (Insular) [4] and Great Pacific Life Assurance
Corporation (Grepalife);[5] (3) the illegitimate children of LoretoOdessa, Karl Brian,
and Trisha Angeliewere entitled only to one-half of the legitime of the legitimate
children, thus, the proceeds released to Odessa and those to be released to Karl Brian
and Trisha Angelie were inofficious and should be reduced; and (4) petitioners could
not be deprived of their legitimes, which should be satisfied first.
In support of the prayer for TRO and writ of preliminary injunction, petitioners
alleged, among others, that part of the insurance proceeds had already been released
in favor of Odessa, while the rest of the proceeds are to be released in favor of Karl
Brian and Trisha Angelie, both minors, upon the appointment of their legal
guardian. Petitioners also prayed for the total amount of P320,000.00 as actual
litigation expenses and attorneys fees.
In answer,[6] Insular admitted that Loreto misrepresented Eva as his legitimate wife
and Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they
filed their claims for the insurance proceeds of the insurance policies; that when it
ascertained that Eva was not the legal wife of Loreto, it disqualified her as a
beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha An gelie,
as the remaining designated beneficiaries; and that it released Odessas share as she
was of age, but withheld the release of the shares of minors Karl Brian and Trisha
Angelie pending submission of letters of guardianship.Insular alleged that the
complaint or petition failed to state a cause of action insofar as it sought to declare
as void the designation of Eva as beneficiary, because Loreto revoked her designation
as such in Policy No. A001544070 and it disqualified her in Policy No. A001693029;
and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and

Trisha Angelie, considering that no settlement of Loretos estate had been filed nor
had the respective shares of the heirs been determined. Insular further claimed that
it was bound to honor the insurance policies designating the children of Loreto with
Eva as beneficiaries pursuant to Section 53 of the Insurance Code.
In its own answer [7] with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl
Brian, and Trisha Angelie were denied because Loreto was ineligible for insurance
due to a misrepresentation in his application form that he was born on December 10,
1936 and, thus, not more than 65 years old when he signed it in September 2001;
that the case was premature, there being no claim filed by the legitimate family of
Loreto; and that the law on succession does not apply where the designation of
insurance beneficiaries is clear.
As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to
petitioners, summons by publication was resorted to. Still, the illegitimate family of
Loreto failed to file their answer. Hence, the trial court, upon motion of petitioners,
declared them in default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues
raised in their respective answers be resolved first. The trial court ordered petitioners
to comment within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife
was purely legal whether the complaint itself was proper or not and that the
designation of a beneficiary is an act of liberality or a donation and, therefore, subject
to the provisions of Articles 752 [8] and 772 [9] of the Civil Code.
In reply, both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies , not to the estate or to the
heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was legally married to Vicenta Pangilinan
Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion of
which reads
WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular
Life and Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha
Maramag. The action shall proceed with respect to the other defendants Eva Verna
de Guzman, Insular Life and Grepalife.
SO ORDERED.[10]

In so ruling, the trial court ratiocinated thus

Art. 2011 of the Civil Code provides that the contract of insurance is governed by the
(sic) special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code. The principal law on insurance is the Insurance Code, as
amended. Only in case of deficiency in the Insurance Code that the Civil Code may be
resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the
insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person
in whose name or for whose benefit it is made, unless otherwise specified in the
policy. Since the defendants are the ones named as the primary beneficiary (sic) in
the insurances (sic) taken by the deceased Loreto C. Maramag and there is no
showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the beneficiary
has a vested right to the indemnity, unless the insured reserves the right to change
the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).

Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect
the insurance indemnity. The beneficiary in a contract of insurance is not the donee
spoken in the law of donation. The rules on testamentary succession cannot apply
here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which
can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern
Luzon Employees Association v. Juanita Golpeo, et al., the Honorable Supreme Court
made the following pronouncements[:]

However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is
his concubine Eva Verna De Guzman. Any person who is forbidden from receiving any
donation under Article 739 cannot be named beneficiary of a life insurance policy of
the person who cannot make any donation to him, according to said article (Art.
2012, Civil Code). If a concubine is made the beneficiary, it is believed that the
insurance contract will still remain valid, but the indemnity must go to the legal heirs
and not to the concubine, for evidently, what is prohibited under Art. 2012 is the
naming of the improper beneficiary. In such case, the action for the declaration of
nullity may be brought by the spouse of the donor or donee, and the guilt of the
donor and donee may be proved by preponderance of evidence in the same action
(Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the
designation of defendant Eva Verna de Guzman as one of the primary beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739
of the Civil Code, the insurance indemnity that should be paid to her must go to the
legal heirs of the deceased which this court may properly take cognizance as the
action for the declaration for the nullity of a void donation falls within the general
jurisdiction of this Court.[11]
Insular [12] and Grepalife[13] filed their respective motions for reconsideration, arguing,
in the main, that the petition failed to state a cause of action. Insular further averred
that the proceeds were divided among the three children as the remaining named
beneficiaries. Grepalife, for its part, also alleged that the premiums paid had already
been refunded.
Petitioners, in their comment, reiterated their earlier arguments and posited that
whether the complaint may be dismissed for failure to state a cause of action must
be determined solely on the basis of the allegations in the complaint, such that the
defenses of Insular and Grepalife would be better threshed out during trial.

With the finding of the trial court that the proceeds to the Life Insurance Policy
belongs exclusively to the defendant as his individual and separate property, we
agree that the proceeds of an insurance policy belong exclusively to the beneficiary
and not to the estate of the person whose life was insured, and that such proceeds
are the separate and individual property of the beneficiary and not of the heirs of the
person whose life was insured, is the doctrine in America. We believe that the same
doctrine obtains in these Islands by virtue of Section 428 of the Code of Commerce

On June 16, 2005, the trial court issued a Resolution, disposing, as follows:

In [the] light of the above pronouncements, it is very clea r that the plaintiffs has (sic)
no sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie
Maramag for the reduction and/or declaration of inofficiousness of donation as
primary beneficiary (sic) in the insurances (sic) of the l ate Loreto C. Maramag.

SO ORDERED.[14]

WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration

filed by defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the
portion of the Resolution of this Court dated 21 September 2004 which ordered the
prosecution of the case against defendant Eva Verna De Guzman, Grepalife and
Insular Life is hereby SET ASIDE, and the case against them is hereby ordered
DISMISSED.

In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in

one policy and that Insular disqualified her as a beneficiary in the other policy such
that the entire proceeds would be paid to the illegitimate children of Loreto with Eva
pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases where
there are no beneficiaries designated, or when the only designated beneficiary is
disqualified, that the proceeds should be paid to the estate of the insured. As to the
claim that the proceeds to be paid to Loretos illegitimate children should be reduced
based on the rules on legitime, the trial court held that the distribution of th e
insurance proceeds is governed primarily by the Insurance Code, and the provisions
of the Civil Code are irrelevant and inapplicable. With respect to the Grepalife policy,
the trial court noted that Eva was never designated as a beneficiary, but only Odessa,
Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the
illegitimate children. It further held that the matter of Loretos misrepresentation was
premature; the appropriate action may be filed only upon denial of the claim of the
named beneficiaries for the insurance proceeds by Grepalife.

argue that for a motion to dismiss to prosper on that ground, only the allegations in
the complaint should be considered. They further contend that, even assuming
Insular disqualified Eva as a beneficiary, her share should not have been distributed
to her children with Loreto but, instead, awarded to them, being the legitimate heirs
of the insured deceased, in accordance with law and jurisprudence.

Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the
appeal for lack of jurisdiction, holding that the decision of the trial court dismissing
the complaint for failure to state a cause of action involved a pure question of
law. The appellate court also noted that petitioners did not file within the
reglementary period a motion for reconsideration of the trial courts Resolution,
dated September 21, 2004, dismissing the complaint as against Odessa, Karl Brian,
and Trisha Angelie; thus, the said Resolution had already attained finality.

(g) That the pleading asserting the claim states no cause of action.

Hence, this petition raising the following issues:

a.
In determining the merits of a motion to dismiss for failure to state a
cause of action, may the Court consider matters which were not alleged in the
Complaint, particularly the defenses put up by the defendants in their Answer?
b.
In granting a motion for reconsideration of a motion to dismiss for failure
to state a cause of action, did not the Regional Trial Court engage in the examination
and determination of what were the facts and their probative value, or the truth
thereof, when it premised the dismissal on allegations of the defendants in thei r
answer which had not been proven?
c.
x x x (A)re the members of the legitimate family entitled to the proceeds
of the insurance for the concubine? [15]
In essence, petitioners posit that their petition before the trial court should not have
been dismissed for failure to state a cause of action because the finding that Eva was
either disqualified as a beneficiary by the insurance companies or that her
designation was revoked by Loreto, hypothetically admitted as true, was raised only
in the answers and motions for reconsideration of both Insular and Grepalife. They

The petition should be denied.

