G..R. No.

156978 May 2, 2006

ABOITIZ SHIPPING CORPORATION, Petitioner,

vs.
NEW INDIA ASSURANCE COMPANY, LTD., Respondent.

DECISION

QUISUMBING, J.:

For review on certiorari are the Decision1 dated August 29, 2002 of the Court of Appeals in CA-G.R. CV No. 28770 and its
Resolution2 dated January 23, 2003 denying reconsideration. The Court of Appeals affirmed the Decision 3 dated
November 20, 1989 of the Regional Trial Court of Manila in Civil Case No. 82-1475, in favor of respondent New India
Assurance Company, Ltd.

This petition stemmed from the action for damages against petitioner, Aboitiz Shipping Corporation, arising from the
sinking of its vessel, M/V P. Aboitiz, on October 31, 1980.

The pertinent facts are as follows:

Societe Francaise Des Colloides loaded a cargo of textiles and auxiliary chemicals from France on board a vessel owned
by Franco-Belgian Services, Inc. The cargo was consigned to General Textile, Inc., in Manila and insured by respondent
New India Assurance Company, Ltd. While in Hongkong, the cargo was transferred to M/V P. Aboitiz for transshipment to
Manila.4

Before departing, the vessel was advised by the Japanese Meteorological Center that it was safe to travel to its
destination.5 But while at sea, the vessel received a report of a typhoon moving within its general path. To avoid the
typhoon, the vessel changed its course. However, it was still at the fringe of the typhoon when its hull leaked. On October
31, 1980, the vessel sank, but the captain and his crew were saved.

On November 3, 1980, the captain of M/V P. Aboitiz filed his "Marine Protest", stating that the wind force was at 10 to 15
knots at the time the ship foundered and described the weather as "moderate breeze, small waves, becoming longer,
fairly frequent white horses."6

Thereafter, petitioner notified7 the consignee, General Textile, of the total loss of the vessel and all of its cargoes. General
Textile, lodged a claim with respondent for the amount of its loss. Respondent paid General Textile and was subrogated
to the rights of the latter.8

Respondent hired a surveyor, Perfect, Lambert and Company, to investigate the cause of the sinking. In its report, 9 the
surveyor concluded that the cause was the flooding of the holds brought about by the vessels questionable
seaworthiness. Consequently, respondent filed a complaint for damages against petitioner Aboitiz, Franco-Belgian
Services and the latters local agent, F.E. Zuellig, Inc. (Zuellig). Respondent alleged that the proximate cause of the loss
of the shipment was the fault or negligence of the master and crew of the vessel, its unseaworthiness, and the failure of
defendants therein to exercise extraordinary diligence in the transport of the goods. Hence, respondent added,
defendants therein breached their contract of carriage.101avvphil.net

Franco-Belgian Services and Zuellig responded, claiming that they exercised extraordinary diligence in handling the
shipment while it was in their possession; its vessel was seaworthy; and the proximate cause of the loss of cargo was a
fortuitous event. They also filed a cross-claim against petitioner alleging that the loss occurred during the transshipment
with petitioner and so liability should rest with petitioner.

For its part, petitioner also raised the same defense that the ship was seaworthy. It alleged that the sinking of M/V P.
Aboitiz was due to an unforeseen event and without fault or negligence on its part. It also alleged that in accordance with
the real and hypothecary nature of maritime law, the sinking of M/V P. Aboitiz extinguished its liability on the loss of the
cargoes.11

Meanwhile, the Board of Marine Inquiry (BMI) conducted its own investigation to determine whether the captain and crew
were administratively liable. However, petitioner neither informed respondent nor the trial court of the investigation. The
BMI exonerated the captain and crew of any administrative liability; and declared the vessel seaworthy and concluded that
the sinking was due to the vessels exposure to the approaching typhoon.

On November 20, 1989, the trial court, citing the Court of Appeals decision in General Accident Fire and Life Assurance
Corporation v. Aboitiz Shipping Corporation12 involving the same incident, ruled in favor of respondent. It held petitioner
liable for the total value of the lost cargo plus legal interest, thus:

WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered in favor of New India and against Aboitiz
ordering the latter to pay unto the former the amount of P142,401.60, plus legal interest thereon until the same is fully
paid, attorneys fees equivalent to fifteen [percent] (15%) of the total amount due and the costs of suit.

The complaint with respect to Franco and Zuellig is dismissed and their counterclaim against New India is likewise
dismissed

SO ORDERED.131avvphil.net

Petitioner elevated the case to the Court of Appeals and presented the findings of the BMI. However, on August 29, 2002,
the appellate court affirmed in toto the trial courts decision. It held that the proceedings before the BMI was only for the
administrative liability of the captain and crew, and was unilateral in nature, hence not binding on the courts. Petitioner
moved for reconsideration but the same was denied on January 23, 2003.

Hence, this petition for review, alleging that the Court of Appeals gravely erred in:

I.

x x x DISREGARDING THE RULINGS OF THE HONORABLE SUPREME COURT ON THE APPLICATION OF THE
RULE ON LIMITED LIABILITY UNDER ARTICLE 587, 590 AND 837 OF THE CODE OF COMMERCE TO CASES
INVOLVING THE SINKING OF THE M/V "P. ABOITIZ;

A.

x x x NOT APPLYING THE RULINGS IN THE CASES OF MONARCH INSURANCE CO., INC. ET AL. V. COURT OF
APPEALS ET AL. AND ABOITIZ SHIPPING CORPORATION V. GENERAL ACCIDENT FIRE AND LIFE ASSURANCE
CORPORATION, LTD.;

B.

x x x RULING THAT THE ISSUE ON THE APPLICATION OF THE RULE ON LIMITED LIABILITY UNDER ARTICLES
587, 590 AND 837 OF THE CODE OF COMMERCE HAD BEEN CONSIDERED AND PASSED UPON IN ITS DECISION;

II.

x x x NOT LIMITING THE AWARD OF DAMAGES TO RESPONDENT TO ITS PRO-RATA SHARES IN THE
INSURANCE PROCEEDS FROM THE SINKING OF THE M/V "P. ABOITIZ".14

Stated simply, we are asked to resolve whether the limited liability doctrine, which limits respondents award of damages
to its pro-rata share in the insurance proceeds, applies in this case.

Petitioner, citing Monarch Insurance Co. Inc. v. Court of Appeals, 15 contends that respondents claim for damages should
only be against the insurance proceeds and limited to its pro-rata share in view of the doctrine of limited liability.

Respondent counters that the doctrine of real and hypothecary nature of maritime law is not applicable in the present case
because petitioner was found to have been negligent. Hence, according to respondent, petitioner should be held liable for
the total value of the lost cargo.

It bears stressing that this Court has variedly applied the doctrine of limited liability to the same incident the sinking
of M/V P. Aboitiz on October 31, 1980. Monarch, the latest ruling, tried to settle the conflicting pronouncements of this
Court relative to the sinking of M/V P. Aboitiz. In Monarch, we said that the sinking of the vessel was not due to force
majeure, but to its unseaworthy condition.16 Therein, we found petitioner concurrently negligent with the captain and
crew.17 But the Court stressed that the circumstances therein still made the doctrine of limited liability applicable. 18

Our ruling in Monarch may appear inconsistent with the exception of the limited liability doctrine, as explicitly stated in the
earlier part of the Monarch decision. An exception to the limited liability doctrine is when the damage is due to the fault of
the shipowner or to the concurrent negligence of the shipowner and the captain. In which case, the shipowner shall be
liable to the full-extent of the damage.19 We thus find it necessary to clarify now the applicability here of the decision
in Monarch.

From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary
diligence over the goods they transport according to all the circumstances of each case.20 In the event of loss, destruction
or deterioration of the insured goods, common carriers are responsible, unless they can prove that the loss, destruction or
deterioration was brought about by the causes specified in Article 1734 of the Civil Code. 21 In all other cases, common
carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed
extraordinary diligence.22 Moreover, where the vessel is found unseaworthy, the shipowner is also presumed to be
negligent since it is tasked with the maintenance of its vessel. Though this duty can be delegated, still, the shipowner
must exercise close supervision over its men.23

In the present case, petitioner has the burden of showing that it exercised extraordinary diligence in the transport of the
goods it had on board in order to invoke the limited liability doctrine. Differently put, to limit its liability to the amount of the
insurance proceeds, petitioner has the burden of proving that the unseaworthiness of its vessel was not due to its fault or
negligence. Considering the evidence presented and the circumstances obtaining in this case, we find that petitioner
failed to discharge this burden. It initially attributed the sinking to the typhoon and relied on the BMI findings that it was not
at fault. However, both the trial and the appellate courts, in this case, found that the sinking was not due to the typhoon
but to its unseaworthiness. Evidence on record showed that the weather was moderate when the vessel sank. These
factual findings of the Court of Appeals, affirming those of the trial court are not to be disturbed on appeal, but must be
accorded great weight. These findings are conclusive not only on the parties but on this Court as well. 24

In contrast, the findings of the BMI are not deemed always binding on the courts. 25 Besides, exoneration of the vessels
officers and crew by the BMI merely concerns their respective administrative liabilities.26 It does not in any way operate to
absolve the common carrier from its civil liabilities arising from its failure to exercise extraordinary diligence, the
determination of which properly belongs to the courts. 27

Where the shipowner fails to overcome the presumption of negligence, the doctrine of limited liability cannot be
applied.28 Therefore, we agree with the appellate court in sustaining the trial courts ruling that petitioner is liable for the
total value of the lost cargo.

WHEREFORE, the petition is DENIED for lack of merit. The Decision dated August 29, 2002 and Resolution dated
January 23, 2003 of the Court of Appeals in CA-G.R. CV No. 28770 are AFFIRMED.

Costs against petitioner.

SO ORDERED.

LEONARDO A. QUISUMBING
Associate Justice

WE CONCUR:

ANTONIO T. CARPIO
Associate Justice

CONCHITA CARPIO MORALES DANTE O. TINGA

Associate Justice Asscociate Justice

PRESBITERO J. VELASCO, JR.

Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

CERTIFICATION

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

ARTEMIO V. PANGANIBAN
Chief Justice

___

G.R. No. L-33637 December 31, 1931

ANG GIOK CHIP, doing business under the name and style of Hua Bee Kong Si, plaintiff-appellee,
vs.
SPRINGFIELD FIRE & MARINE INSURANCE COMPANY, defendant-appellant.

C.A. Sobral for appellant.

Paredes and Buencamino for appellee.
Gibbs and McDonough and Ramon Ozaeta as amici curiae.

MALCOLM, J.:

An important question in the law of insurance, not heretofore considered in this jurisdiction and, according to our
information, not directly resolved in California from which State the Philippine Insurance Act was taken, must be decided
on this appeal for the future guidance of trial courts and of insurance companies doing business in the Philippine Islands.
This question, flatly stated, is whether a warranty referred to in the policy as forming part of the contract of insurance and
in the form of a rider to the insurance policy, is null and void because not complying with the Philippine Insurance Act. The
court has had the benefit of instructive briefs and memoranda from the parties and has also been assisted by a well
prepared brief submitted on behalf of amici curiae.

The admitted facts are these: Ang Giok Chip doing business under the name and style of Hua Bee Kong Si was formerly
the owner of a warehouse situated at No. 643 Calle Reina Regente, City of Manila. The contents of the warehouse were
insured with the three insurance companies for the total sum of P60,000. One insurance policy, in the amount of P10,000,
was taken out with the Springfield Fire & Marine Insurance Company. The warehouse was destroyed by fire on January
11, 1928, while the policy issued by the latter company was in force.

Predicated on this policy the plaintiff instituted action in the Court of First Instance of Manila against the defendant to
recover a proportional part of the loss coming to P8,170.59. Four special defenses were interposed on behalf of the
insurance company, one being planted on a violation of warranty F fixing the amount of hazardous goods which might be
stored in the insured building. The trial judge in his decision found against the insurance company on all points, and gave
judgment in favor of the plaintiff for the sum of P8,188.74. From this judgment the insurance company has appealed, and
it is to the first and fourth errors assigned that we would address particular attention.

Considering the result at which we arrive, it is unnecessary for us to discuss three of the four special defenses which were
made by the insurance company. We think, however, that it would be a reasonable deduction to conclude that more than
3 per cent of the total value of the merchandise contained in the warehouse constituted hazardous goods, and that this
per cent reached as high as 39. We place reliance on the consular invoices and on the testimony of the adjuster,
Herridge. Having thus swept to one side all intervening obstacle, the legal question recurs, as stated in the beginning of
this decision, of whether or not warranty F was null and void.

To place this question in its proper light, we turn to the policy issued by the Springfield Fire & Marine Insurance Company
in favor of the plaintiff. The description of the risk in this policy is as follows:lawphil.net

Ten thousand pesos Philippine Currency. On general non-hazardous merchandise, chiefly

consisting of chucherias, also produce, Cacao, Flour, all the property of the Insured, or held by
them in trust, on commission or on joint account with others, or for which he is responsible, while
contained during the currency of this policy in the godown, situate No. 643 Calle Reina Regent. . .
.