The grant of the motion to dismiss was based on the trial courts finding that the
petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the
Rules of Court, which reads :
SECTION 1. Grounds. Within the time for but before filing the answer to the complaint
or pleading asserting a claim, a motion to dismiss may be made on any of the
following grounds:

A cause of action is the act or omission by which a party violates a right of

another.[16] A complaint states a cause of action when it contains the three (3)
elements of a cause of action(1) the legal right of the plaintiff; (2) the correlative
obligation of the defendant; and (3) the act or omission of the defendant in violation
of the legal right. If any of these elements is absent, the complaint becomes
vulnerable to a motion to dismiss on the ground of failure to state a cause of
action.[17]
When a motion to dismiss is premised on this ground, the ruling thereon should be
based only on the facts alleged in the complaint. The court must resolve the issue on
the strength of such allegations, assuming them to be true. The test of sufficiency of
a cause of action rests on whether, hypothetically admitting the facts alleged in the
complaint to be true, the court can render a valid judgment upon the same, in
accordance with the prayer in the complaint. This is the general rule.
However, this rule is subject to well -recognized exceptions, such that there is no
hypothetical admission of the veracity of the allegations if:
1.

the falsity of the allegations is subject to judicial notice;

2.

such allegations are legally impossible;

3.

the allegations refer to facts which are inadmissible in evidence;

4.
by the record or document in the pleading, the allegations appear
unfounded; or

5.
there is evidence which has been presented to the court by stipulation of
the parties or in the course of the hearings related to the case. [18]
In this case, it is clear from the petition filed before the trial court that, alth ough
petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries
in the insurance policies issued by Insular and Grepalife. The basis of petitioners claim
is that Eva, being a concubine of Loreto and a suspect in his murder, is dis qualified
from being designated as beneficiary of the insurance policies, and that Evas children
with Loreto, being illegitimate children, are entitled to a lesser share of the proceeds
of the policies. They also argued that pursuant to Section 12 of the I nsurance
Code,[19] Evas share in the proceeds should be forfeited in their favor, the former
having brought about the death of Loreto. Thus, they prayed that the share of Eva
and portions of the shares of Loretos illegitimate children should be awarded to
them, being the legitimate heirs of Loreto entitled to their respective legitimes.
It is evident from the face of the complaint that petitioners are not entitled to a
favorable judgment in light of Article 2011 of the Civil Code which expressly provides
that insurance contracts shall be governed by special laws, i.e., the Insurance
Code.Section 53 of the Insurance Code states
SECTION 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless otherwise
specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the insured is
already deceased, upon the maturation of the policy. [20] The exception to this rule is
a situation where the insurance contract was intended to benefit third persons who
are not parties to the same in the form of favorable stipulations or indemnity. In such
a case, third parties may directly sue and claim from the insurer. [21]
Petitioners are third parties to the insurance contracts with Insular and Grepalife and,
thus, are not entitled to the proceeds thereof. Accordingly, respondents Insular and
Grepalife have no legal obligation to turn over the insurance proceeds to
petitioners.The revocation of Eva as a beneficiary in one policy and her
disqualification as such in another are of no moment considering that the designation
of the illegitimate children as beneficiaries in Loretos insurance policies remains
valid. Because no legal proscription exists in naming as beneficiaries the children of
illicit relationships by the insured,[22] the shares of Eva in the insurance proceeds,
whether forfeited by the court in view of the prohibition on donations under Article
739 of the Civil Code or by the insurers themselves for reasons based on the insurance
contracts, must be awarded to the said illegitimate children, the designated
beneficiaries, to the exclusion of petitioners. It is only in cases where the insured has

not designated any beneficiary,[23] or when the designated beneficiary is disqualified

by law to receive the proceeds,[24] that the insurance policy proceeds shall redound
to the benefit of the estate of the insured.
In this regard, the assailed June 16, 2005 Resolution of the trial court should be
upheld. In the same light, the Decision of the CA dated January 8, 2008 should be
sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the
appeal; the issue of failure to state a cause of action is a question of law and not of
fact, there being no findings of fact in the first place. [25]
WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.

SOUTHERN LUZON EMPLOYEES ASSOC. VS GOLPEO

The plaintiff, Southern Luzon Employees' Association is c omposed of laborers and
employees of Laguna tayabas Bus Co., and Batangas Transportation Company, and
one of its purposes is mutual aid of its members and their defendants in case of
death. Roman A. Concepcion was a member until his death on December 13, 1 950.
The association adopted on September 17, 1949 the following resolution:
RESOLVED: That a family record card of each member be printed wherein the
members will put down his dependents and/or beneficiaries.
BE IT RESOLVED, FURTHER, that a member may, if he chooses, put down his commonlaw wife as his beneficiary and/or children had with her as the case may be; that in
case of a widower, he may put down his legitimate children with the first marriage
who are below 21 years of age, single, and may at the s ame time, also name his
common-law wife, if he has any, as dependents and/or beneficiaries; and
BE IT RESOLVED: That such person so named by the member will be sole persons to
be recognized by the Association regarding claims for condolence contributions.
In the form required by the association to be accomplished by its members, with
reference to the death benefit, Roman A. Concepcion listed as his beneficiaries
Aquilina Maloles, Roman M. Concepcion, Jr., Estela M. Concepcion, Rolando M.
Concepcion and Robi n M. Concepcion. After the death of Roman A. Concepcion, the
association was able to collect voluntary contributions from its members amounting
to P2,5055. Three sets of claimants presented themselves, namely, (1) Juanita
Golpeo, legal wife of Roman A. Concepcion, and her children, named beneficiaries by
the deceased; and (3) Elsie Hicban, another common law wife of Roman A.
Concepcion, and her child. The plaintiff association was accordingly constrained to
institute in the Court of First Instance of Laguna the present action for interpleading
against the three conflicting claimants as defendants. Marcelino and Josefina
Concepcion, children of the deceased Roman A. Concepcion with Juanita Golpeo,
intervened in their own rights, aligning themselves with the defendants, Juanita
Golpeo and her minor children. After hearing, the court rendered a decision,
declaring the defendants Aquilina Maloles and her children the sole beneficiaries of
the sum of P2,505.00, and ordering the plaintiff to deliver said amount to them. From
this decision only the defendants Juanita Golpeo and her minor children and the
intervenors Marcelino and Josefina Concepcion have appealed to this court.
The decision is based mainly on the theory that the contract between the plaintiff
and the deceased Roman A. Concepcion partook of the nature of an insurance and
that, therefore, the amount in question belonged exclusively to the beneficiaries,

invoking the following pronouncements of this Court in the case of Del Val vs. Del Val,
29 Phil., 534:
With the finding of the trial court that the proceeds of the life-insurance policy
belongs exclusively to the defendant as his individual and separate property, we
agree. That the proceeds of an insurance policy belong exclusively to the beneficiary
and not to the estate of the person whose life was insured, and that such proceeds
are the separate and individual property of the beneficiary, and not of the heirs of
the person whose life was insured, is the doctrine in America. We believe that the
same doctrine obtains in these Islands by virtue of section 428 of the Code of
Commerce, which reads:
"The amounts which the underwriter must deliver to the person insured, in
fulfillment of the contract, shall be the property creditors of any kind whatsoever of
the person who effected the insurance in favor of the formers."
It is claimed by the attorney for the plaintiffs that the section just quoted in
subordinated to the provisions of the civil code as found in article 10035. This article
reads:
"An heir by force of law surviving with others of the same character to a succession
must bring into the hereditary estate the property or securities he may bring into the
hereditary estate the property or securities he may have been received from the
deceased during the l ife of the same, by way of dowry, gift, or for any good
consideration, in order to compute it in fixing the legal portions and in the amount of
the division."
Counsel also claims that the proceed of the insurance policy were donation or gift
made by the father during his lifetime to the defendant and that, as such, its ultimate
destination is determined by those provisions of the Civil Code which relate to
donations, especially article 819. This article provides that "gifts made to children
which are not betterments shall be considered as part of their legal portion."
We cannot agree with these contention. The contract of life insurance is a special
contract and the destination of the proceeds thereof is determined by special laws
which deal exclusively with that subject. The Civil Code has no provisions which relate
directly and specifically to life-insurance contract or to the destination of lifeinsurance proceeds. That subject is regulate exclusively by the Code of Commerce
which provides for the terms of the contract, the relations of the parties and the
destination of the proceeds of the policy. (Supra, pp. 540-541.)
It is argued for the appellants, however, that the Insurance Law is not applicable
because the plaintiff is a mutual benefit association as defined in section 1628 of the

Revised Administrative Code. This argument evidently ignore the fact that the trial
court has no considered the plaintiff as a regular insurance company but merely ruled
that the death benefit in question is analogous to an insurance. Moreover, section
1628 of the Revised Administrative Code defines a mutual benefit association as one,
among others, "providing for any method of accident or life insurance among its
members out of dues or assessments collected from the membership." The
comparison made in the appealed decision is, therefore, well taken.
Appellant also contend that the stipulation between the plaintiff and the deceased
Roman A. Concepcion regarding the specification of the latter's beneficiaries, and the
resolution of September 17, 1949, are void for the being contrary to law, moral or
public policy. Specifically, the appellants cite article 2012 of the new Civil Code
providing that "Any person who is forbidden from receiving any donation under
article 739 cannot be named beneficiary of a life insurance policy and by the person
who cannot make any donation to him, according to said article." Inasmuch as,
according to article 739 of the new Civil Code, a donation is valid when made
"between persons who are guilty or adultery or concubinage at the time of the
donation," it is alleged that the defendant-appellee Aquilina Maloles, cannot be
named a beneficiary, every assuming that the insurance law is applicable. Without
considering the intimation in the brief for the defendant appellees that appellant
Juanita Golpeo, by her silence and actions, had acquiesced in the illicit relations
between her husband and appellee Aquilina Maloles, appellant argument would
certainly not apply to the children of Aquilina likewise named beneficiaries by the
deceased Roman A. Concepcion. As a matter of a fact the new Civil Code recognized
certain successional rights of illegitimate children. (Article 287.)
The other contention advanced rather exhaustively by counsel for appellants, and
the citations in support there of are either negative or rendered inapplicable by the
decisive considerations already stated. In this connection it is noteworthy that the
estate of the deceased Roman A. Concepcion was not entirely left without anything
legally due it since it is an admitted fact that the sum of P2,500 was paid by Laguna
Tayabas Bus Co., employer of the deceased to the appellants under the Workmen's
Compensation Act. Wherefore, the appealed decision is affirmed, and it is so ordered
without costs.
Bengzon,
Jugo
and
Bautista
Padilla and Reyes, A., JJ., concur in the result.

Angelo,

JJ., concur.

VDA DE CONSUEGRA VS GSIS

ZALDIVAR, J.:
Appeal on purely questions of law from the decision of the Court of First Instance of
Surigao del Norte, dated March 7, 1967, in its Special Proceeding No. 1720.
The pertinent facts, culled from the stipulation of facts submitted by the parties, are
the following:
The late Jose Consuegra, at the time of his death, was employed as a shop foreman
of the office of the District Engineer in the province of Surigao del Norte. In his
lifetime, Consuegra contracted two marriages, the first with herein respondent
Rosario Diaz, solemnized in the parish church of San Nicolas de Tolentino, Surigao,
Surigao, on July 15, 1937, out of which marriage were born two children, namely,
Jose Consuegra, Jr. and Pedro Consuegra, but both predeceased their father; and the
second, which was contracted in good faith while the first marriage was subsisting,
with herein petitioner Basilia Berdin, on May 1, 1957 in the same parish and
municipality, out of which marriage were born seven children, namely, Juliana,
Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz, all surnamed Consuegra.
Being a member of the Government Service Insurance System (GSIS, for short) when
Consuegra died on September 26, 1965, the proceeds of his life insurance under
policy No. 601801 were paid by the GSIS to petitioner Basilia Berdin and her children
who were the beneficiaries named in the policy. Having been in the ser vice of the
government for 22.5028 years, Consuegra was entitled to retirement insurance
benefits in the sum of P6,304.47 pursuant to Section 12(c) of Commonwealth Act 186
as amended by Republic Acts 1616 and 3836. Consuegra did not designate any
beneficiary who would receive the retirement insurance benefits due to him.
Respondent Rosario Diaz, the widow by the first marriage, filed a claim with the GSIS
asking that the retirement insurance benefits be paid to her as the only legal heir of
Consuegra, considering that the deceased did not designate any beneficiary with
respect to his retirement insurance benefits. Petitioner Basilia Berdin and her
children, likewise, filed a similar claim with the GSIS, asserting that being the
beneficiaries named in the life insurance policy of Consuegra, they are the only ones
entitled to receive the retirement insurance benefits due the deceased Consuegra.
Resolving the conflicting claims, the GSIS ruled that the legal heirs of the late Jose
Consuegra were Rosario Diaz, hi s widow by his first marriage who is entitled to onehalf, or 8/16, of the retirement insurance benefits, on the one hand; and Basilia
Berdin, his widow by the second marriage and their seven children, on the other
hand, who are entitled to the remaining one-half, or 8/16, each of them to receive
an equal share of 1/16.

Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia
Berdin and her children 1 filed on October 10, 1966 a petition for mandamus with
preliminary injunction in the Court of First Instance of Surigao, naming as
respondents the GSIS, the Commissioner of Public Highways, the Highway District
Engineer of Surigao del Norte, the Commissioner of Civil Service, and Rosario Diaz,
praying that they (petitioners therein) be declared the legal heirs and exclusive
beneficiaries of the retirement insurance of the late Jose Consuegra, and that a writ
of preliminary injunction be issued restraining the implementation of the
adjudication made by the GSIS. On October 26, 1966, the trial court issued an order
requiring therein respondents to file their respective answers, but refrained from
issuing the writ of preliminary injunction prayed for. On February 11, 1967, the
parties submitted a stipulation of facts, prayed that the same be admitted and
approved and that judgment be rendered on the basis of the stipulation of facts. On
March 7, 1967, the court below rendered judgment, the pertinent portions of which
are quoted hereunder:
This Court, in conformity with the foregoing stipulati on of facts, likewise is in full
accord with the parties with respect to the authority cited by them in support of said
stipulation and which is herein-below cited for purposes of this judgment, to wit:
"When two women innocently and in good faith are lega lly united in holy matrimony
to the same man, they and their children, born of said wedlock, will be regarded as
legitimate children and each family be entitled to one half of the estate. Lao & Lao
vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon vs.
Bejec, 74 Phil. 88.
WHEREFORE, in view of the above premises, this Court is of the opinion that the
foregoing stipulation of facts is in order and in accordance with law and the same is
hereby approved. Judgment, therefore, is hereby rendered declaring the petitioner
Basilia Berdin Vda. de Consuegra and her co-petitioners Juliana, Pacita, Maria
Lourdes, Jose, Jr., Rodrigo, Lenida and Luis, all surnamed Consuegra, beneficiary and
entitled to one-half (1/2) of the retirement benefi t in the amount of Six Thousand
Three Hundred Four Pesos and Fourty-Seven Centavos (P6,304.47) due to the
deceased Jose Consuegra from the Government Service Insurance System or the
amount of P3,152.235 to be divided equally among them in the proportional amount
of 1/16 each. Likewise, the respondent Rosario Diaz Vda. de Consuegra is hereby
declared beneficiary and entitled to the other half of the retirement benefit of the
late Jose Consuegra or the amount of P3,152.235. The case with respect to the
Highway District Engineer of Surigao del Norte is hereby ordered dismissed.
Hence the present appeal by herein petitioners -appellants, Basilia Berdin and her
children.

It is the contention of appellants that the lower court erred in not holding that the
designated beneficiaries in the life insurance of the late Jose Consuegra are also the
exclusive beneficiaries in the retirement insurance of said deceased. In other words,
it is the submission of appellants that because the deceased Jose Consuegra failed to
designate the beneficiaries in his retirement insurance, the appellants who were the
beneficiaries named in the life insurance should automatically be considered the
beneficiaries to receive the retirement insurance benefits, to the exclusion of
respondent Rosario Diaz. From the arguments adduced by appellants in their brief
We gather that it is their stand that the system of life insurance and the system of
retirement insurance, that are provided for in Commonwealth Act 186 as amended,
are simply complementary to each other, or that one is a part or an extension of the
other, such that whoever is named the beneficiary in the life insurance is also the
beneficiary in the retirement insurance when no such beneficiary is named in the
retirement insurance.
The contention of appellants is untenable.
It should be noted that the law creating the Government Service Insurance System is
Commonwealth Act 186 which was enacted by the National Assembly on November
14, 1936. As originally approved, Commonwealth Act 186 provided for the
compulsory membership in the Government Service Insurance System of all regularly
and permanently appointed officials and employees of the government, considering
as automatically insured on life all such officials and employees, and issuing to them
the corresponding membership policy under the terms and conditions as provided in
the Act.2
Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth
Act 186 was amended by Republic Act 660 which was enacted by the Congress of the
Philippines on June 16, 1951, and, among others, the amendatory Act provided that
aside from the system of life insurance under the Government Service Insurance
System there was also established the system of retirement insurance. Thus, We will
note in Republic Act 660 that there is a chapter on life insurance and another chapter
on retirement insurance. 3 Under the chapter on life insurance are sections 8, 9 and
10 of Commonwealth Act 186, as amended; and under the chapter on retirement
insurance are sections 11, 12, 13 and 13-A. On May 31, 1957, Republic Act 1616 was
enacted by Congress, amending section 12 of Commonwealth Act 186 as amended
by Republic Act 660, by adding thereto two new subsections, designated as
subsections (b) and (c). This subsection (c) of section 12 of Commonwealth Act 186,
as amended by Republic Acts 660, 1616 and 3096, was again amended by Republic
Act 3836 which was enacted on June 22, 1963.lwph1.t The pertinent provisions
of subsection (c) of Section 12 of Commonwealth Act 186, as thus amended and
reamended, read as follows:

(c) Retirement is likewise allowed to a member, regardless of age, who has rendered
at least twenty years of service. The benefit shall, in addition to the return of his
personal contributions plus interes t and the payment of the corresponding
employer's premiums described in subsection (a) of Section 5 hereof, without
interest, be only a gratuity equivalent to one month's salary for every year of service,
based on the highest rate received, but not to exceed twenty-four months; Provided,
That the retiring officer or employee has been in the service of the said employer or
office for at least four years, immediately preceding his retirement.
xxx xxx xxx
The gratuity is payable by the employer or office concerned which is hereby
authorized to provide the necessary appropriation to pay the same from any
unexpended items of appropriations.
Elective or appointive officials and employees paid gratuity under this subsection
shall be entitled to the commutation of the unused vacation and sick leave, based on
the highest rate received, which they may have to their credit at the time of
retirement.
Jose Consuegra died on September 26, 1965, and so at the time of his death he had
acquired rights under the above-quoted provisions of subsection (c) of Section 12 of
Com. Act 186, as finally amended by Rep. Act 3836 on June 22, 1963. When
Consuegra died on September 26, 1965, he had to his credit 22.5028 years of service
in the government, and pursuant to the above-quoted provisions of subsection (c) of
Section 12 of Com. Act 186, as amended, on the basis of the highest rate of salary
received by him which was P282.83 per month, he was entitled to receive retirement
insurance benefits in the amount of P6,304.47. This is the r etirement benefits that
are the subject of dispute between the appellants, on the one hand, and the appellee
Rosario Diaz, on the other, in the present case. The question posed is: to whom
should this retirement insurance benefits of Jose Consuegra be paid, because he did
not, or failed to, designate the beneficiary of his retirement insurance?
If Consuegra had 22.5028 years of service in the government when he died on
September 26, 1965, it follows that he started in the government service sometime
during the early part of 1943, or before 1943. In 1943 Com. Act 186 was not yet
amended, and the only benefits then provided for in said Com. Act 186 were those
that proceed from a life insurance. Upon entering the government service Consuegra
became a compulsory member of the GSIS, being automatically insured on his life,
pursuant to the provisions of Com. Act 186 which was in force at the time. During
1943 the operation of the Government Service Insurance System was suspended
because of the war, and the operation was resumed sometime in 1946. When
Consuegra designated his beneficiaries in his life insurance he could not have

intended those beneficiaries of his life insurance as also the beneficiaries of his
retirement insurance because the provisions on retirement insurance under the GSIS
came about only when Com. Act 186 was amended by Rep. Act 660 on June 16, 1951.
Hence, it cannot be said that because herein appellants were designated
beneficiaries in Consuegra's life insurance they automatically became the
beneficiaries also of his retirement insurance. Rep. Act 660 added to Com. Act 186
provisions regarding retirement insurance, which are Sections 11, 12, and 13 of Com.
Act 186, as amended. Subsection (b) of Section 11 of Com. Act 186, as amended by
Rep. Act 660, provides as follows:
(b) Survivors benefit. Upon death before he becomes eligible for retirement, his
beneficiaries as recorded in the application for retirement annuity filed with the
System shall be paid his own premiums with interest of three per centum per annum,
compounded monthly. If on his death he is eligible for retirement, then the automatic
retirement annuity or the annuity chosen by him previously shall be paid accordingly.
The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act
186, as amended by Rep. Act 660, clearly indicate that there is need for the employee
to file an application for retirement insurance benefits when he becomes a member
of the GSIS, and he should state in his application the beneficiary of his retirement
insurance. Hence, the beneficiary named in the life insurance does not automatically
become the beneficiary in the retirement insurance unless the same beneficiary in
the life insurance is so designated in the application for retirement insuran ce.
Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a
life insurance fund and for a retirement insurance fund. There was no such provision
in Com. Act 186 before it was amended by Rep. Act 660. Thus, subsections (a) and (b)
of Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, partly read as
follows:
(a) Life insurance fund. This shall consist of all premiums for life insurance benefit
and/or earnings and savings therefrom. It shall meet death claims as they may a rise
or such equities as any member may be entitled to, under the conditions of his policy,
and shall maintain the required reserves to the end of guaranteeing the fulfillment of
the life insurance contracts issued by the System ...
(b) Retirement insurance fund. This shall consist of all contributions for retirement
insurance benefit and of earnings and savings therefrom. It shall meet annuity
payments and establish the required reserves to the end of guaranteeing the
fulfillment of the contracts issued by the System. ...
Thus, We see that the GSIS offers two separate and distinct systems of benefits to its
members one is the life insurance and the other is the retirement insurance. These

two distinct systems of benefits are paid out from two distinct a nd separate funds
that are maintained by the GSIS.
In the case of the proceeds of a life insurance, the same are paid to whoever is named
the beneficiary in the life insurance policy. As in the case of a life insurance provided
for in the Insurance Act (Act 2427, as amended), the beneficiary in a life insurance
under the GSIS may not necessarily be a heir of the insured. The insured in a life
insurance may designate any person as beneficiary unless disqualified to be so under
the provisions of the Civil Code.4 And in the absence of any beneficiary named in the
life insurance policy, the proceeds of the insurance will go to the estate of the
insured.
Retirement insurance is primarily intended for the benefit of the employee to
provide for his old age, or incapacity, after rendering service in the government for a
required number of years. If the employee reaches the age of retirement, he gets the
retirement benefits even to the exclusion of the beneficiary or beneficiaries named
in his application for retirement insurance. The beneficiary of the retirement
insurance can only claim the proceeds of the retirement insurance if the employee
dies before retirement. If the employee failed or overlooked to state the beneficiary
of his retirement insurance, the retirement benefits will accrue to his estate and will
be given to his legal heirs in accordance with law, as in the case of a life insurance if
no beneficiary is named in the insurance policy.
It is Our view, therefore, that the respondent GSIS had correctly a cted when it ruled
that the proceeds of the retirement insurance of the late Jose Consuegra should be
divided equally between his first living wife Rosario Diaz, on the one hand, and his
second wife Basilia Berdin and his children by her, on the other; and the lower court
did not commit error when it confirmed the action of the GSIS, it being accepted as a
fact that the second marriage of Jose Consuegra to Basilia Berdin was contracted in
good faith. The lower court has correctly applied the ruling of this Court in the case
of Lao, et al. vs. Dee Tim, et al., 45 Phil. 739 as cited in the stipulation of facts and in
the decision appealed from.5 In the recent case of Gomez vs. Lipana, L-23214, June
30, 1970, 6 this Court, in construing the rights of two women who were married to
the same man a situation more or less similar to the case of appellant Basilia Berdin
and appellee Rosario Diaz held "that since the defendant's first marriage has not
been dissolved or declared void the conjugal partnership establi shed by that
marriage has not ceased. Nor has the first wife lost or relinquished her status as
putative heir of her husband under the new Civil Code, entitled to share in his estate
upon his death should she survive him. Consequently, whether as conjugal partner in
a still subsisting marriage or as such putative heir she has an interest in the husband's
share in the property here in dispute.... " And with respect to the right of the second
wife, this Court observed that although the second marriage can be presumed to be

void ab initio as it was celebrated while the first marriage was still subsisting, still
there is need for judicial declaration of such nullity. And inasmuch as the conjugal
partnership formed by the second marriage was dissolved before judi cial declaration
of its nullity, "[t]he only lust and equitable solution in this case would be to recognize
the right of the second wife to her share of one-half in the property acquired by her
and her husband and consider the other half as pertaining to the conjugal partnership
of the first marriage."
WHEREFORE, the decision appealed from is affirmed, with costs against petitionersappellants. It is so ordered.