This policy is subject to the hereon attached "Ordinary Short Period Rate Scale" Warranties A &
F, Co-insurances Clause "and Three Fourths Loss Clause," which are forming part of same. Co-
insurance declared:

"P20,000. Sun Insurance Office Ltd. (K & S)." (Emphasis inserted.) Securely pasted on the left
hand margin of the face of the policy are five warranties and special clauses. One of them is
warranty F, specially referred to on the face of the policy, reading in part as follows:

WARRANTY F

It is hereby declared and agreed that during the currency of this policy no hazardous goods be
stored in the Building to which this insurance applies or in any building communicating therewith,
provided, always, however, that the Insured be permitted to stored a small quantity of the
hazardous goods specified below, but not exceeding in all 3 per cent of the total value of the
whole of the goods or merchandise contained in said warehouse, viz; . . . .

The applicable law is found in the Instance Act, Act No. 2427, as amended, section 65 reading:

"Every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in another
instrument signed by the insured and referred to in the policy, as making a part of it." As the Philippine law was taken
verbatim from the law of California, in accordance with well settled canons of statutory construction, the court should
follow in fundamental points, at least, the construction placed by California courts on a California law. Unfortunately the
researches of counsel reveal no authority coming from the courts of California which is exactly on all fours with the case
before us. However, there are certain consideration lying at the basis of California law and certain indications in the
California decisions which point the way for the decision in this case

Section 65 of the Philippine Insurance Act corresponds to section 2605 of the Civil Cod of California. The comments of the
Code Examiners of California disclose that the language of section 2605 was quite different from that under the Code as
adopted in 1872. That language was found too harsh as to insurance companies. The Code Examiners' notes state: "The
amendment restores the law as it existed previous to the Code: SeeParsons on Maritime Law, 106, and Phillips on
Insurance, sec. 756." The passage referred to in Philips on Insurance, was worded by the author as follows:

"Any express warranty or condition is always a part of the policy, but, like any other part of an express contract, may be
written in the margin, or contained in proposals or documents expressly referred to in the policy, and so made a part of it."
The annotator of the Civil Code of California, after setting forth these facts, adds:

. . . The section as it now reads is in harmony with the rule that a warranty may be contained in another
instrument than the policy when expressly referred to in the policy as forming a part thereof: . . . .

What we have above stated has been paraphrased from the decision of the California Court of Appeals in the case of
Isaac Upham Co. vs. United States Fidelity & Guaranty Co. ( [1922], 211 Pac., 809), and thus discloses the attitude of the
California courts. Likewise in the Federal courts, in the case of Conner vs. Manchester Assur. Co. ([1904], 130 Fed., 743),
section 2605 of the Civil Code of California came under observation, and it was said that it "is in effect an affirmance of
the generally accepted doctrine applicable to such contracts."

We, therefore, think it wrong to hold that the California law represents a radical departure from the basic principles
governing the law of insurance. We are more inclined to believe that the codification of the law of California had exactly
the opposite purpose, and that in the language of the Federal court it was but an affirmance of the generally accepted
doctrine applicable to such contracts. This being true, we turn to two of such well recognized doctrines. In the first place, it
is well settled that a rider attached to a policy is a part of the contract, to the same extent and with like effect as it actually
embodied therein. (I Couch, Cyclopedia of Insurance Law, sec. 159.) In the second place, it is equally well settled that an
express warranty must appear upon the face of the policy, or be clearly incorporated therein and made a part thereof by
explicit reference, or by words clearly evidencing such intention. (4 Couch, Cyclopedia of Insurance Law, sec. 862.)

Section 65 of the Insurance Act and its counterpart, section 265 of the Civil Code of California, will bear analysis as tested
by reason and authority. The law says that every express warranty must be "contained in the policy itself." The word
"contained," according to the dictionaries, means "included," inclosed," "embraced," "comprehended," etc. When,
therefore, the courts speak of a rider attached to the policy, and thus "embodied" therein, or of a warranty "incorporated"
in the policy, it is believed that the phrase "contained in the policy itself" must necessarily include such rider and warranty.
As to the alternative relating to "another instrument," "instrument" as here used could not mean a mere slip of paper like a
rider, but something akin to the policy itself, which in section 48 of the Insurance Act is defined as "The written instrument,
in which a contract of insurance is set forth." In California, every paper writing is not necessarily an "instrument" within the
statutory meaning of the term. The word "instrument has a well defined definition in California, and as used in the Codes
invariably means some written paper or instrument signed and delivered by one person to another, transferring the title to,
or giving a lien, on property, or giving a right to debt or duty. (Hoag vs. Howard [1880], 55 Cal., 564; People vs.
Fraser[1913], 137 Pac., 276.) In other words, the rider, warranty F, is contained in the policy itself, because by the
contract of insurance agreed to by the parties it is made to form a part of the same, but is not another instrument signed
by the insured and referred to in the policy as forming a part of it.

Again, referring to the jurisprudence of California, another rule of insurance adopted in that State is in point. It is admitted
that the policy before us was accepted by the plaintiff. The receipt of this policy by the insured without objection binds both
the acceptor and the insured to the terms thereof. The insured may not thereafter be heard to say that he did not read the
policy or know its terms, since it is his duty to read his policy and it will be assumed that he did so. In California
Jurisprudence, vol. 14, p. 427, from which these statements are taken with citations to California decisions, it is added that
it has been held that where the holder of a policy discovers a mistake made by himself and the local agent in attaching the
wrong rider to his application, elects to retain the policy issued to him, and neither requests the issuance of a different one
nor offers to pay the premium requisite to insure against the risk which he believe the rider to cover, he thereby accepts
the policy.

We are given to understand, and there is no indication to the contrary, that we have here a standard insurance policy. We
are further given to understand, and there is no indication to the contrary, that the issuance of the policy in this case with
its attached rider conforms to well established practice in the Philippines and elsewhere. We are further given to
understand, and there is no indication to the contrary, that there are no less than sixty-nine insurance companies doing
business in the Philippine Islands with outstanding policies more or less similar to the one involved in this case, and that
to nullify such policies would place an unnecessary hindrance in the transaction of insurance business in the Philippines.
These are matters of public policy. We cannot believe that it was ever the legislative intention to insert in the Philippine
Law on Insurance an oddity, an incongruity, entirely out of harmony with the law as found in other jurisdiction, and
destructive of good business practice.

We have studied this case carefully and having done so have reached the definite conclusion that warranty F, a rider
attached to the face of the insurance policy, and referred to in contract of insurance, is valid and sufficient under section
65 of the Insurance Act. Accordingly, sustaining the first and fourth errors assigned, and it being unnecessary to discuss
the remaining errors, the result will be to reverse the judgment appealed from and to order the dismissal of the complaint,
without special pronouncement as to costs in either instance.

Street, Villamor, Ostrand, and Romualdez, JJ., concur.

Separate Opinions
VILLA-REAL, J., dissenting:

I fully concur in the dissenting opinion penned by Justice Imperial, and further say that a rider or slip attached to an
insurance policy, though referred to therein as making a part of it, is not one of the forms prescribed by section 65 of the
Insurance Law in which an express warranty may be made to appear validly so as to be binding between the insurer and
the insured. There are two, and only two forms provided in said section by which an express warranty may be made to
appear validly, to wit: by embodiment either in the insurance policy itself or in another instrument signed by the insured
and referred to in the policy as making a part of it.

Now the question arises as to whether the rider or slip containing said warranty F attached to the policy in question and
referred to therein as making a part thereof is one of the two forms provided in said section 65 of the Insurance Law.

It is admitted that it is not the second form, because not being signed by the insured it does not constitute an instrument.
(Hoag vs. Howard [1880], 55 Cal., 564; People vs. Fraser [1913], 137 Pac., 276.)

Is it the first form required by law, that is, is it contained in the policy itself? It is so contended in the majority opinion and
authorities are cited in support of such contention.

In 1 Couch, Cyclopedia of Insurance Law, par. 159, it is said that "as a general rule, a rider or slip attached to a policy or
certificate of insurance is, prima facie at least, a part of the contract to the same extent, and with like effect, as if actually
embodied therein, provided, of course, that it does not violate any statutory inhibition, and has been lawfully, and
sufficiently attached, ..." (See also 32 Corpus Juris, 1159, par. 270).

Does the attachment of a rider or slip containing an express warranty contravene the provisions of section 65 of the
Insurance Law? When the law, in order to protect the insured, requires that an express warranty be contained in the policy
or in another instrument referred to therein as making a part thereof, it could not have been its intention to permit that
such express warranty be contained in a piece of paper not signed by the insured although it is attached to the policy and
referred to therein as making a part thereof, because it would be contrary to the requirement that such express warranty
be contained in an instrument signed by the insured. It is a general rule of statutory construction that a law should not be
so construed as to produced an absurd result. It would certainly be an absurdity if section 65 of the Insurance Law were
construed as requiring that an express warranty be contained only in the policy or in another instrument signed by the
insured and referred to therein as making a part thereof for the protection of such insured, and at the same time pertaining
that such, express warranty be contained in a piece of paper not signed by the insured but simply attached to the policy
and referred to therein as making a part thereof, thus opening the door to fraud, it being easy to detach such rider or
slip and change it with another, which is precisely what the law is trying to prevent. It will thus be seen that the
attachment of a rider or slip containing an express warranty to a policy, although referred to therein as making a part
thereof, is contrary to the evident intent and purpose of section 65 of the Insurance Law.

In the case of Isaac Upham Co. vs. United States Fidelity & Guaranty Co. (211 Pac., 809), cited in the majority opinion,
the question was whether a warranty contained in an application for insurance, which was not referred to in the policy as
making a part thereof, incorporated said warranty in the said policy and was valid. The Supreme Court of California held
that it was not, for lack of such reference. Of course an application for insurance is a document signed by the insured, and
an express warranty contained therein if referred to in the policy as making a part thereof, will be considered as contained
therein in accordance with law.

In the case of Conner vs. Manchester Assur. Co. (130 Feb., 743), also cited in the majority opinion, the question was
whether an open policy was a warranty and the Circuit Court of Appeals for the Northern District of California held that it
was not, and further said that "section 2605 of the Civil Code of California (from which section 65 of the Insurance Law
was taken) was evidently intended to express in statutory form the rule that no express warranty made by the insured
shall affect the contract of insurance, unless it be contained in the policy or in the application, or some other instrument
signed by the insured and made a part of the contract, and is in effect an affirmance of the generally accepted doctrine
applicable to such contracts." It will be seen from this statement that the court in enumerating the forms in which an
express warranty may be express or made to appear does not mention any paper which is not signed by the insured.

The fact that for many years it has been the practice of the insurance companies to use riders or slips of paper containing
express warranties without the signature of the insured in violation of the law is no reason why such practice should be
permitted to continue when its legality is questioned.

In view of the foregoing consideration, I am constrained to dissent from the opinion of the majority.
IMPERIAL, J., dissenting:

The decision of this case depended principally, but wholly, on the validity of the warranty F, Exhibit A-2. This instrument
consist of a slip of paper pasted on the margin of a page of the fire insurance policy. It contains the stipulation that the
insured is permitted to store in the building concerned the hazardous goods specified, to an amount not exceeding three
per cent of the total value of the merchandise stored. The policy makes reference to this rider as follows: "This policy is
subject to the hereon attached `Ordinary Short Period Rate Scale,' Warranties A and F, Co-insurance clause and `Three
Fourths Loss Clause' which are forming part of the same"; but the rider is not signed by the insured.

Section 65 of Act No. 2427 (Insurance Law) reads as follows:

Every express warranty, made at or before the execution of a policy, must be contained in the policy itself, or in
another instrument signed by the insured and referred to in the policy, as making a part of it.

An express warranty, then, made at or before the execution of the policy, like warranty F, is valid only if it is contained in
the policy itself, or in another instrument signed by the insured and referred to in the policy as forming a part thereof.
Examining warranty F, it may be seen that it does not form an integral part of the policy but appeals on another slip of
paper pasted on the policy; it is therefore an instrument other than the policy and comes under the second paragraph
provided for in section 65. And, according to this provision, warranty F cannot be valid or binding, for the simple reason
that it is not signed by the insured, and has no weight, notwithstanding the fact that reference is made to it in a general
way in the body of the policy. This reference is not equivalent to including it in the policy, for the simple reason, as we
have said, that it was made in a general way. It is mentioned simply as warranty F, without giving any idea of its contents.
The term of the rider might be changed and the heading "Warranty F" retained, and, following the appellant's line of
reasoning, it might, with equal plausibility, be defended as the express warranty agreed upon, because it was headed
"Warranty F." It is just such alterations as this that the law seeks to prevent in requiring that all warranties of the kind are
to be signed by the insured and referred to in the policy.

Setting aside for the moment the legal question of the validity of the warranty, and assuming warranty F to be valid, we
have to consider another circumstance which indicates that the insured did not violate it. The trial court found that at the
time of the fire, the inflammable goods in the warehouse or building of the insured did not exceed the amount permitted by
the insurance company, that is, three per cent of the total value of the merchandise stored. This finding is borne out by the
evidence, and there is no reason for changing it and making another.

For these reasons, I believe the judgment appealed from should be affirmed in its entirely.

Avancea, C.J., concurs.

___

G.R. No. 156956 October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as Insurance

Commissioner, petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.:

The securities required by the Insurance Code to be deposited with the Insurance Commissioner are intended to answer
for the claims of all policy holders in the event that the depositing insurance company becomes insolvent or otherwise
unable to satisfy their claims. The security deposit must be ratably distributed among all the insured who are entitled to
their respective shares; it cannot be garnished or levied upon by a single claimant, to the detriment of the others.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the January 16, 2003 Order 2 of
the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance
Commissioner Eduardo T. Malinis guilty of indirect contempt for refusing to comply with the December 18, 2002
Resolution3 of the lower court. The January 16, 2003 Order states in full:

"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T. Malinis of the Office of the
Insurance Commission in Contempt of Court because of his failure and refusal to obey the lawful order of this
court embodied in a Resolution dated December 18, 2002 directing him to allow the withdrawal of the security
deposit of Capital Insurance and Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid to Sheriff
Manuel Paguyo in the satisfaction of the Notice of Garnishment pursuant to a Decision of this Court which has
become final and executory.

"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis or his counsel or his duly
authorized representative failed to appear despite notice in utter disregard of the order of this Court. However,
Commissioner Malinis filed on January 15, 2003 a written Comment reiterating the same grounds already passed
upon and rejected by this Court. This Court finds no lawful justification or excuse for Commissioner Malinis'
refusal to implement the lawful orders of this Court.

"Wherefore, premises considered and after due hearing, Commissioner Eduardo T. Malinis is hereby declared
guilty of Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of the 1997 Rules of Civil Procedure for
willfully disobeying and refusing to implement and obey a lawful order of this Court." 4

The Facts

On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412, finding the defendants (Vilfran Liner,
Inc., Hilaria Villegas and Maura Villegas) jointly and severally liable to pay Del Monte Motors, Inc., P11,835,375.50
representing the balance of Vilfran Liner's service contracts with respondent. The trial court further ordered the execution
of the Decision against the counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and
Surety Co., Inc. (CISCO).

On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent, claiming that the latter had no record or
document regarding the alleged issuance of the counterbond; thus, the bond was not valid and enforceable.

On June 13, 2002, the RTC granted the Motion for Execution and issued the corresponding Writ. Armed with this Writ,
Sheriff Manuel S. Paguyo proceeded to levy on the properties of CISCO. He also issued a Notice of Garnishment on
several depository banks of the insurance company. Moreover, he served a similar notice on the Insurance Commission,
so as to enforce the Writ on the security deposit filed by CISCO with the Commission in accordance with Section 203 of
the Insurance Code.

On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that the Notice of Garnishment served
by Sheriff Paguyo on the insurance commission was valid. The trial court added that the letter and spirit of the law made
the security deposit answerable for contractual obligations incurred by CISCO under the insurance contracts the latter had
entered into. The RTC resolved thus:

"Furthermore, the Commissioner of the Office of the Insurance Commission is hereby ordered to comply with its
obligations under the Insurance Code by upholding the integrity and efficacy of bonds validly issued by duly
accredited Bonding and Insurance Companies; and to safeguard the public interest by insuring the faithful
performance to enforce contractual obligations under existing bonds. Accordingly said office is ordered to
withdraw from the security deposit of Capital Insurance & Surety Company, Inc. the amount of P11,835.50 to be
paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice of Garnishment served on August 16, 2002." 5

On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T. Malinis in contempt of court for his
refusal to obey the December 18, 2002 Resolution of the trial court.
 Ruling of the Trial Court

The RTC held Insurance Commissioner Malinis in contempt for his refusal to implement its Order. It explained that the
commissioner had no legal justification for his refusal to allow the withdrawal of CISCO's security deposit.

Hence, this Petition.6

Issues

Petitioner raises this sole issue for the Court's consideration:

"Whether or not the security deposit held by the Insurance Commissioner pursuant to Section 203 of the
Insurance Code may be levied or garnished in favor of only one insured."7

The Court's Ruling

The Petition is meritorious.

Preliminary Issue:
Propriety of Review

Before discussing the principal issue, the Court will first dispose of the question of mootness.

Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the treasurer of the Philippines a letter dated
March 26, 2003, stating that the former had no objection to the release of the security deposit to Del Monte Motors.
Portions of the fund were consequently released to respondent in July, October, and December 2003. Thus, the issue
arises: whether these circumstances render the case moot.

Petitioner, however, contends that the partial releases should not be construed as an abandonment of its stand that
security deposits under Section 203 of the Insurance Code are exempt from levy and garnishment. The Republic claims
that the releases were made pursuant to the commissioner's power of control over the fund, not to the lower court's Order
of garnishment. Petitioner further invokes the jurisdiction of this Court to put to rest the principal issue of whether security
deposits made with the Insurance Commission may be levied and garnished.

The issue is not totally moot. To stress, only a portion of respondent's claim was satisfied, and the Insurance Commission
has required CISCO to replenish the latter's security deposit. Respondent, therefore, may one day decide to further
garnish the security deposit, once replenished. Moreover, after the questioned Order of the lower court was issued, similar
claims on the security deposits of various insurance companies have been made before the Insurance Commission. To
set aside the resolution of the issue will only postpone a task that is certain to crop up in the future.

Besides, the business of insurance is imbued with public interest. It is subject to regulation by the State, with respect not
only to the relations between the insurer and the insured, but also to the internal affairs of insurance companies.8 As this
case is undeniably endowed with public interest and involves a matter of public policy, this Court shall not shirk from its
duty to educate the bench and the bar by formulating guiding and controlling principles, precepts, doctrines and rules. 9

Principal Issue:
Exemption of Security Deposit from Levy or Garnishment

Section 203 of the Insurance Code provides as follows:

"Sec. 203. Every domestic insurance company shall, to the extent of an amount equal in value to twenty-five per
centum of the minimum paid-up capital required under section one hundred eighty-eight, invest its funds only in
securities, satisfactory to the Commissioner, consisting of bonds or other evidences of debt of the Government of
the Philippines or its political subdivisions or instrumentalities, or of government-owned or controlled corporations
and entities, including the Central Bank of the Philippines: Provided, That such investments shall at all times be
maintained free from any lien or encumbrance; and Provided, further, That such securities shall be deposited with
and held by the Commissioner for the faithful performance by the depositing insurer of all its obligations under
its insurance contracts. The provisions of section one hundred ninety-two shall, so far as practicable, apply to
the securities deposited under this section.
 "Except as otherwise provided in this Code, no judgment creditor or other claimant shall have the right to
levy upon any of the securities of the insurer held on deposit pursuant to the requirement of the
Commissioner." (Emphasis supplied)

Respondent notes that Section 203 does not provide for an absolute prohibition on the levy and garnishment of the
security deposit. It contends that the law requires the deposit, precisely to ensure faithful performance of all the
obligations of the depositing insurer under the latter's various insurance contracts. Hence, respondent claims that the
security deposit should be answerable for the counterbond issued by CISCO.

The Court is not convinced. As worded, the law expressly and clearly states that the security deposit shall be (1)
answerable for all the obligations of the depositing insurer under its insurance contracts; (2) at all times free from any
liens or encumbrance; and (3) exempt from levy by any claimant.

To be sure, CISCO, though presently under conservatorship, has valid outstanding policies. Its policy holders have a right
under the law to be equally protected by its security deposit. To allow the garnishment of that deposit would impair the
fund by decreasing it to less than the percentage of paid-up capital that the law requires to be maintained. Further, this
move would create, in favor of respondent, a preference of credit over the other policy holders and beneficiaries.

Our Insurance Code is patterned after that of California.10 Thus, the ruling of the state's Supreme Court on a similar
concept as that of the security deposit is instructive. Engwicht v. Pacific States Life Assurance Co.11held that the money
required to be deposited by a mutual assessment insurance company with the state treasurer was "a trust fund to be
ratably distributed amongst all the claimants entitled to share in it. Such a distribution cannot be had except in an action in
the nature of a creditors' bill, upon the hearing of which, and with all the parties interested in the fund before it, the court
may make equitable distribution of the fund, and appoint a receiver to carry that distribution into effect." 12

Basic is the statutory construction rule that provisions of a statute should be construed in accordance with the purpose for
which it was enacted.13 That is, the securities are held as a contingency fund to answer for the claims against the
insurance company by all its policy holders and their beneficiaries. This step is taken in the event that the company
becomes insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not lay stake on the
securities to the exclusion of all others. The other parties may have their own claims against the insurance company
under other insurance contracts it has entered into.

Respondent's Inchoate Right

The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all other obligations of the
company arising from its insurance contracts. Thus, respondent's interest is merely inchoate. Being a mere expectancy, it
has no attribute of property. At this time, it is nonexistent and may never exist.14Hence, it would be premature to make the
security deposit answerable for CISCO's present obligation to Del Monte Motors.

Moreover, since insolvency proceedings against CISCO have yet to be conducted, it would be impossible to establish at
this time which claimants are entitled to the security deposit and in what pro-rated amounts. Only after all other claimants
under subsisting policies issued by CISCO have been heard can respondent's share be determined.

Powers of the Commissioner

The Insurance Code has vested the Office of the Insurance Commission with both regulatory and adjudicatoryauthority
over insurance matters.15

The general regulatory authority of the insurance commissioner is described in Section 414 of the Code as follows:

"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance
companies and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully
executed and to perform the duties imposed upon him by this Code, and shall, notwithstanding any existing laws
to the contrary, have sole and exclusive authority to regulate the issuance and sale of variable contracts as
defined in section two hundred thirty-two and to provide for the licensing of persons selling such contracts, and to
issue such reasonable rules and regulations governing the same.

"The Commissioner may issue such rulings, instructions, circulars, orders and decisions as he may deem
necessary to secure the enforcement of the provisions of this Code, subject to the approval of the Secretary of
 Finance. Except as otherwise specified, decisions made by the Commissioner shall be appealable to the
Secretary of Finance." (Emphasis supplied)

Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to issue) certificates of
authority to persons or entities desiring to engage in insurance business in the Philippines; 16 (2) revoke or suspend these
certificates of authority upon finding grounds for the revocation or suspension; 17 (3) impose upon insurance companies,
their directors and/or officers and/or agents appropriate penalties -- fines, suspension or removal from office -- for failing to
comply with the Code or with any of the commissioner's orders, instructions, regulations or rulings, or for otherwise
conducting business in an unsafe or unsound manner.18

Included in the above regulatory responsibilities is the duty to hold the security deposits under Sections 191 19and 203 of
the Code, for the benefit and security of all policy holders. In relation to these provisions, Section 192 of the Insurance
Code states:

"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the benefit and security of all
the policyholders of the company depositing the same, but shall as long as the company is solvent, permit the
company to collect the interest or dividends on the securities so deposited, and, from time to time, with his assent,
to withdraw any of such securities, upon depositing with said Commissioner other like securities, the market value
of which shall be equal to the market value of such as may be withdrawn. In the event of any company ceasing to
do business in the Philippines the securities deposited as aforesaid shall be returned upon the company's making
application therefor and proving to the satisfaction of the Commissioner that it has no further liability under any of
its policies in the Philippines." (Emphasis supplied)

Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate the insurance industry so
as to protect the insuring public. The law specifically confers custody over the securities upon the commissioner, with
whom these investments are required to be deposited. An implied trust20 is created by the law for the benefit of all
claimants under subsisting insurance contracts issued by the insurance company. 21

As the officer vested with custody of the security deposit, the insurance commissioner is in the best position to determine
if and when it may be released without prejudicing the rights of other policy holders. Before allowing the withdrawal or the
release of the deposit, the commissioner must be satisfied that the conditions contemplated by the law are met and all
policy holders protected.

Commissioner's Actions
Entitled to Great Respect

In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing that the funds were
exempt from execution as provided by law, he sought to protect other policy holders. His interpretation of the provisions of
the law carries great weight and consideration,22 as he is the head of a specialized body tasked with the regulation of
insurance matters and primarily charged with the implementation of the Insurance Code.

The emergence of the multifarious needs of modern society necessitates the establishment of diverse administrative
agencies. In addressing these needs, the administrative agencies charged with applying and implementing particular
statutes have accumulated experience and specialized capabilities. Thus, in a long line of cases, this Court has
recognized that their construction of a statute is entitled to great respect and should ordinarily be controlling, unless
clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws. 23

Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit of CISCO. It follows that
without the issuance of a valid order, the insurance commissioner could not have been in contempt of court.24

WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs.