THE
INSULAR
LIFE
ASSURANCE
COMPANY,
LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.
This is a novel question in insurance law: Can a common-law wife named as
beneficiary in the life insurance policy of a legally married man claim the proceeds
thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life
Assurance Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for
Accidental Death for the same amount Buenaventura C. Ebrado designated T. Ebrado
as the revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was
hit by a failing branch of a tree. As the policy was in force, The Insular Life Assurance
Co., Ltd. liable to pay the coverage in the total amount of P11,745.73, representing
the face value of the policy in the amount of P5,882.00 plus the additional benefits
for accidental death also in the amount of P5,882.00 and the refund of P18.00 paid
for the premium due November, 1969, minus the unpaid premiums and interest
thereon due for January and February, 1969, in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit
of marriage.

lifetime of the deceased, he was insured with Insular Life Assurance Co. Under Policy
No. 009929 whole life plan, dated September 1, 1968 for the sum of P5,882.00 with
the rider for accidental death benefit as evidenced by Exhibits A for plaintiffs and
Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during
the lifetime of Buenaventura Ebrado, he was living with his common-wife, Carponia
Ebrado, with whom she had 2 children although he was not legally separated from
his legal wife; 4) that Buenaventura in accident on October 21, 1969 as evidenced by
the death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5) that
complainant Carponia Ebrado filed claim with the Insular Life Assurance Co. which
was contested by Pascuala Ebrado who also filed claim for the proceeds of said policy
6) that in view ofthe adverse claims the insurance company filed this action against
the two herein claimants Carponia and Pascuala Ebrado; 7) that there is now due
from the Insular Life Assurance Co. as proceeds of the policy P11,745.73; 8) that the
beneficiary designated by the insured in the policy is Carponia Ebrado and the insured
made reservation to change the beneficiary but although the insured made the
option to change the beneficiary, same was never changed up to the time of his death
and the wife did not have any opportunity to write the company that there was
reservation to change the designation of the parties agreed that a decision be
rendered based on and stipulation of facts as to who among the two claimants is
entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.
SO ORDERED.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured.
She asserts that she is the one entitled to the insurance proceeds, not the c ommonlaw wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular
Life Assurance Co., Ltd. commenced an action for Interpleader before the Court of
First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972,
after which, a pre-trial order was entered reading as follows: +.wph!1
During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicabl e settlement. Hence, the Court proceeded to have the parties
submit their evidence for the purpose of the pre-trial and make admissions for the
purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was
married to Pascuala Ebrado with whom she has six (legitimate) namely; Hernando,
Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that during the

On September 25, 1972, the trial court rendered judgment declaring among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured
Buenaventura Cristor Ebrado and directing the payment of the insurance proceeds
to the estate of the deceased insured. The trial court held: +.wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).
It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their

stipulation above-quoted that the deceased insured and defendant Carponia T.

Ebrado were living together as husband and wife without being legally married and
that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado
was valid and still existing at the time the insurance in question was purchased there
is no question that defendant Carponia T. Ebrado is disqualified from becoming the
beneficiary of the policy in question and as such she is not entitled to the proceeds
of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July
11, 1976, the Appellate Court certified the case to Us as involving only questions of
law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the
new Insurance Code (PD No. 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the
Insurance Act which provides that "(t)he insurance shag be applied exclusively to the
proper interest of the person in whose name it is made" 1 cannot be validly seized
upon to hold that the mm includes the beneficiary. The word "inter est" highly
suggests that the provision refers only to the "insured" and not to the beneficiary,
since a contract of insurance is personal in character. 2 Otherwise, the prohibitory
laws against illicit relationships especially on property and descent will be rendered
nugatory, as the same could easily be circumvented by modes of insurance. Rather,
the general rules of civil law should be applied to resolve this void in the Insurance
Law. Article 2011 of the New Civil Code states: "The contract of insurance is governed
by special laws. Matters not expressly provided for in such special laws shall be
regulated by this Code." When not otherwise specifically provided for by the
Insurance Law, the contract of life insurance is governed by the general rules of th e
civil law regulating contracts. 3 And under Article 2012 of the same Code, "any person
who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a fife insurance policy by the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred from receiving donations from
each other. Article 739 of the new Civil Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the
time of donation;
Those made between persons found guilty of the same criminal offense, in
consideration thereof;

3. Those made to a public officer or his wife, descendants or ascendants by reason of

his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality.
A beneficiary is like a donee, because from the premiums of the policy which the
insured pays out of liberality, the beneficiary will receive the proceeds or pr ofits of
said insurance. As a consequence, the proscription in Article 739 of the new Civil Code
should equally operate in life insurance contracts. The mandate of Article 2012
cannot be laid aside: any person who cannot receive a donation cannot be named as
beneficiary in the life insurance policy of the person who cannot make the
donation.5 Under American law, a policy of life insurance is considered as a testament
and in construing it, the courts will, so far as possible treat it as a will and determine
the effect of a clause designating the beneficiary by rules under which wins are
interpreted. 6
3. Policy considerations and dictates of morality rightly justify the institution of a
barrier between common law spouses in record to Property relations since such hip
ultimately encroaches upon the nuptial and filial rights of the legitimate family There
is every reason to hold that the bar in donations between legitimate spouses and
those between illegitimate ones should be enforced in life insurance policies since
the same are based on similar consideration As above pointed out, a beneficiary in a
fife insurance policy is no different from a donee. Both are recipients of pure
beneficence. So long as manage remains the threshold of family laws, reason and
morality dictate that the impediments imposed upon married couple should likewise
be imposed upon extra-marital relationship. If legitimate relationship is
circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v.
Cervantes, 7 this Court, through Justice Fernando, said: +.wph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por -que no
se enganen desponjandose el uno al otro por amor que han de consuno' (According
to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem);
then there is very reason to apply the same prohibitive policy to persons living

together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid
is correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib.
32 ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest the
condition 6f those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.
It is hardly necessary to add that even in the absence of the above pronouncemen t,
any other conclusion cannot stand the test of scrutiny. It would be to indict the frame
of the Civil Code for a failure to apply a laudable rule to a situation which in its
essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it
as what is written, this is it. Otherwise the basic purpose discernible in su ch codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an adherence
to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before
the disabilities mentioned in Article 739 may effectuate. More specifically, with
record to the disability on "persons who were guilty of adultery or concubinage at
the time of the donation," Article 739 itself provides: +.wph!1
In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilty of the donee may be proved by
preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is
a condition precedent. In fact, it cannot even be from the aforequoted provision that
a prosecution is needed. On the contrary, the law plainly states that the guilt of the
party may be proved "in the same acting for declaration of nullity of donation. And,
it would be sufficient if evidence preponderates upon the guilt of the consort for the
offense indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the
insured and the beneficiary has been conveniently supplied by the stipulations
between the parties in the pre-trial conference of the case. It case agreed upon and

stipulated therein that the deceased insured Buenaventura C. Ebr ado was married to
Pascuala Ebrado with whom she has six legitimate children; that during his lifetime,
the deceased insured was living with his common-law wife, Carponia Ebrado, with
whom he has two children. These stipulations are nothing less thanjudicial
admissions which, as a consequence, no longer require proof and cannot be
contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be validly
rendered without going through the rigors of a trial for the sole purpose of proving
the illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the
parties even agreed "that a decision be rendered based on this agreement and
stipulation of facts as to who among the two claimants is entitled to the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed.
Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late
Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds
of the policy are hereby held payable to the estate of the deceased insured. Costs
against Carponia T. Ebrado.
SO ORDERED.

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., petitioners, vs. COURT OF APPEALS and CKS DEVELOPMEN T
CORPORATION, respondents.
DE CI SIO N

8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a

decision** dated 11 January 1996, affirming the trial court decision, deleting however
the awards for exemplary damages and attorneys fees. A motion for reconsideration
by United was denied on 29 March 1996.

PADILLA, J.:

In the present petition, the following errors are assigned by petitioners to the Court
of Appeals:

This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set
aside a decision of respondent Court of Appeals.

The undisputed facts of the case are as follows:

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS), as
lessor, on 5 October 1988.
2. One of the stipulations of the one (1) year lease contract states:
18. x x x. The LESSEE shall not insure against fire the chattels, merchandise, textiles,
goods and effects placed at any stall or store or space in the leased premises without
first obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s)
the insurance thereof without the consent of the LESSOR then the policy is deemed
assigned and transferred to the LESSOR for its own benefit; x x x [1]
3. Notwithstanding the above stipulation in the lease contract, the Cha spouses
insured against loss by fire their merchandise inside the leased premises for Five
Hundred Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter
United) without the written consent of private respondents CKS.
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.
5. When CKS learned of the insurance earlier procured by the Cha spouses (without
its consent), it wrote the insurer (United) a demand letter asking that the proceeds
of the insurance contract (between the Cha spouses and United) be paid directly to
CKS, based on its lease contract with Cha spouses.
6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.
7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a
decision* ordering therein defendant United to pay CKS the amount ofP335,063.11
and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as
attorneys fees and costs of suit.