SO ORDERED.

Ynares-Santiago, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Footnotes

1 Rollo, pp. 20-50.

2 Id. at 70-71. Penned by Judge (now Court of Appeals Justice) Noel G. Tijam.

3 Id. at 54-69.

4 January 16, 2003 Order; rollo, pp. 70-71.

5 December 18, 2002 Resolution, pp. 15-16; rollo, pp. 68-69.

6The case was deemed submitted for decision on February 8, 2005, upon receipt by this Court of petitioner's
Memorandum signed by Assistant Solicitor General Karl B. Miranda and Solicitor Marsha C. Recon. Respondent's
Memorandum, signed by Atty. Eduardo E. Francisco, was received by the Court on November 26, 2004.

7 Petitioner's Memorandum, p. 11. Uppercase in the original.

8AFP Mutual Benefit Association, Inc. v. NLRC, 334 Phil. 712, January 28, 1997, citing Insular Life Assurance
Co., Ltd. v. NLRC, 179 SCRA 459, November 15, 1989.

9ABS-CBN Broadcasting Corporation v. Commission on Elections, 380 Phil. 780, January 28, 2000; Gonzales v.
Chavez, 205 SCRA 816, February 4, 1992.

10Maria Clara L. Campos, in her commentary on the Insurance Code of the Philippines, traces the history of the
present Insurance Code as follows:

"The forerunner of this [Insurance] Code was the Insurance Act which took effect on July 1, 1915, and
which was copied almost verbatim from the California Insurance Act, with the exception of a few
provisions which were adopted from the New York Law. x x x. The first Insurance Code took effect on
December 18, 1974 and besides incorporating most of the provisions of the Insurance Act with a few
changes, it contained many new provisions mostly regulatory in nature. After a number of these new
provisions were rendered obsolete by subsequent amendments, the Insurance Code of 1978 was
promulgated by Presidential Decree No. 1460, incorporating not only such amendments but also
additional changes deemed necessary in order to keep pace with the changing needs and demands of
the insurance industry. However, the substantive provisions governing the contract of insurance itself
remain for the most part as they were under the Insurance Act." (Campos, Insurance, [1983], pp. 8-9.)

The Court has held that rulings and general principles on insurance recognized in the state of California
have persuasive authority in the Philippines. (Ang Giok Chip v. Springfield Fire and Marine Insurance Co.,
56 Phil. 375, December 31, 1931 and Gercio v. Sun Life Assurance Co. of Canada, 48 Phil. 53,
September 28, 1925).

11 153 Cal. 183, March 9, 1908, per curiam (citing San Francisco S

__

___

G.R. No. 167330 September 18, 2009

PHILIPPINE HEALTH CARE PROVIDERS, INC., Petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

RESOLUTION
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

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

ARTICLE XIII
Social Justice and Human Rights

Section 11. The State shall adopt an integrated and comprehensive approach to health development which shall
endeavor to make essential goods, health and other social services available to all the people at affordable cost. There
shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor
to provide free medical care to paupers.1

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July
14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.2

We recall the facts of this case, as follows:

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

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the
corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the
taxable years 1996 and 1997 in the total amount of 224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care agreement with the
members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest,
petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and
DST assessments.

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

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby
ORDERED to PAY the deficiency VAT amounting to 22,054,831.75 inclusive of 25% surcharge plus 20% interest from
January 20, 1997 until fully paid for the 1996 VAT deficiency and 31,094,163.87 inclusive of 25% surcharge plus 20%
interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is
declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He
claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997
Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the nature of a
non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and
set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from
collecting the same is REVERSED and SET ASIDE.

Respondent is ordered to pay the amounts of 55,746,352.19 and 68,450,258.73 as deficiency Documentary Stamp
Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27,
2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners
health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity,
citing Blue Cross Healthcare, Inc. v. Olivares3 and Philamcare Health Systems, Inc. v. CA.4 We also ruled that petitioners
contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because
contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts.
Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at
exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for
reconsideration, asserting the following arguments:

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

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

(c) Section 185 should be strictly construed.

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

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

(f) Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered
by Section 185.

(g) The agreements do not fall under the phrase "other branch of insurance" mentioned in Section 185.

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

(i) Petitioner availed of the tax amnesty benefits under RA5 9480 for the taxable year 2005 and all prior years.
Therefore, the questioned assessments on the DST are now rendered moot and academic.6

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 9480 7 (also
known as the "Tax Amnesty Act of 2007") by fully paying the amount of 5,127,149.08 representing 5% of its net worth as
of the year ending December 31, 2005.8
We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987. 9 It is
engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and
advices on diet, exercise and other healthy habits, and immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count,
and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an
injury or sickness on the part of the enrolled member.10

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The
medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner,
through physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners
regarding payment schemes, financing and other procedures for the delivery of health services. Except in cases of
emergency, the professional services are to be provided only by petitioner's physicians, i.e. those directly employed by
it11 or whose services are contracted by it.12 Petitioner also provides hospital services such as room and board
accommodation, laboratory services, operating rooms, x-ray facilities and general nursing care.13 If and when a member
avails of the benefits under the agreement, petitioner pays the participating physicians and other health care providers for
the services rendered, at pre-agreed rates.14

To avail of petitioners health care programs, the individual members are required to sign and execute a standard health
care agreement embodying the terms and conditions for the provision of the health care services. The same agreement
contains the various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and
curative medical services. Except for the curative aspect of the medical service offered, the enrolled member may actually
make use of the health care services being offered by petitioner at any time.

Health Maintenance Organizations Are Not Engaged In The Insurance Business

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its
agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege,
opportunity or facility used in the transaction of the business. 15

Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to
determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of
whether or not it is liable for DST on its health care agreements.16

A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are
meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or
obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or
company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler,
burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance),
and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for
the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond
or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any
such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (0.50) on each
four pesos (4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be
considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders
every word operative is preferred over that which makes some words idle and nugatory. 17 This principle is expressed in
the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute
its every word.18

From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1)
the document must be a policy of insurance or an obligation in the nature of indemnity and(2) the maker should be
transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or "The National Health Insurance Act of 1995"), an HMO is "an entity
that provides, offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid
premium."19 The payments do not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We
rule that it was not.

Section 2 (2) of PD20 1460 (otherwise known as the Insurance Code) enumerates what constitutes "doing an insurance
business" or "transacting an insurance business:"

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

b) making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental
to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing
of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to
evade the provisions of this Code.

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

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions,21 have determined that
HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and
indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the
organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that
of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.

Applying the "principal object and purpose test,"22 there is significant American case law supporting the argument that a
corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a
group with health services, is not engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association23 wherein the Court of Appeals of the District of Columbia
Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was
created primarily for the distribution of health care services rather than the assumption of insurance risk.

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

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

In California Physicians Service v. Garrison,25 the California court felt that, after scrutinizing the plan of operation as a
whole of the corporation, it was service rather than indemnity which stood as its principal purpose.

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

American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs
undertake to provide or arrange for the provision of medical services through participating physicians while insurance
companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey27 is clear on this point:

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

xxx xxx xxx

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

A participating provider of health care services is one who agrees in writing to render health care services to or for
persons covered by a contract issued by health service corporation in return for which the health service corporation
agrees to make payment directly to the participating provider.28 (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide
medical services as needed, with payment made directly to the provider of these services.29 In short, even if petitioner
assumes the risk of paying the cost of these services even if significantly more than what the member has prepaid, it
nevertheless cannot be considered as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-
participating health providers would still be incidental to petitioners purpose of providing and arranging for health care
services and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner
is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that
indemnification is not its sole object.

In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep
members from developing medical conditions or diseases.30 As an HMO, it is its obligation to maintain the good health of
its members. Accordingly, its health care programs are designed to prevent or to minimize the possibility of any
assumption of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any
loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed
to prevent such loss or damage.31

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curativemedical
services), but these are incidental to the principal activity of providing them medical care. The "insurance-like" aspect of
petitioners business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health
care services rather than insurance services, it cannot be considered as being in the insurance business.

It is important to emphasize that, in adopting the "principal purpose test" used in the above-quoted U.S. cases, we are not
saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were
parties to those cases. What we are stating is that, for the purpose of determining what "doing an insurance business"
means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course
only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to
insurers and other entities engaged in the insurance business. Moreover, we are also not unmindful that there are other
American authorities who have found particular HMOs to be actually engaged in insurance activities. 32

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is
not supervised by the Insurance Commission but by the Department of Health. 33 In fact, in a letter dated September 3,
2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination
of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency
which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the
courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:34

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

A Health Care Agreement Is Not An Insurance Contract Contemplated Under Section 185 Of The NIRC of 1997

Section 185 states that DST is imposed on "all policies of insurance or obligations of the nature of indemnity for loss,
damage, or liability." In our decision dated June 12, 2008, we ruled that petitioners health care agreements are
contracts of indemnity and are therefore insurance contracts:

It is incorrect to say that the health care agreement is not based on loss or damage because, under the said
agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such
as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability
a member will incur in case of illness or injury.

Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of
sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray
and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event
which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled
to indemnification by petitioner.

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

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

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

In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing
authority.38 This is because taxation is a destructive power which interferes with the personal and property rights of the
people and takes from them a portion of their property for the support of the government. 39Hence, tax laws may not be
extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters
not specifically provided.40

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of
non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a
tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health
care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly
against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a
consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An
insurance contract exists where the following elements concur:

1. The insured has an insurable interest;

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

3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons
bearing a similar risk and

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

Do the agreements between petitioner and its members possess all these elements? They do not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the
elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:

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

Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with,
there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under
the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and
professional services rendered by the petitioners physician or affiliated physician to him. In case of availment by a
member of the benefits under the agreement, petitioner does not reimburse or indemnify the member as the latter does
not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers
for the services rendered at pre-agreed rates. The member does not make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member
to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms
"indemnify" or "indemnity" presuppose that a liability or claim has already been incurred. There is no indemnity precisely
because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under
the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory
services, x-ray, routine annual physical examination and consultations, vaccine administration as well as family planning
counseling, even in the absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating
physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the
expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of
illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,43 although the health care contracts called
for the defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not
make defendant an insurer. Citing Jordan, the Court determined that "the primary activity of the defendant (was) the
provision of podiatric services to subscribers in consideration of prepayment for such services." 44 Since indemnity of the
insured was not the focal point of the agreement but the extension of medical services to the member at an affordable
cost, it did not partake of the nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to
establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk.
Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance
contracts.

Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might
fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies.
Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the
premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured. 45

However, assuming that petitioners commitment to provide medical services to its members can be construed as an
acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract
because petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance
contract within the context of our Insurance Code.

There Was No Legislative Intent To Impose DST On Health Care Agreements Of HMOs

Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under
Section 185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early
as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under
Section 116, Article XI of Act No. 1189 (otherwise known as the "Internal Revenue Law of 1904")46 enacted on July 2,
1904 and became effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim
reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

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

xxx xxx xxx

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

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws
relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely
reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to
DST was thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of
Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became
Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the
internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was
increased but the provision remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as
Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was
again increased.1avvphi1

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as
Section 198. And under Section 23 of EO47 273 dated July 25, 1987, it was again renumbered and became Section 185.

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

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal
provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA
924348 but Section 185 was untouched.

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

We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law
imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments
to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been
defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have
done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained
no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such,
belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on
January 27, 2000, after more than a decade in the business as an HMO. 50

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health
care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of
insurance within the context of the provision.

The Power To Tax Is Not The Power To Destroy

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very
nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes
the tax on the constituency who is to pay it.51 So potent indeed is the power that it was once opined that "the power to tax
involves the power to destroy."52

Petitioner claims that the assessed DST to date which amounts to 376 million 53 is way beyond its net worth of 259
million.54 Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner
would be highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the
government ought to encourage private enterprise.55 Petitioner, just like any concern organized for a lawful economic
activity, has a right to maintain a legitimate business.56 As aptly held in Roxas, et al. v. CTA, et al.:57

The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax
collector kill the "hen that lays the golden egg."58

Legitimate enterprises enjoy the constitutional protection not to be taxed out of existence. Incurring losses because of a
tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nations thrust towards a better economy which will
ultimately benefit the majority of our people.59

Petitioners Tax Liability Was Extinguished Under The Provisions Of RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot
and academic60 when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid 5,127,149.08
representing 5% of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax
amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and
the appurtenant civil, criminal or administrative penalties under the 1997 NIRC, as amended, arising from the failure to
pay any and all internal revenue taxes for taxable year 2005 and prior years. 61

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

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax
involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising
in 2005 and the preceding years.

In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed
above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission,
however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under
circumstances amounting to tax fraud under Section 10 of said amnesty law. 62 (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA
9480.63 There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997
was totally extinguished by its availment of the tax amnesty under RA 9480.