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE

STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY
II
THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT
OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND THEREFORE THE
QUESTIONABLE PROVISION THEREIN TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF PETITIONER
III
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW
IV
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN
INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
THE RESPONDENT CORPORATION.[2]
The core issue to be resolved in this case is whether or not the aforequoted paragraph
18 of the lease contract entered into between CKS and the Cha spouses is valid insofar
as it provides that any fire insurance policy obtained by the lessee (Cha spouses) over
their merchandise inside the leased premises is deemed assigned or transferred to
the lessor (CKS) if said policy is obtained without the prior written of the latter.
It is, of course, basic in the law on contracts that the stipulations contained in a
contract cannot be contrary to law, morals, good customs, public order or public
policy.[3]

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable except
for the benefit of some person having an insurable interest in the property insured.
A non-life insurance policy such as the fire i nsurance policy taken by petitionerspouses over their merchandise is primarily a contract of indemnity. Insurable
interest in the property insured must exist at the time the insurance takes effect and
at the time the loss occurs.[4]The basis of such requirement of insurable interest in
property insured is based on sound public policy: to prevent a person from taking out
an insurance policy on property upon whi ch he has no insurable interest and
collecting the proceeds of said policy in case of loss of the property. In such a case,
the contract of insurance is a mere wager which is void under Section 25 of the
Insurance Code, which provides:
SECTION 25. Every stipulation in a policy of Insurance for the payment of loss,
whether the person insured has or has not any interest in the property insured, or
that the policy shall be received as proof of such interest, and every policy executed
by way of gaming or wageri ng, is void.
In the present case, it cannot be denied that CKS has no insurable interest in the
goods and merchandise inside the leased premises under the provisions of Section
17 of the Insurance Code which provide.
Section 17. The measure of an insurable interest in property is the extent to which
the insured might be damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance Code a special law be validly
a beneficiary of the fire insurance policy taken by the petitioner -spouses over their
merchandise. This insurable interest over said merchandise remains with the insured,
the Cha spouses. The automatic assignment of the policy to CKS under the provision
of the lease contract previously quoted is void for being contrary to law and/or public
policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses
Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be
compelled to pay the proceeds of the fire insurance policy to a per son (CKS) who has
no insurable interest in the property insured.
The liability of the Cha spouses to CKS for violating their lease contract in that Cha
spouses obtained a fire insurance policy over their own merchandise, without the
consent of CKS, is a separate and distinct issue which we do not resolve in this case.
WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET
ASIDE and a new decision is hereby entered, awarding the proceeds of the fire
insurance policy to petitioners Nil o Cha and Stella Uy-Cha.

SO ORDERED.

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS AND
MEDARDA V. LEUTERIO,respondents.
DE CI SIO N
QUISUMBING, J.:
This petition for review, under Rule 45 of the Rules of Court, assails the
Decision[1] dated May 17, 1993, of the Court of Appeals and its Resolution [2] dated
January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto the
judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance
claim filed by private respondent against Great Pacific Life Assurance Co. The
dispositive portion of the trial courts decision reads:
WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation
to Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF
THE PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of
EIGHTY SIX THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for
damages, attorneys fees and litigation expenses in the complaint and counterclaim,
with costs against the defendant and dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary, for lack of cause of action. [3]
The facts, as found by the Court of Appeals, are as follows:
A contract of group life insurance was executed between petitioner Great Pacific Life
Assurance Corporation (hereinafter Grepalife) and Development Bank of the
Philippines (hereinafter DBP). Grepalife agreed to insure the lives of eligible housing
loan mortgagors of DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of
DBP applied for membership in the group life insurance plan.In an application fo rm,
Dr. Leuterio answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood
pressure, cancer, diabetes, lung, kidney or stomach disorder or any other physical
impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.[4]

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance

coverage of Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting
to eighty-six thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage.
Consequently, DBP submitted a death claim to Grepalife. Grepalife denied the claim
alleging that Dr. Leuterio was not physically healthy when he applied for an insurance
coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose
he had been suffering from hypertension, which caused his death. Allegedly, such
non-disclosure constituted concealment that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V.
Leuterio, filed a complaint with the Regional Trial Court of Misamis Oriental, Branch
18, against Grepalife for Specific Performance with Damages. [5] During the trial, Dr.
Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejias
findings, based partly from the information given by the respondent widow, stated
that Dr. Leuterio complained of headaches presumably due to high blood
pressure. The inference was not conclusive because Dr. Leuterio was not autopsied,
hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent
widow and against Grepalife. On May 17, 1993, the Court of Appeals sustained the
trial courts decision. Hence, the present petition. Petitioners interposed the
following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE REDEMPTION INSURANCE ON
THE LIFE OF PLAINTIFFS HUSBAND WILFREDO LEUTERIO ONE OF ITS LOAN
BORROWERS, INSTEAD OF DISMISSING THE CASE AGAINST DEFENDANT-APPELL AN T
[Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP
THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW
MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS
GROUP INSURANCE CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION

FOR MEMBERSHIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANT APPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO
LEUTERIO.[6]
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as
beneficiary in a group life insurance contract from a complaint filed by the wid ow of
the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that
he had hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of
eighty six thousand, two hundred (P86,200.00) pesos without proof of the actual
outstanding mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not
the real party in interest, hence the trial court acquired no jurisdiction over the
case. It argues that when the Court of Appeals affirmed the trial courts judgment,
Grepalife was held liable to pay the proceeds of insurance contract in favor of DBP,
the indispensable party who was not joined in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties
and the parties to this type of contract. The rationale of a group insurance policy of
mortgagors, otherwise known as the mortgage redemption ins urance, is a device for
the protection of both the mortgagee and the mortgagor. On the part of the
mortgagee, it has to enter into such form of contract so that in the event of the
unexpected demise of the mortgagor during the subsistence of the mortgage
contract, the proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from paying the
obligation.[7] In a similar vein, ample protection is given to the mortgagor under such
a concept so that in the event of death; the mortgage obligation will be extinguished
by the application of the insurance proceeds to the mortgage
indebtedness.[8]Consequently, where the mortgagor pays the insurance premium
under the group insurance policy, making the loss payable to the mortgagee, the
insurance is on the mortgagors interest, and the mortgagor continues to be a party
to the contract. In this type of policy insurance, the mortgagee is simply an appointee
of the insurance fund, such loss -payable clause does not make the mortgagee a party
to the contract.[9]
Section 8 of the Insurance Code provides:

Unless the policy provides, where a mortgagor of property effects insurance in his
own name providing that the loss shall be pa yable to the mortgagee, or assigns a
policy of insurance to a mortgagee, the insurance is deemed to be upon the interest
of the mortgagor, who does not cease to be a party to the original contract, and any
act of his, prior to the loss, which would otherwi se avoid the insurance, will have the
same effect, although the property is in the hands of the mortgagee, but any act
which, under the contract of insurance, is to be performed by the mortgagor, may be
performed by the mortgagee therein named, with the sa me effect as if it had been
performed by the mortgagor.
The insured private respondent did not cede to the mortgagee all his rights or
interests in the insurance, the policy stating that: In the event of the debtors death
before his indebtedness with the Creditor [DBP] shall have been fully paid, an amount
to pay the outstanding indebtedness shall first be paid to the creditor and the balance
of sum assured, if there is any, shall then be paid to the beneficiary/ies designated by
the debtor.[10] When DBP submitted the insurance claim against petitioner, the latter
denied payment thereof, interposing the defense of concealment committed by the
insured.Thereafter, DBP collected the debt from the mortgagor and took the
necessary action of foreclosure on the residential lot of private
respondent.[11] InGonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co.[12] we held:
Insured, being the person with whom the contract was made, is primarily the proper
person to bring suit thereon. * * * Subject to some exceptions, insured may thus sue,
although the policy is taken wholly or in part for the benefit of another person named
or unnamed, and although it is expressly made payable to another as his interest may
appear or otherwise. * * * Although a policy issued to a mortgagor is taken out for
the benefit of the mortgagee and is made payable to him, yet the mortgagor may sue
thereon in his own name, especially where the mortgagees interest is less than the
full amount recoverable under the policy, * * *.
And in volume 33, page 82, of the same work, we read the following:
Insured may be regarded as the real party in interest, although he has assigned the
policy for the purpose of collection, or has assigned as collateral security any
judgment he may obtain.[13]
And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such
person may recover it whatever the insured might have recovered, [14] the widow of
the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner
interposed as its defense to annul the insurance contract. Petitioner contends that

Dr. Leuterio failed to disclose that he had hypertension, which might have caused his
death. Concealment exists where the assured had knowledge of a fact material to the
risk, and honesty, good faith, and fair dealing requires that he should communicate
it to the assured, but he designedly and intentionally withholds the same.[15]

avoid liability is an affirmative defense and the duty to establish such defense by
satisfactory and convincing evidence rests upon the insurer.[19] In the case at bar, the
petitioner failed to clearly and satisfactorily establish its defense, and is therefore
liable to pay the proceeds of the insurance.

Petitioner merely relied on the testimony of the attending physician, Dr. Hernando
Mejia, as supported by the information given by the widow of the
decedent. Grepalife asserts that Dr. Mejias technical diagnosis of the cause of death
of Dr. Leuterio was a duly documented hospital record, and that the widows
declaration that her husband had possible hypertension several years ago should not
be considered as hearsay, but as part of res gestae.

And that brings us to the last point in the review of the case at bar. Petitioner claims
that there was no evidence as to the amount of Dr. Leuterios outstanding
indebtedness to DBP at the time of the mortgagors death. Hence, for private
respondents failure to establish the same, the action for specific performance should
be dismissed. Petitioners claim is without merit. A life insurance policy is a valued
policy.[20] Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy.[21] The mortgagor paid the premium according
to the coverage of his insurance, which states that:

On the contrary the medical findings were not conclusive because Dr. Mejia did not
conduct an autopsy on the body of the decedent. As the attending physician, Dr.
Mejia stated that he had no knowledge of Dr. Leuterios any previous hospital
confinement.[16] Dr. Leuterios death certificate stated that hypertension was only the
possible cause of death. The private respondents s tatement, as to the medical history
of her husband, was due to her unreliable recollection of events. Hence, the
statement of the physician was properly considered by the trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate
court, thus:
The insured, Dr. Leuterio, had answered in his insurance application that he was in
good health and that he had not consulted a doctor or any of the enumerated
ailments, including hypertension; when he died the attending physician had certified
in the death certificate that the former died of cerebral hemorrhage, probably
secondary to hypertension. From this report, the appellant insurance company
refused to pay the insurance claim. Appellant alleged that the insured had concealed
the fact that he had hypertension.
Contrary to appellants allegations, there was no sufficient proof that the insured had
suffered from hypertension. Aside from the statement of the insureds widow who
was not even sure if the medicines taken by Dr. Leuterio were for hypertension, the
appellant had not proven nor produced any witness who could attest to Dr. Leuterios
medical history...
xxx
Appellant insurance company had failed to establish that there was concealment
made by the insured, hence, it cannot refuse payment of the claim.[17]
The fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract.[18] Misrepresentation as a defense of the insurer to

The policy states that upon receipt of due proof of the Debtors death during th e
terms of this insurance, a death benefit in the amount of P86,200.00 shall be paid.
In the event of the debtors death before his indebtedness with the creditor shall have
been fully paid, an amount to pay the outstanding indebtedness shall first be paid to
the Creditor and the balance of the Sum Assured, if there is any shall then be paid to
the beneficiary/ies designated by the debtor.[22] (Emphasis omitted)
However, we noted that the Court of Appeals decision was promulgated on May 17,
1993. In private respondents memorandum, she states that DBP foreclosed in 1995
their residential lot, in satisfaction of mortgagors outstanding loan. Considering this
supervening event, the insurance proceeds shall inure to the benefit of the heirs of
the deceased person or his beneficiaries. Equity dictates that DBP should not unjustly
enrich itself at the expense of another (Nemo cum alterius detrimenio
protest). Hence, it cannot collect the insurance proceeds, after it already foreclosed
on the mortgage.The proceeds now rightly belong to Dr. Leuterios heirs represented
by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the
Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the
petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six
thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wil fredo
Leuterio (deceased), upon presentation of proof of prior settlement of mortgagors
indebtedness to Development Bank of the Philippines. Costs against petitioner.
SO ORDERED.

VICENTE
ONG
LIM
SING,
vs.
FEB LEASING & FINANCE CORPORATION, respondent.

JR., petitioner,

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

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

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

The facts are as follows:

On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease 3 of
equipment and motor vehicles with JVL Food Products (JVL). On the same date,
Vicente Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement 4 with FEB
to guarantee the prompt and faithful performance of the terms and conditions of the
aforesaid lease agreement. Corresponding Lease Schedules with Deli very and
Acceptance Certificates 5 over the equipment and motor vehicles formed part of the
agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross
monthly rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos
(P170,494.00).
JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount
in arrears, including penalty charges and insurance premiums, amounted to Three
Million Four Hundred Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos
(P3,414,468.75). On August 23, 2000, FEB sent a letter to JVL demanding payment of
the said amount. However, JVL failed to pay.6
On December 6, 2000, FEB filed a Complaint7 with the Regional Trial Court of Manila,
docketed as Civil Case No. 00-99451, for sum of money, damages, and replevin
against JVL, Lim, and John Doe.
In the Amended Answer,8 JVL and Lim admitted the existence of the leas e agreement
but asserted that it is in reality a sale of equipment on installment basis, with FEB
acting as the financier. JVL and Lim claimed that this intention was apparent from the
fact that they were made to believe that when full payment was effected, a Deed of
Sale will be executed by FEB as vendor in favor of JVL and Lim as vendees. 9 FEB
purportedly assured them that documenting the transaction as a lease agreement is
just an industry practice and that the proper documentation would be effected as
soon as full payment for every item was made. They also contended that the lease
agreement is a contract of adhesion and should, therefore, be construed against the
party who prepared it, i.e., FEB.

In an adhesion contract which is drafted and printed in advance and parties are not
given a real arms length opportunity to transact, the Courts treat this kind of contract
strictly against their architects for the reason that the party entering into this kind of
contract has no choice but to accept the terms and conditions found therein even if
he is not in accord therewith and for that matter may not have understood all the
terms and stipulations prescribed thereat. Contracts of this character are prepared
unilaterally by the stronger party with the best legal talents at its disposal. It is upon
that thought that the Courts are called upon to analyze closely said contracts so that
the weaker party could be fully protected.
Another instance is when the alleged lessee was required to insure the thing against
loss, damage or destruction.
In property insurance against loss or other accidental causes, the assured must have
an insurable interest, 32 Corpus Juris 1059.
xxxx
It has also been held that the test of insurable interest in property is whether the
assured has a right, title or interest therein that he will be benefited by its
preservation and continued existence or suffer a direct pecuniary loss from its
destruction or injury by the peril insured against. If the defendants were to be
regarded as only a lessee, logically the lessor who asserts ownership will be the one
directly benefited or injured and therefore the lessee is not supposed to be the
assured as he has no insurable interest.

There is also an observation from the records that the actual value of each object of
the contract would be the result after computing the monthly rentals by multiplying
the said rentals by the number of months specified when the rentals ought to be paid.
Still another observation is the existence in the records of a Deed of Absolute Sale by
and between the same parties, plaintiff and defendants which was an exhibit of the
defendant where the plaintiff sold to the same defendants one unit 1995 Mitsubishi
L-200 STRADA DC PICK UP and in said Deed, The Court noticed that the same terms
as in the alleged lease were used in respect to warranty, as well as liability in case of
loss and other conditions. This action of the plaintiff unequivocally exhibited their
real intention to execute the corresponding Deed after the defendants have paid in
full and as heretofore discussed and for the sake of emphasis the obscurity in the
written contract cannot favor the party who caused the obscurity.
Based on substantive Rules on Interpretation, if the terms are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its
stipulations shall control. If the words appear to be contrary to the evident intention
of the parties, their contemporaneous and subsequent acts shall be principally
considered. If the doubts are cast upon the principal object of the contract in such a
way that it cannot be known what may have been the intention or will of the parties,
the contract shall be null and void.10
Thus, the court concluded with the following disposition:
In this case, which is held by this Court as a sale on installment there is no chattel
mortgage on the thing sold, but it appears amongst the Complaints prayer, that the
plaintiff elected to exact fulfillment of the obligation.

A. When it ruled that the agreement between the Parties -Litigants is one of sale of
personal properties on installment and not of lease;
B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code)
and not R.A. No. 8556;
C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance
of the price because of the previous payments made by the defendants for the
reasonable use of the units;
D. When it failed to make a ruling or judgment on the Joint and Solidary Liability of
Vicente Ong Lim, Jr. to the Plaintiff-Appellant.14
On March 15, 2005, the CA issued its Decision 15 declaring the transaction between
the parties as a financial lease agreement under Republic Act (R.A.) No.
8556.16 The fallo of the assailed Decision reads:
WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22
November 2002 rendered by the Regional Trial Court of Manila, Branch 49 in Civil
Case No. 00-99451 is REVERSED and SET ASIDE, and a new judgment is
hereby ENTERED ordering appellees JVL Food Products and Vicente Ong Lim, Jr. to
solidarily pay appellant FEB Leasing and Finance Corporation the amount of Three
Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight Pesos and
75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per
annum starting from the date of judicial demand on 06 December 2000, until full
payment thereof. Costs against appellees.
SO ORDERED.17

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

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

SO ORDERED.11

II

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

The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule
18 of the 1997 Rules of Civil Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC
(June 8, 2004).

contending that:
I
The Honorable Court of Appeals erred when it failed to consider that the undated
complaint was filed by Saturnino J. Galang, Jr., without any authority from
respondents Board of Directors and/or Secretarys Certificate.