Is The Court Bound By A Minute Resolution In Another Case?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the
CA64 in CIR v. Philippine National Bank65 that a health care agreement of Philamcare Health Systems is not an insurance
contract for purposes of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal
in Philippine National Bank (G.R. No. 148680).66 Petitioner argues that the dismissal of G.R. No. 148680 by minute
resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement
is not an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the
case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in
that case has already become final.67 When a minute resolution denies or dismisses a petition for failure to comply with
formal and substantive requirements, the challenged decision, together with its findings of fact and legal conclusions, are
deemed sustained.68 But what is its effect on other cases?
With respect to the same subject matter and the same issues concerning the same parties, it constitutes res
judicata.69 However, if other parties or another subject matter (even with the same parties and issues) is involved, the
minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel,70 the Court noted that a previous case, CIR v.
Baier-Nickel71 involving the same parties and the same issues, was previously disposed of by the Court thru a minute
resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case
"ha(d) no bearing" on the latter case because the two cases involved different subject matters as they were concerned
with the taxable income of different taxable years.72

Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The
constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law
on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute
resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does
not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the
Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.73 Indeed, as a rule, this Court
lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by the members of
the Court and certified by the Chief Justice.

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care
agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in
that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this
does not detract in any way from the fact that petitioners health care agreements are not subject to DST.

A Final Note

Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was
never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly
included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the
average wage earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the
goal of providing a more efficient and inexpensive health care system made possible by quantity purchasing of services
and economies of scale. They offer advantages over the pay-for-service system (wherein individuals are charged a fee
each time they receive medical services), including the ability to control costs. They protect their members from exposure
to the high cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they
play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens
with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged. 74 Its imposition will elevate the cost of
health care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health
services beyond the reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither
side wins, considering the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-
G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is
hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax.

No costs.

SO ORDERED.

___

G.R. No. 137172 April 4, 2001

UCPB GENERAL INSURANCE CO., INC., petitioner,

vs.
MASAGANA TELAMART, INC., respondent.

RESOLUTION
DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the Court of Appeals,
which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum of
P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondent's properties;
(b) declaring the replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993; and (c)
ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewal-
replacement policies. The modification consisted in the (1) deletion of the trial court's declaration that three of the policies
were in force from August 1991 to August 1992; and (2) reduction of the award of the attorney's fees from 25% to 10% of
the total amount due the Respondent.

The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals in its
assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits "A" to
"E", Record, pp. 158-175) on its properties [in Pasay City and Manila] . . . .

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May
1992." On June 13, 1992, plaintiffs properties located at 2410-2432 and 2442-2450 Taft Avenue, Pasay City were
razed by fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's
Checks in the total amount of P225,753.45 as renewal premium payments for which Official Receipt Direct
Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana made
its formal demand for indemnification for the burned insured properties. On the same day, defendant returned the
five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's
claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;

b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and

c) The properties covered by the said policies were burned in a fire that took place last June 13, 1992, or
before tender of premium payment."

(Record, p. 5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the premiums on 13 July
1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as provided
under Policy Condition No. 26, which states:

26. Renewal Clause. Unless the company at least forty five days in advance of the end of the policy period
mails or delivers to the assured at the address shown in the policy notice of its intention not to renew the policy or
to condition its renewal upon reduction of limits or elimination of coverages, the assured shall be entitled to renew
the policy upon payment of the premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured
insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the renewal of
the policies. Such a practice had existed up to the time the claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium
was paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance
Policy No. 34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May
4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No.
46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from
May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990
under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990
to May 22, 1991 was issued on May 3, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46582
 (Exhs. "X" and "X-1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May 22,
1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y"
and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990 was
issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799
(Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12, 1989 to January
12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December 10, 1988 but premium
therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance
Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800
for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No.
29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for
insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No.
HO/F-29362 was issued on June 15, 1989 but premium was paid only on February 13, 1990 under O.R. No.
39233 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy
No. 26303 was issued on November 22, 1988 but premium therefor was collected only on March 15, 1989 under
O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and
"FF-1").

Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof that no timely
notice of non-renewal was made by Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar Reinsurance
Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as indicated on
Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not earlier than said
date, or within 45 days from the expiry dates of the policies as provided under Policy Condition No. 26; (2)
Defendant insurer unconditionally accepted, and issued an official receipt for, the premium payment on July 1[3],
1992 which indicates defendant's willingness to assume the risk despite only a 67.5% reinsurance cover[age];
and (3) Defendant insurer appointed Esteban Adjusters and Valuers to investigate plaintiff's claim as shown by
the letter dated July 17, 1992 (Exhibit "11", Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies issued by petitioner
to the respondent covering the period from May 22, 1991 to May 22, 1992 . . . had been extended or renewed by an
implied credit arrangement though actual payment of premium was tendered on a later date and after the occurrence of
the (fire) risk insured against." We resolved this issue in the negative in view of Section 77 of the Insurance Code and our
decisions in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of Appeals; 3 and Tibay
v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the Court of Appeals.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we had
made in the decision our own findings of facts, which are not in accord with those of the trial court and the Court of
Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22 May 1992, or
before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by operation of law
and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within the 60- to 90-
day credit term.

Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension of
credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take judicial
notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit terms in
premium payment has been the prevalent practice in the insurance industry. Most insurance companies, including
Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely
designed for the protection of the parties to an insurance contract. The Code itself, in Section 78, authorizes the validity of
a policy notwithstanding non-payment of premiums.

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77 Petitioner
persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term was perfectly
alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and habitually accepting
payments 60 to 90 days from the effective dates of the policies, it has implicitly agreed to modify the tenor of the
insurance policy and in effect waived the provision therein that it would pay only for the loss or damage in case the same
occurred after payment of the premium.

Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the trial court and the
Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-
renewal and sent by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise ignored the
fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the Insurance Code readily
shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on the
effective date of renewal should first be made. Respondent's argument that Section 77 is not a prohibitive provision finds
no authoritative support.

Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and the
pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts, as found
by the trial court and the Court of Appeals, are indeed duly established:

1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually
renewed.

2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on the
renewed policies.

3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the notice
sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent to Zuellig was ever
transmitted to Respondent.

4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by Respondent
within the 60- to 90-day credit term and were duly accepted and received by Petitioner's cashier.

The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No. 1460)
must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for the
payment of premiums.

Section 77 of the Insurance Code of 1978 provides:

SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid, except in the
case of a life or an industrial life policy whenever the grace period provision applies.

This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December 1974. In
turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended by R.A.
No. 3540, approved on 21 June 1963, which read:

SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril
insured against, unless there is clear agreement to grant the insured credit extension of the premium due. No
policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid.
(Italic supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement to
extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace
period provision applies.

The second is that covered by Section 78 of the Insurance Code, which provides:

SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall
not be binding until premium is actually paid.

A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, 5 wherein we ruled
that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial
payment has been made at the time of loss. We said therein, thus:
 We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly
show that the petitioners and private respondent intended subject insurance policies to be binding and effective
notwithstanding the staggered payment of the premiums. The initial insurance contract entered into in 1982 was
renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner.
Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting
the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were
not prepaid in full.

Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision:

While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of
the contract, We are not prepared to rule that the request to make installment payments duly approved by the
insurer would prevent the entire contract of insurance from going into effect despite payment and acceptance of
the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of
the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as
conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually
unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not
paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not
contrary to morals, good customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is an
understanding to allow insured to pay premiums in installments not so prescribed. At the very least, both parties
should be deemed in estoppel to question the arrangement they have voluntarily accepted.

By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth
exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This simply
means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the
expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within
the credit term.

Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term within
which to pay the premiums. That agreement is not against the law, morals, good customs, public order or public policy.
The agreement binds the parties. Article 1306 of the Civil Code provides:

ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against
Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full
awareness of Section 77. Estoppel bars it from taking refuge under said Section, since Respondent relied in good faith on
such practice. Estoppel then is the fifth exception to Section 77.

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new one is
hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a reversible error
was committed by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in toto.

No pronouncement as to cost.

SO ORDERED.

Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr. and Sandoval-
Gutierrez, JJ ., concur.
Melo, J., I join the dissents of Justice Vitug and Pardo.
Vitug, J., Please see separate opinion.
Pardo, J., I dissent. See attached.

Separate Opinions
VITUG, J .:

An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract where the rights and
obligations of the parties correlate and mutually correspond. The insurer assumes the risk of loss which an insured might
suffer in consideration of premium payments under a risk-distributing device. Such assumption of risk is a component of a
general scheme to distribute actual losses among a group of persons, bearing similar risks, who make ratable
contributions to a fund from which the losses incurred due to exposures to the peril insured against are assured and
compensated.

It is generally recognized that the business of insurance is one imbued with public interest. 1 For the general good and
mutual protection of all the parties, it is aptly subjected to regulation and control by the State by virtue of an exercise of its
police power. 2 The State may regulate in various respects the relations between the insurer and the insured, including the
internal affairs of an insurance company, without being violative of due process. 3

A requirement imposed by way of State regulation upon insurers is the maintenance of an adequate legal reserve in favor
of those claiming under their policies. 4 The law generally mandates that insurance companies should retain an amount
sufficient to guarantee the security of its policyholders in the remote future, as well as the present, and to cover any
contingencies that may arise or may be fairly anticipated. The integrity of this legal reserve is threatened and undermined
if a credit arrangement on the payment of premium were to be sanctioned. Calculations and estimations of liabilities under
the risk insured against are predicated on the basis of the payment of premiums, the vital element that establishes the
juridical relation between the insured and the insurer. By legislative fiat, any agreement to the contrary notwithstanding,
the payment of premium is a condition precedent to, and essential for, the efficaciousness of the insurance contract,
except (a) in case of life or industrial life insurance where a grace period applies, or (b) in case of a written
acknowledgment by the insurer of the receipt of premium, such as by a deposit receipt, the written acknowledgment being
conclusive evidence of the premium payment so far as to make the policy binding. 5

Section 77 of the Insurance Code provides:

"SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid, except in the
case of a life or an industrial life policy whenever the grace period provision applies."

This provision amended Section 72 of the then Insurance Act by deleting the phrase, "unless there is a clear agreement to
grant the insured credit extension of the premium due," and adding at the beginning of the second sentence the phrase,
"[n]otwithstanding any agreement to the contrary." Commenting on the new provision, Dean Hernando B. Perez states:

"Under the former rule, whenever the insured was granted credit extension of the premium due or given a period
of time to pay the premium on the policy issued, such policy was binding although premiums had not been paid
(Section 72, Insurance Act; 6 Couch 2d. 67). This rule was changed when the present provision eliminated the
portion concerning credit agreement, and added the phrase 'notwithstanding any agreement to the contrary' which
precludes the parties from stipulating that the policy is valid even if premiums are not paid. Hence, under the
present law, the policy is not valid and binding unless and until the premium is paid (Arce vs. Capital Insurance &
Surety Co., Inc., 117 SCRA 63). If the insurer wants to favor the insured by making the policy binding
notwithstanding the non-payment of premium, a mere credit agreement would not be sufficient. The remedy
would be for the insurer to acknowledge in the policy that premiums were paid although they were not, in which
case the policy becomes binding because such acknowledgment is a conclusive evidence of payment of premium
(Section 78). Thus, the Supreme Court took note that under the present law, Section 77 of the Insurance Code of
1978 has deleted the clause 'unless there is a clear agreement to grant the insured credit extension of the
premium due' (Velasco vs. Apostol, 173 SCRA 228)." 6

By weight of authority, estoppel cannot create a contract of insurance, 7 neither can it be successfully invoked to create a
primary liability, 8 nor can it give validity to what the law so proscribes as a matter of public policy. 9So essential is the
premium payment to the creation of the vinculum juris between the insured and the insurer that it would be doubtful to
have that payment validly excused even for a fortuitous event. 10

The law, however, neither requires for the establishment of the juridical tie, nor measures the strength of such tie by, any
specific amount of premium payment. A part payment of the premium, if accepted by the insurer, can thus perfect the
contract and bring the parties into an obligatory relation. 11 Such a payment puts the contract into full binding force, not
merely pro tanto, thereby entitling and obligating the parties by their agreement. Hence, in case of loss, full recovery less
the unpaid portion of the premium (by the operative act of legal compensation), can be had by the insured and,
correlatively, if no loss occurs the insurer can demand the payment of the unpaid balance of the premium. 12

In the instant case, no juridical tie appears to have been established under any of the situations hereinabove discussed.

WHEREFORE, I vote to deny the motion for reconsideration.

Melo, J ., concurs.