III

The Honorable Court of Appeals erred in not dismissing the appeal for failure of the
respondent to file on time its appellants brief and to separately rule on the
petitioners motion to dismiss.
IV
The Honorable Court of Appeals erred in finding that the contract between the
parties is one of a financial lease and not of a contract of sale.
V
The Honorable Court of Appeals ERRED IN ruling that the payments paid by the
petitioner to the respondent are "rentals" and not installments paid for the purchase
price of the subject motor vehicles, heavy machines and equipment.
VI
The Honorable Court of Appeals erred in ruling that the previous contract of sale
involving the pick-up vehicle is of no consequence.
VII
The Honorable Court of Appeals failed to take into consideration that the contract of
lease, a contract of adhesion, concealed the true intention of the parties, which is a
contract of sale.
VIII
The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with
insurable interest over the subject personal properties.
IX
The Honorable Court of Appeals erred in construing the intentions of the Court a
quo in its usage of the term merchantability.18
We affirm the ruling of the appellate court.
First, Lim can no longer question Galangs authority as FEBs authorized
representative in filing the suit against Lim. Galang was the representative of FEB in
the proceedings before the trial court up to the appellate court. Petitioner never
placed in issue the validity of Galangs representation before the trial and appellate
courts. Issues raised for the first time on appeal are barred by estoppel. Arguments
not raised in the original proceedings cannot be considered on review; otherwise, it
would violate basic principles of fair play.19

Second, there is no legal basis for Lim to question the authority of the CA to go
beyond the matters agreed upon during the pre-trial conference, or in not dismissing
the appeal for failure of FEB to file its brief on time, or in not ruling separately on the
petitioners motion to dismiss.
Courts have the prerogative to relax procedural rules of even the most mandatory
character, mindful of the duty to reconcile both the need to speedily put an end to
litigation and the parties right to due process. In numerous cases, this Court has
allowed liberal construction of the rules when to do so would serve the demands of
substantial justice and equity.20 In Aguam v. Court of Appeals , the Court explained:
The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a
power conferred on the court, not a duty. The "discretion must be a sound one, to
be exercised in accordance with the tenets of justice and fair play, having in mind the
circumstances obtaining in each case." Technicalities, however, must be avoided. The
law abhors technicalities that impede the cause of justice. The court's primary duty
is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits
unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its
proper office as an aid to justice and becomes its great hindrance and chief enemy,
deserves scant consideration from courts." Litigations mus t be decided on their
merits and not on technicality. Every party litigant must be afforded the amplest
opportunity for the proper and just determination of his cause, free from the
unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical
grounds is frowned upon where the policy of the court is to encourage hearings of
appeals on their merits and the rules of procedure ought not to be applied in a very
rigid, technical sense; rules of procedure are used only to help secure, not ov erride
substantial justice. It is a far better and more prudent course of action for the court
to excuse a technical lapse and afford the parties a review of the case on appeal to
attain the ends of justice rather than dispose of the case on technicality a nd cause a
grave injustice to the parties, giving a false impression of speedy disposal of cases
while actually resulting in more delay, if not a miscarriage of justice.21
Third, while we affirm that the subject lease agreement is a contract of adhesion,
such a contract is not void per se. It is as binding as any ordinary contract. A party
who enters into an adhesion contract is free to reject the stipulations entirely.22 If the
terms thereof are accepted without objection, then the contract serves as the law
between the parties.
In Section 23 of the lease contract, it was expressly stated that:
SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE

23.1. The LESSOR and the LESSEE agree this instrument constitute the entire
agreement between them, and that no representations have been made other than
as set forth herein. This Agreement shall not be amended or altered in any manner,
unless such amendment be made in writing and signed by the parties hereto.
Petitioners claim that the real intention of the parties was a contract of sale of
personal property on installment basis is more likely a mere afterthought in order to
defeat the rights of the respondent.
The Lease Contract with corresponding Lease Schedules with Delivery and
Acceptance Certificates is, in point of fact, a financial lease within the purview of R.A.
No. 8556. Section 3(d) thereof defines "financial leasing" as:
[A] mode of extending credit through a non-cancelable lease contract under which
the lessor purchases or acquires, at the instance of the lessee, machinery, equipment,
motor vehicles, appliances, business and office machines, and other movable or
immovable property in consideration of the periodic payment by the lessee of a fixed
amount of money sufficient to amortize at least seventy (70%) of the purchase price
or acquisition cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee has the right
to hold and use the leased property with the right to expense the lease rentals paid
to the lessor and bears the cost of repa irs, maintenance, insurance and preservation
thereof, but with no obligation or option on his part to purchase the leased property
from the owner-lessor at the end of the lease contract.
FEB leased the subject equipment and motor vehicles to JVL in consideration of a
monthly periodic payment ofP170,494.00. The periodic payment by petitioner is
sufficient to amortize at least 70% of the purchase price or acquisition cost of the said
movables in accordance with the Lease Schedules with Delivery and Acceptance
Certificates. "The basic purpose of a financial leasing transaction is to enable the
prospective buyer of equipment, who is unable to pay for such equipment in cash in
one lump sum, to lease such equipment in the meantime for his use, at a fixed rental
sufficient to amortize at least 70% of the acquisition cost (including the expenses and
a margin of profit for the financial lessor) with the expectation that at the end of the
lease period the buyer/financial lessee will be able to pay any remaining balance of
the purchase price."23
The allegation of petitioner that the rent for the use of each movable constitutes the
value of the vehicle or equipment leased is of no moment. The law on financial lease
does not prohibit such a circumstance and this alone does not make the transaction
between the parties a sale of personal property on installment. In fact, the value of
the lease, usually constituting the value or amount of the property involved, is a
benefit allowed by law to the lessor for the use of the property by the lessee for the

duration of the lease. It is recognized that the value of these movables depreciates
through wear and tear upon use by the lessee. In Beltran v. PAIC Finance
Corporation,24 we stated that:
Generally speaking, a financing company is not a buyer or seller of goods; it is not a
trading company. Neither is it an ordinary leasing company; it does not make its profit
by buying equipment and repeatedly leasing out such equipment to different users
thereof. But a financial lease must be preceded by a purchase and sale contract
covering the equipment which becomes the subject matter of the financial lease. The
financial lessor takes the role of the buyer of the equipment leased. And so the formal
or documentary tie between the seller and the real buyer of the equipment, i.e., the
financial lessee, is apparently severed. In economic reality, however, that
relationship remains. The sale of the equipment by the supplier thereof to the
financial lessor and the latter's legal ownership thereof are intended to secure the
repayment over time of the purchase price of the equipment, plus financing charges,
through the payment of lease rentals; that legal title is the upfront security held by
the financial lessor, a security probably superior in some instances to a chattel
mortgagee's lien.25
Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL
entered into the lease contract with full knowledge of its terms and conditions. The
contract was in force for more than four years. Since its inception on March 9, 1995,
JVL and Lim never questioned its provisions. They only attacked the validity of the
contract after they were judicially made to answer for their default in the payment
of the agreed rentals.
It is settled that the parties are free to agree to such stipulations, clauses, terms, and
conditions as they may want to include in a contract. As long as such agreements are
not contrary to law, morals, good customs, public policy, or public order, they shall
have the force of law between the parties.26 Contracting parties may stipulate on
terms and conditions as they may see fit and these have the force of law between
them.27
The stipulation in Section 14 28 of the lease contract, that the equipment shall be
insured at the cost and expense of the lessee against loss, damage, or destruction
from fire, theft, accident, or other insurable risk for the full term of the lease, is a
binding and valid stipulation. Petitioner, as a lessee, has an insurable interest in the
equipment and motor vehicles leased. Section 17 of the Insurance Code provides that
the measure of an insurable interest in property is the extent to which the insured
might be damnified by loss or injury thereof. It cannot be denied that JVL will be
directly damnified in case of loss, damage, or destruction of any of the properties
leased.

Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not
warrant the merchantability of the equipment is a valid stipulation. Section 9.1 of the
lease contract is stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT
IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT THERE
ARE NO WARRANTIES, CONDITIONS, TERMS, REPRESENTATION OR INDUCEMENTS,
EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE
LESSOR AS TO ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF,
OR AS TO ITS FITNESS, SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILI TY,
NOR AS TO WHETHER THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY
LAW, RULE, SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC
MACHINERY OR APPARATUS OR SPECIAL METHODS.29
In the financial lease agreement, FEB did not assume responsibility as to the quality,
merchantability, or capacity of the equipment. This stipulation provides that, in case
of defect of any kind that will be found by the lessee in any of the equipment,
recourse should be made to the manufacturer. "The financial lessor, being a financing
company, i.e., an extender of credit rather than an ordinary equipment rental
company, does not extend a warranty of the fitness of the equipment for any
particular use. Thus, the financial lessee was precisely in a position to enforce such
warranty directly against the supplier of the equipment and not against the financial
lessor. We find nothing contra legem or contrary to public policy in such a contractual
arrangement."30
Fifth, petitioner further proffers the view that the real intention of the parties was to
enter into a contract of sale on installment in the same manner tha t a previous
transaction between the parties over a 1995 Mitsubishi L-200 Strada DC-Pick-Up was
initially covered by an agreement denominated as a lease and eventually became the
subject of a Deed of Absolute Sale.
We join the CA in rejecting this view because to allow the transaction involving the
pick-up to be read into the terms of the lease agreement would expand the coverage
of the agreement, in violation of Article 1372 of the New Civil Code. 31 The lease
contract subject of the complaint speaks only of a lease. Any agreement between the
parties after the lease contract has ended is a different transaction altogether and
should not be included as part of the lease. Furthermore, it is a cardinal rule in the
interpretation of contracts that if the terms of a contract are clear and leave no doubt
as to the intention of the contracting parties, the literal meaning of its stipulations

shall control. No amount of extrinsic aid is necessary in order to determine the

parties' intent.32
WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of
the CA in CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23,
2005 are AFFIRMED. Costs against petitioner.
SO ORDERED.