PARDO, J ., dissenting:

The majority resolved to grant respondent's motion for reconsideration of the Court's decision promulgated on June 15,
1999. By this somersault, petitioner must now pay respondent's claim for insurance proceeds amounting to
P18,645,000.00, exclusive of interests, plus 25% of the amount due as attorney's fees, P25,000.00 as litigation expenses,
and costs of suit, covering its Pasay City property razed by fire. What an undeserved largess! Indeed, an unjust
enrichment at the expense of petitioner; even the award of attorney's fees is bloated to 25% of the amount due.

We cannot give our concurrence. We beg to dissent. We find respondent's claim to be fraudulent:

First: Respondent Masagana surreptitiously tried to pay the overdue premiums before giving written notice to petitioner of
the occurrence of the fire that razed the subject property. This failure to give notice of the fire immediately upon its
occurrence blatantly showed the fraudulent character of its claim. The fire totally destroyed the property on June 13, 1992;
the written notice of loss was given only more than a month later, on July 14, 1992, the
day after respondent surreptitiously paid the overdue premiums. Respondent very well knew that the policy was not
renewed on time. Hence, the surreptitious attempt to pay overdue premiums. Such act revealed a reprehensible disregard
of the principle that insurance is a contract uberrima fides, the most abundant good faith. 1 Respondent is required by law
and by express terms of the policy to give immediate written notice of loss. This must be complied with in the utmost good
faith.

Another badge of fraud is that respondent deviated from its previous practice of coursing its premium payments through
its brokers. This time, respondent Masagana went directly to petitioner and paid through its cashier with manager's
checks. Naturally, the cashier routinely accepted the premium payment because he had no written notice of the
occurrence of the fire. Such fact was concealed by the insured and not revealed to petitioner at the time of payment.

Indeed, if as contended by respondent, there was a clear agreement regarding the grant of a credit extension, respondent
would have given immediate written notice of the fire that razed the property. This clearly showed respondent's attempt
to deceive petitioner into believing that the subject property still existed and the risk insured against had not happened.

Second: The claim for insurance benefits must fall as well because the failure to give timely written notice of the fire was a
material misrepresentation affecting the risk insured against.

Section 1 of the policy provides:

"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 false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the insured or any one acting on his behalf to obtain any benefit under
the policy." 2

In the factual milieu, the purported practice of giving 60 to 90-day credit extension for payment of premiums was a
disputed fact. But it is a given fact that the written notice of loss was not immediately given. It was given only the day after
the attempt to pay the delayed premiums.

At any rate, the purported credit was a mere verbal understanding of the respondent Masagana of an agreement between
the insurance company (petitioner) and the insurance brokers of respondent Masagana. The president of respondent
Masagana admitted that the insurance policy did not contain any proviso pertaining to the grant of credit within which to
pay the premiums. Respondent Masagana merely deduced that a credit agreement existed based on previous years'
practice that they had of delayed payments accepted by the insurer as reflected on the face of the receipts issued by
UCPB evidencing the payment of premiums.

"Q: You also claim that you have 60 to 90 days credit arrangement with UCPB; is that correct?,

A: Yes, ma'am.

Q: I'm showing to you the policy which had previously been marked in evidence as Exhibit "A", "B", "C", "D",
& "E"' for the plaintiff and likewise, marked as exhibits "1", "2", "3", "4", & "5" for the defendant. Could you show
us, Mr. witness where in these policies does it show that you are actually given 60 to 90 days credit arrangement
with UCPB?

A: Well, it's verbal with your company, and Ansons Insurance Brokerage. It is not written.

Q: It is not written in the policy?

A: Yes.

Q: You merely have verbal agreement with Ansons Insurance Brokerage?

A: Yes; as shown in our mode of payment; in our vouchers and the receipts issued by the insurance
company." 3

It must be stressed that a verbal understanding of respondent Masagana cannot amend an insurance policy. In insurance
practice, amendments or even corrections to a policy are done by written endorsements or tickets appended to the policy.

However, the date on the face of the receipts does not refer to the date of actual remittance by respondent Masagana to
UCPB of the premium payments, but merely to the date of remittance to UCPB of the premium payments by the insurance
brokers of respondent Masagana.

"Q: You also identified several receipts; here; official receipts issued by UCPB General Insurance Company, Inc.,
which has been previously marked as Exhibits "F", "G", "H", "I", and "J" for the plaintiff; is that correct?

A: Yes.

Q: And, you would agree with me that the dates indicated in these particular Official Receipts (O. R.), merely
indicated the dates when UCPB General Insurance Company issued these receipts? Do you admit that, Mr.
Witness?

A: That was written in the receipts.

Q: But, you would also agree that this did not necessarily show the dates when you actually forwarded the
checks to your broker, Anson Insurance Agency, for payment to UCPB General Insurance Co. Inc., isn't it?

A: The actual support of this would be the cash voucher of the company, Masagana Telamart Inc., the date
when they picked up the check from the company.

Q: And are these cash voucher with you?

A: I don't know if it is in the folder or in our folder, now.

Q: So, you are not certain, whether or not you actually delivered the checks covered by these Official
Receipts to UCPB General Insurance, on the dates indicated?

A: I would suppose it is few days earlier, when they picked up the payment in our office." 4

Hence, what has been established was the grant of credit to the insurance brokers, not to the assured. The insurance
company recognized the payment to the insurance brokers as payment to itself, though the actual remittance of the
premium payments to the principal might be made later. Once payment of premiums is made to the insurance broker, the
assured would be covered by a valid and binding insurance policy, provided the loss occurred after payment to the broker
has been made.

Assuming arguendo that the 60 to 90 day-credit-term has been agreed between the parties, respondent could not still
invoke estoppel to back up its claim. "Estoppel is unavailing in this case," 5 thus spoke the Supreme Court through the pen
of Justice Hilario G. Davide, Jr., now Chief Justice. Mutatis mutandi, he may well be speaking of this case. He added that
"[E]stoppel can not give validity to an act that is prohibited by law or against public policy." 6 The actual payment of
premiums is a condition precedent to the validity of an insurance contract other than life insurance policy. 7 Any
agreement to the contrary is void as against the law and public policy. Section 77 of the Insurance Code provides:

"An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured
against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance
company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or
an industrial life policy whenever the grace period provision applies." [Emphasis supplied]

An incisive reading of the afore-cited provision would show that the emphasis was on the conclusiveness of the
acknowledgment in the policy of the receipt of premium, notwithstanding the absence of actual payment of premium,
because of estoppel. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon. "A party may not go back on
his own acts and representations to the prejudice of the other party who relied upon them." 8

This is the only case of estoppel which the law considers a valid exception to the mandatory requirement of pre-payment
of premium. The law recognized that the contracting parties, in entering a contract of insurance, are free to enter into
stipulations and make personal undertakings so long as they are not contrary to law or public policy. However, the law is
clear in providing that the acknowledgment must be contained in the policy or contract of insurance. Anything short of it
would not fall under the exception so provided in Section 78.

Hence, because of respondent's failure to pay the premiums prior to the occurrence of the fire insured against, no valid
and binding insurance policy was created to cover the loss and destruction of the property. The fire took place on June 13,
1992, twenty-two (22) days after the expiration of the policy of fire insurance. The tender of payment of premiums was
made only thirty (30) days after the occurrence of the fire, or on July 13, 1992. Respondent Masagana did not give
immediate notice to petitioner of the fire as it occurred as required in the insurance policy. Respondent Masagana tried to
tender payment of the premiums overdue surreptitiously before giving notice of the occurrence of the fire. More
importantly, the parties themselves expressly stipulated that the insurance policy would not be binding on the insurer
unless the premiums thereon had been paid in full. Section 2 of the policy provides:

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

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

"No payment in respect of any premium shall be deemed to be payment to the Company unless a printed form of
receipt for the same signed by an Official or duly appointed Agent of the Company shall have been given to the
Insured, except when such printed receipt is not available at the time of payment and the company or its
representative accepts the premium in which case a temporary receipt other than the printed form may be issued
in lieu thereof. "Except only on those specific cases where corresponding rules and regulations which now we are
or may hereafter be in force provide for the payment of the stipulated premiums in periodic installments at fixed
percentages, it is hereby declared, agreed and warranted that this policy shall be deemed effective valid and
binding upon the Company when the premiums thereof have actually been paid in full and duly acknowledged in a
receipt signed by any authorized official or representative/agent of the Company in such manner as provided
herein." 9[emphasis supplied]

Thus, the insurance policy, including any renewal thereof or any endorsements thereon shall not come in force until the
premiums have been fully paid and duly received by the insurance Company. No payment in respect of any premiums
shall be deemed to be payment to the Insurance Company unless a printed form of receipt for the same signed by an
Official or duly appointed Agent of the Company shall be given to the insured.
The case of Tibay v. Court of Appeals 10 is in point. The issue raised therein was: "May a fire insurance policy be valid,
binding and enforceable upon mere partial payment of premium?" In the said case, Fortune Life and General Insurance
Co., Inc. issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo, on a two-storey
residential building located at 5855 Zobel Street, Makati City, together with all the personal effects therein, The insurance
was for P600,000.00, covering the period from 23 January 1987 to 23 January 1988. On 23 January 1987, of the total
premium of P2,983.50, Violeta Tibay only paid P600.00, thus leaving a substantial balance unpaid. On March 8, 1987, the
insured building was completely destroyed by fire. Two days later, or on 10 March 1987, Violeta Tibay paid the balance of
the premium. On the same day, she filed with Fortune a claim for the proceeds of the fire insurance policy.

In denying the claim of insurance, the Court ruled that "by express agreement of the parties, no vinculum juris or bond of
law was to be established until full payment was effected prior to the occurrence of the risk insured against. 11 As
expressly stipulated in the contract, full payment must be made before the risk occurs for the policy to be considered
effective and in force. "No vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever
resulted from the fractional payment of premium." 12

The majority cited the case of Makati Tuscany Condominium Corp. vs. Court of Appeals 13 to support the contention that
the insurance policies subject of the instant case were valid and effective. However, the factual situation in that case was
different from the case at bar.

In Tuscany, the Court held that the insurance policies were valid and binding because there was partial payment of the
premiums and a clear understanding between the parties that they had intended the insurance policies to be binding and
effective notwithstanding the staggered payment of the premiums. On the basis of equity and fairness, the Court ruled that
there was a perfected contract of insurance upon the partial payment of the premiums, notwithstanding the provisions of
Section 77 to the contrary. The Court would not allow the insurer to continue collecting and accepting the premiums,
although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full.

There is no dispute that like in any other contract, the parties to a contract of insurance enjoy the freedom to stipulate on
the terms and conditions that will govern their agreement so long as they are not contrary to law, morals, good customs,
public order or public policy. However, the agreement containing such terms and conditions must be clear and definite.

In the case at bar, there was no clear and definite agreement between petitioner and respondent on the grant of a credit
extension; neither was there partial payment of premiums for petitioner to invoke the exceptional doctrine in Tuscany.

Hence, the circumstances in the above cited case are totally different from the case at bar, and consequently, not
applicable herein.

Insurance is an aleatory contract whereby one undertakes for a consideration to indemnify another against loss, damage
or liability arising from an unknown or contingent event. 14 The consideration is the premium, which must be paid at the
time and in the manner specified in the policy, and if not so paid, the policy will lapse and be forfeited by its own terms. 15

With regard to the contention that the absence of notice of non-renewal of the policy resulted to the automatic renewal of
the insurance policy, we find the contention untenable. As above discussed, the law provides that only upon payment of
the insurance premium will the insurance policy bind the insurer to the peril insured against and hold it liable under the
policy in case of loss.

Even in the absence of notice of non-renewal, the assured would be bound by the law that a non life insurance policy
takes effect only on the date payment of the premium was made.

Verily, it is elemental law that the payment of premium is a mandatory requisite to make the policy of insurance effective.
If the premium is not paid in the manner prescribed in the policy as intended by the parties, the policy is void and
ineffective. 16

Basically a contract of indemnity, an insurance contract is the law between the parties. 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. 17

IN VIEW WHEREOF, I vote to DENY the respondent's motion for reconsideration, for lack of merit.

Melo, Puno and Quisumbing, JJ ., concur.

__

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 105562 September 27, 1993

LUZ PINEDA, MARILOU MONTENEGRO, VIRGINIA ALARCON, DINA LORENA AYO, CELIA CALUMBAG and
LUCIA LONTOK, petitioners,
vs.
HON. COURT OF APPEALS and THE INSULAR LIFE ASSURANCE COMPANY, LIMITED, respondents.

Mariano V. Ampil, Jr. for petitioners.

Ramon S. Caguiao for private respondent.

DAVIDE, JR., J.:

This is an appeal by certiorari to review and set aside the Decision of the public respondent Court of Appeals in CA-G.R.
SP No. 229501 and its Resolution denying the petitioners' motion for reconsideration. 2 The challenged decision modified
the decision of the Insurance Commission in IC Case
No. RD-058. 3

The petitioners were the complainants in IC Case No. RD-058, an administrative complaint against private respondent
Insular Life Assurance Company, Ltd. (hereinafter Insular Life), which was filed with the Insurance Commission on 20
September 1989. 4 They prayed therein that after due proceedings, Insular Life "be ordered to pay the claimants their
insurance claims" and that "proper sanctions/penalties be imposed on" it "for its deliberate, feckless violation of its
contractual obligations to the complainants, and of the Insurance Code." 5Insular Life's motion to dismiss the complaint on
the ground that "the claims of complainants are all respectively beyond the jurisdiction of the Insurance Commission as
provided in Section 416 of the Insurance Code,"6 having been denied in the Order of 14 November 1989, 7 it filed its
answer on 5 December 1989. 8 Thereafter, hearings were conducted on various dates.

On 20 June 1990, the Commission rendered its decision9 in favor of the complainants, the dispositive portion of which
reads as follows:

WHEREFORE, this Commission merely orders the respondent company to:

a) Pay a fine of FIVE HUNDRED PESOS (P500.00) a day from the receipt of a copy of this Decision until
actual payment thereof;

b) Pay and settle the claims of DINA AYO and LUCIA LONTOK, for P50,000.00 and P40,000.00,
respectively;

c) Notify henceforth it should notify individual beneficiaries designated under any Group Policy, in the
event of the death of insured(s), where the corresponding claims are filed by the Policyholder;

d) Show cause within ten days why its other responsible officers who have handled this case should not
be subjected to disciplinary and other administrative sanctions for deliberately releasing to Capt. Nuval
the check intended for spouses ALARCON, in the absence of any Special Power of Attorney for that
matter, and for negligence with respect to the release of the other five checks.
 SO ORDERED. 10

In holding for the petitioners, the Insurance Commission made the following findings and conclusions:

After taking into consideration the evidences [sic], testimonial and documentary for the complainants and
the respondent, the Commission finds that; First: The respondent erred in appreciating that the powers of
attorney executed by five (5) of the several beneficiaries convey absolute authority to Capt. Nuval, to
demand, receive, receipt and take delivery of insurance proceeds from respondent Insular Life. A cursory
reading of the questioned powers of authority would disclosed [sic] that they do not contain in unequivocal
and clear terms authority to Capt. Nuval to obtain, receive, receipt from respondent company insurance
proceeds arising from the death of the seaman-insured. On the contrary, the said powers of attorney are
couched in terms which could easily arouse suspicion of an ordinary
man. . . .

Second: The testimony of the complainants' rebuttal witness,

Mrs. Trinidad Alarcon, who declared in no uncertain terms that neither she nor her husband, executed a
special power of attorney in favor of Captain Rosendo Nuval, authorizing him to claim, receive, receipt
and take delivery of any insurance proceeds from Insular Life arising out of the death of their
insured/seaman son, is not convincingly refuted.

Third: Respondent Insular Life did not observe Section 180 of the Insurance Code, when it issued or
released two checks in the amount of P150,000.00 for the three minor children (P50,000.00 each) of
complainant, Dina Ayo and another check of P40,000.00 for minor beneficiary Marissa Lontok, daughter
of another complainant Lucia Lontok, there being no showing of any court authorization presented or the
requisite bond posted.

Section 180 is quotes [sic] partly as follows:

. . . In the absence of a judicial guardian, the father, or in the latter's absence or

incapacity, the mother of any minor, who is an insured or a beneficiary under a contract
of life, health or accident insurance, may exercise, in behalf of said minor, any right,
under the policy, without necessity of court authority or the giving of a bond where the
interest of the minor in the particular act involved does not exceed twenty thousand
pesos . . . . 11

Insular Life appealed the decision to the public respondent which docketed the case as CA-G.R. SP No. 22950. The
appeal urged the appellate court to reverse the decision because the Insurance Commission (a) had no jurisdiction over
the case considering that the claims exceeded P100,000.00,
(b) erred in holding that the powers of attorney relied upon by Insular Life were insufficient to convey absolute authority to
Capt. Nuval to demand, receive and take delivery of the insurance proceeds pertaining to the petitioners, (c) erred in not
giving credit to the version of Insular Life that the power of attorney supposed to have been executed in favor of the
Alarcons was missing, and
(d) erred in holding that Insular Life was liable for violating Section 180 of the Insurance Code for having released to the
surviving mothers the insurance proceeds pertaining to the beneficiaries who were still minors despite the failure of the
former to obtain a court authorization or to post a bond.

On 10 October 1991, the public respondent rendered a decision, 12 the decretal portion of which reads:

WHEREFORE, the decision appealed from is modified by eliminating therefrom the award to Dina Ayo
and Lucia Lontok in the amounts of P50,000.00 and P40,000.00, respectively. 13

It found the following facts to have been duly established:

It appears that on 23 September 1983, Prime Marine Services, Inc. (PMSI, for brevity), a
crewing/manning outfit, procured Group PoIicy
No. G-004694 from respondent-appellant Insular Life Assurance Co., Ltd. to provide life insurance
coverage to its sea-based employees enrolled under the plan. On 17 February 1986, during the effectivity
of the policy, six covered employees of the PMSI perished at sea when their vessel, M/V Nemos, a Greek
cargo vessel, sunk somewhere in El Jadida, Morocco. They were survived by complainants-appellees,
the beneficiaries under the policy.
 Following the tragic demise of their loved ones, complainants-appellees sought to claim death benefits
due them and, for this purpose, they approached the President and General Manager of PMSI, Capt.
Roberto Nuval. The latter evinced willingness to assist complainants-appellees to recover Overseas
Workers Welfare Administration (OWWA) benefits from the POEA and to work for the increase of their
PANDIMAN and other benefits arising from the deaths of their husbands/sons. They were thus made to
execute, with the exception of the spouses Alarcon, special powers of attorney authorizing Capt. Nuval to,
among others, "follow up, ask, demand, collect and receive" for their benefit indemnities of sums of
money due them relative to the sinking of M/V Nemos. By virtue of these written powers of attorney,
complainants-appellees were able to receive their respective death benefits. Unknown to them, however,
the PMSI, in its capacity as employer and policyholder of the life insurance of its deceased workers, filed
with respondent-appellant formal claims for and in behalf of the beneficiaries, through its President, Capt.
Nuval. Among the documents submitted by the latter for the processing of the claims were five special
powers of attorney executed by complainants-appellees. On the basis of these and other documents duly
submitted, respondent-appellant drew against its account with the Bank of the Philippine Islands on 27
May 1986 six (6) checks, four for P200,00.00 each, one for P50,000.00 and another for P40,00.00,
payable to the order of complainants-appellees. These checks were released to the treasurer of PMSI
upon instructions of
Capt. Nuval over the phone to Mr. Mariano Urbano, Assistant Department Manager for Group
Administration Department of respondent-appellant. Capt. Nuval, upon receipt of these checks from the
treasurer, who happened to be his son-in-law, endorsed and deposited them in his account with the
Commercial Bank of Manila, now Boston Bank.

On 3 July 1989, after complainants-appellees learned that they were entitled, as beneficiaries, to life
insurance benefits under a group policy with respondent-appellant, they sought to recover these benefits
from Insular Life but the latter denied their claim on the ground that the liability to complainants-appellees
was already extinguished upon delivery to and receipt by PMSI of the six (6) checks issued in their
names.14

On the basis thereof, the public respondent held that the Insurance Commission had jurisdiction over the case on the
ground that although some of the claims exceed P100,000.00, the petitioners had asked for administrative sanctions
against Insular Life which are within the Commission's jurisdiction to grant; hence, "there was merely a misjoinder of
causes of action . . . and, like misjoinder of parties, it is not a ground for the dismissal of the action as it does not affect the
other reliefs prayed for." 15 It also rejected Insular Life's claim that the Alarcons had submitted a special power of attorney
which they (Insular Life) later misplaced.

On the other hand, the public respondent ruled that the powers of attorney, Exhibits "1" to "5," relied upon by Insular Life
were sufficient to authorize Capt. Nuval to receive the proceeds of the insurance pertaining to the beneficiaries. It stated:

When the officers of respondent-appellant read these written powers, they must have assumed Capt.
Nuval indeed had authority to collect the insurance proceeds in behalf of the beneficiaries who duly
affixed their signatures therein. The written power is specific enough to define the authority of the agent to
collect any sum of money pertaining to the sinking of the fatal vessel. Respondent-appellant interpreted
this power to include the collection of insurance proceeds in behalf of the beneficiaries concerned. We
believe this is a reasonable interpretation even by an officer of respondent-appellant unschooled in the
law. Had respondent appellant, consulted its legal department it would not have received a contrary view.
There is nothing in the law which mandates a specific or special power of attorney to be executed to
collect insurance proceeds. Such authority is not included in the enumeration of Art. 1878 of the New Civil
Code. Neither do we perceive collection of insurance claims as an act of strict dominion as to require a
special power of attorney. Moreover, respondent-appellant had no reason to doubt Capt. Nuval. Not only
was he armed with a seemingly genuine authorization, he also appeared to be the proper person to deal
with respondent-appellant being the President and General Manager of the PMSI, the policyholder with
whom respondent-appellant always dealt. The fact that there was a verbal agreement between
complainants-appellees and Capt. Nuval limiting the authority of the latter to claiming specified death
benefits cannot prejudice the insurance company which relied on the terms of the powers of attorney
which on their face do not disclose such limitation. Under the circumstances, it appearing that
complainants-appellees have failed to point to a positive provision of law or stipulation in the policy
requiring a specific power of attorney to be presented, respondents-appellant's reliance on the written
powers was in order and it cannot be penalized for such an act. 16

Insofar as the minor children of Dina Ayo and Lucia Lontok were concerned, it ruled that the requirement in Section 180 of
the Insurance Code which provides in part that:
 In the absence of a judicial guardian, the father, or in the latter's absence or incapacity, the mother, of any
minor, who is an insured or a beneficiary under a contract of life, health or accident insurance, may
exercise, in behalf of said minor, any right under the policy, without necessity of court authority or the
giving of a bond, where the interest of the minor in the particular act involved does not exceed twenty
thousand pesos. Such a right, may include, but shall not be limited to, obtaining a policy loan,
surrendering the policy, receiving the proceeds of the policy, and giving the minor's consent to any
transaction on the policy.

has been amended by the Family Code 17 which grants the father and mother joint legal guardianship over the
property of their unemancipated common child without the necessity of a court appointment; however, when the
market value of the property or the annual income of the child exceeds P50,000.00, the parent concerned shall be
required to put up a bond in such amount as the court may determine.

Hence, this petition for review on certiorari which we gave due course after the private respondent had filed the required
comment thereon and the petitioners their reply to the comment.

We rule for the petitioners.

We have carefully examined the specific powers of attorney, Exhibits "1" to "5," which were executed by petitioners Luz
Pineda, Lucia B. Lontok, Dina Ayo, Celia Calumag, and Marilyn Montenegro, respectively, on 14 May 198618 and
uniformly granted to Capt. Rosendo Nuval the following powers:

To follow-up, ask, demand, collect and receipt for my benefit indemnities or sum of money due me
relative to the sinking of M.V. NEMOS in the vicinity of El Jadida, Casablanca, Morocco on the evening of
February 17, 1986; and

To sign receipts, documents, pertinent waivers of indemnities or other writings of whatsoever nature with
any and all third persons, concerns and entities, upon terms and conditions acceptable to my said
attorney.

We agree with the Insurance Commission that the special powers of attorney "do not contain in unequivocal and clear
terms authority to Capt. Nuval to obtain, receive, receipt from respondent company insurance proceeds arising from the
death of the seaman-insured. On the contrary, the said powers of attorney are couched in terms which could easily
arouse suspicion of an ordinary man." 19 The holding of the public respondent to the contrary is principally premised on its
opinion that:

[t]here is nothing in the law which mandates a specific or special power of attorney to be executed to
collect insurance proceeds. Such authority is not included in the enumeration of art. 1878 of the New Civil
Code. Neither do we perceive collection of insurance claims as an act of strict dominion as to require a
special power of attorney.

If this be so, then they could not have been meant to be a general power of attorney since Exhibits "1" to "5"
are special powers of attorney. The execution by the principals of special powers of attorney, which clearly
appeared to be in prepared forms and only had to be filled up with their names, residences, dates of execution,
dates of acknowledgment and others, excludes any intent to grant a general power of attorney or to constitute a
universal agency. Being special powers of attorney, they must be strictly construed.

Certainly, it would be highly imprudent to read into the special powers of attorney in question the power to collect and
receive the insurance proceeds due the petitioners from Group Policy No. G-004694. Insular Life knew that a power of
attorney in favor of Capt. Nuval for the collection and receipt of such proceeds was a deviation from its practice with
respect to group policies. Such practice was testified to by Mr. Marciano Urbano, Insular Life's Assistant Manager of the
Group Administrative Department, thus:

ATTY. CAGUIOA:

Can you explain to us why in this case, the claim was filed by a certain Capt. Noval [sic]?

WITNESS:
 a The practice of our company in claim pertaining to group insurance, the policyholder is
the one who files the claim for the beneficiaries of the deceased. At that time, Capt. Noval
[sic] is the President and General Manager of Prime Marine.

q What is the reason why policyholders are the ones who file the claim and not the
designated beneficiaries of the employees of the policyholders?

a Yes because group insurance is normally taken by the employer as an employee-

benefit program and as such, the benefit should be awarded by the policyholder to make
it appear that the benefit really is given by the employer. 20

On cross-examination, Urbano further elaborated that even payments, among other things, are coursed through the
policyholder:

q What is the corporate concept of group insurance insofar as Insular Life is concerned?

WITNESS:

a Group insurance is a contract where a group of individuals are covered under one
master contract. The individual underwriting characteristics of each individual is not
considered in the determination of whether the individual is insurable or not. The contract
is between the policyholder and the insurance company. In our case, it is Prime Marine
and Insular Life. We do not have contractual obligations with the individual employees; it
is between Prime Marine and Insular Life.

q And so it is part of that concept that all inquiries, follow-up, payment of claims, premium
billings, etc. should always be coursed thru the policyholder?

a Yes that is our practice.

q And when you say claim payments should always be coursed thru the policyholder, do
you require a power of attorney to be presented by the policyholder or not?

a Not necessarily.

q In other words, under a group insurance policy like the one in this case, Insular Life
could pay the claims to the policyholder himself even without the presentation of any
power of attorney from the designated beneficiaries?

xxx xxx xxx

WITNESS:

a No. Sir.

ATTY. AMPIL:

q Why? Is this case, the present case different from the cases which you answered that
no power of attorney is necessary in claims payments?

WITNESS:

a We did not pay Prime Marine; we paid the beneficiaries.

q Will you now tell the Honorable Commission why you did not pay Prime Marine and
instead paid the beneficiaries, the designated beneficiaries?

xxx xxx xxx

 ATTY. AMPIL:

I will rephrase the question.

q Will you tell the Commission what circumstances led you to pay the designated
beneficiaries, the complainants in this case, instead of the policyholder when as you
answered a while ago, it is your practice in group insurance that claims payments, etc.,
are coursed thru the policyholder?

WITNESS:

a It is coursed but, it is not paid to the policyholder.

q And so in this case, you gave the checks to the policyholder only coursing them thru
said policyholder?

a That is right, Sir.

q Not directly to the designated beneficiaries?

a Yes, Sir. 21

This practice is usual in the group insurance business and is consistent with the jurisprudence thereon in the State of
California from whose laws our Insurance Code has been mainly patterned which holds that the employer-
policyholder is the agent of the insurer.

Group insurance is a comparatively new form of insurance. In the United States, the first modern group insurance policies
appear to have been issued in 1911 by the Equitable Life Assurance Society. 22 Group insurance is essentially a single
insurance contract that provides coverage for many individuals. In its original and most common form, group insurance
provides life or health insurance coverage for the employees of one employer.

The coverage terms for group insurance are usually stated in a master agreement or policy that is issued by the insurer to
a representative of the group or to an administrator of the insurance program, such as an employer. 23The employer acts
as a functionary in the collection and payment of premiums and in performing related duties. Likewise falling within the
ambit of administration of a group policy is the disbursement of insurance payments by the employer to the
employees. 24 Most policies, such as the one in this case, require an employee to pay a portion of the premium, which the
employer deducts from wages while the remainder is paid by the employer. This is known as a contributory plan as
compared to a non-contributory plan where the premiums are solely paid by the employer.

Although the employer may be the titular or named insured, the insurance is actually related to the life and health of the
employee. Indeed, the employee is in the position of a real party to the master policy, and even in a non-contributory plan,
the payment by the employer of the entire premium is a part of the total compensation paid for the services of the
employee. 25 Put differently, the labor of the employees is the true source of the benefits, which are a form of additional
compensation to them.

It has been stated that every problem concerning group insurance presented to a court should be approached with the
purpose of giving to it every legitimate opportunity of becoming a social agency of real consequence considering that the
primary aim is to provide the employer with a means of procuring insurance protection for his employees and their families
at the lowest possible cost, and in so doing, the employer creates goodwill with his employees, enables the employees to
carry a larger amount of insurance than they could otherwise, and helps to attract and hold a permanent class of
employees. 26

In Elfstrom vs. New York Life Insurance Company, 27 the California Supreme Court explicitly ruled that in group insurance
policies, the employer is the agent of the insurer. Thus:

We are convinced that the employer is the agent of the insurer in performing the duties of administering
group insurance policies. It cannot be said that the employer acts entirely for its own benefit or for the
benefit of its employees in undertaking administrative functions. While a reduced premium may result if
the employer relieves the insurer of these tasks, and this, of course, is advantageous to both the
 employer and the employees, the insurer also enjoys significant advantages from the arrangement. The
reduction in the premium which results from employer-administration permits the insurer to realize a
larger volume of sales, and at the same time the insurer's own administrative costs are markedly reduced.

xxx xxx xxx

The most persuasive rationale for adopting the view that the employer acts as the agent of the insurer,
however, is that the employee has no knowledge of or control over the employer's actions in handling the
policy or its administration. An agency relationship is based upon consent by one person that another
shall act in his behalf and be subject to his control. It is clear from the evidence regarding procedural
techniques here that the insurer-employer relationship meets this agency test with regard to the
administration of the policy, whereas that between the employer and its employees fails to reflect true
agency. The insurer directs the performance of the employer's administrative acts, and if these duties are
not undertaken properly the insurer is in a position to exercise more constricted control over the
employer's conduct.

In Neider vs. Continental Assurance Company, 28 which was cited in Elfstrom, it was held that:

[t]he employer owes to the employee the duty of good faith and due care in attending to the policy, and
that the employer should make clear to the employee anything required of him to keep the policy in effect,
and the time that the obligations are due. In its position as administrator of the policy, we feel also that the
employer should be considered as the agent of the insurer, and any omission of duty to the employee in
its administration should be attributable to the insurer.

The ruling in Elfstrom was subsequently reiterated in the cases of Bass vs. John Hancock Mutual Life Insurance
Co. 29 and Metropolitan Life Insurance Co. vs. State Board of Equalization.30

In the light of the above disquisitions and after an examination of the facts of this case, we hold that PMSI, through its
President and General Manager, Capt. Nuval, acted as the agent of Insular Life. The latter is thus bound by the
misconduct of its agent.

Insular Life, however, likewise recognized Capt. Nuval as the attorney-in-fact of the petitioners. Unfortunately, through its
official, Mr. Urbano, it acted imprudently and negligently in the premises by relying without question on the special power
of attorney. In Strong vs. Repide, 31 this Court ruled that it is among the established principles in the civil law of Europe as
well as the common law of American that third persons deal with agents at their peril and are bound to inquire as to the
extent of the power of the agent with whom they contract. And in Harry E. Keller Electric Co. vs. Rodriguez, 32 this Court,
quoting Mechem on Agency, 33 stated that:

The person dealing with an agent must also act with ordinary prudence and reasonable diligence.
Obviously, if he knows or has good reason to believe that the agent is exceeding his authority, he cannot
claim protection. So if the suggestions of probable limitations be of such a clear and reasonable quality,
or if the character assumed by the agent is of such a suspicious or unreasonable nature, or if the
authority which he seeks to exercise is of such an unusual or improbable character, as would suffice to
put an ordinarily prudent man upon his guard, the party dealing with him may not shut his eyes to the real
state of the case, but should either refuse to deal with the agent at all, or should ascertain from the
principal the true condition of affairs. (emphasis supplied)

Even granting for the sake of argument that the special powers of attorney were in due form, Insular Life was grossly
negligent in delivering the checks, drawn in favor of the petitioners, to a party who is not the agent mentioned in the
special power of attorney.

Nor can we agree with the opinion of the public respondent that since the shares of the minors in the insurance proceeds
are less than P50,000.00, then under Article 225 of the Family Code their mothers could receive such shares without
need of either court appointments as guardian or the posting of a bond. It is of the view that said Article had repealed the
third paragraph of Section 180 of the Insurance Code. 34 The pertinent portion of Article 225 of the Family Code reads as
follows:

Art. 225. The father and the mother shall jointly exercise legal guardianship over the property of their
unemancipated common child without the necessity of a court appointment. In case of disagreement, the
father's decision shall prevail, unless there is judicial order to the contrary.
 Where the market value of the property or the annual income of the child exceeds P50,000, the parent
concerned shall be required to furnish a bond in such amount as the court may determine, but not less
than ten per centum (10%) of the value of the property or annual income, to guarantee the performance
of the obligations prescribed for general guardians.

It is clear from the said Article that regardless of the value of the unemancipated common child's property, the father and
mother ipso jure become the legal guardian of the child's property. However, if the market value of the property or the
annual income of the child exceeds P50,000.00, a bond has to be posted by the parents concerned to guarantee the
performance of the obligations of a general guardian.

It must, however, be noted that the second paragraph of Article 225 of the Family Code speaks of the "market value of the
property or the annual income of the child," which means, therefore, the aggregate of the child's property or annual
income; if this exceeds P50,000.00, a bond is required. There is no evidence that the share of each of the minors in the
proceeds of the group policy in question is the minor's only property. Without such evidence, it would not be safe to
conclude that, indeed, that is his only property.

WHEREFORE, the instant petition is GRANTED. The Decision of

10 October 1991 and the Resolution of 19 May 1992 of the public respondent in CA-G.R. SP No. 22950 are SET ASIDE
and the Decision of the Insurance Commission in IC Case No. RD-058 is REINSTATED.

Costs against the private respondent.

SO ORDERED.

Cruz, Bellosillo and Quiason, JJ., concur.

Grio-Aquino, J., is on leave.

__

G.R. No. 132607 May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY, INC., respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court seeking a reversal of the decision
of the Court of Appeal1 which affirmed the decision of the trial court of origin finding the petitioner herein, Cebu Shipyard
and Engineering Works, Inc. (CSEW) negligent and liable for damages to the private respondent, William Lines, Inc., and
to the insurer, Prudential Guarantee Assurance Company, Inc.

The antecedent facts that matter are as follows:

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation engaged in the business of dry-docking
and repairing of marine vessels while the private respondent, Prudential Guarantee and Assurance, Inc. (Prudential), also
a domestic corporation is in the non-life insurance business.

William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V Manila City, a luxury passenger-cargo
vessel, which caught fire and sank on February 16, 1991. At the time of the unfortunate occurrence sued upon, subject
vessel was insured with Prudential for P45,000,000.00 pesos for hull and machinery. The Hull Policy included an
"Additional Perils (INCHMAREE)" Clause covering loss of or damage to the vessel through the negligence of, among
others, ship repairmen. The Policy provided as follows:
 Subject to the conditions of this Policy, this insurance also covers loss of or damage to Vessel directly
caused by the following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an
Assured hereunder.

xxx xxx xxx

provided such loss or damage has not resulted from want of due diligence by the Assured, the Owners or
Managers of the Vessel, of any of them Masters, Officers, Crew or Pilots are not to be considered Owners
within the meaning of this Clause should they hold shares in the Vessel. 2

Petitioner CSEW was also insured by Prudential for third party liability under a Shiprepairer's Legal Liability Insurance
Policy. The policy was for P10 million only, under the limited liability clause, to wit:

7. Limit of Liability

The limit of liability under this insurance, in respect of any one accident or series of accidents, arising out
of one occurrence, shall be [P10 million], including liability for costs and expense which are either:

(a) incurred with the written consent of the underwriters hereon, or

(b) awarded against the Assured.3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the Cebu Shipyard in Lapulapu City for
annual dry-docking and repair.

On February 6, 1991, an arrival conference was held between representatives of William Lines, Inc. and CSEW to discuss
the work to be undertaken on the M/V Manila City.

The contracts, denominated as Work Orders, were signed thereafter, with the following stipulations:

10. The Contractor shall replace at its own work and at its own cost any work or material which can be
shown to be defective and which is communicated in writing within one (1) month of redelivery of the
vessel or if the vessel was not in the Contractor's Possession, the withdrawal of the Contractor's
workmen, or at its option to pay a sum equal to the cost of such replacement at its own works. These
conditions shall apply to any such replacements.

11. Save as provided in Clause 10, the Contractor shall not be under any liability to the Customer either in
contract or for delict or quasi-delict or otherwise except for negligence and such liability shall itself be
subject to the following overriding limitations and exceptions, namely:

(a) The total liability of the Contractor to the Customer (over and above the liability to
replace under Clause 10) or of any sub-contractor shall be limited in respect of any defect
or event (and a series of accidents arising out of the same defect or event shall constitute
one defect or event) to the sum of Pesos Philippine Currency One Million only.

(b) In no circumstance whatsoever shall the liability of the Contractor or any Sub-
Contractor include any sum in respect of loss of profit or loss of use of the vessel or
damages consequential on such loss of use

xxx xxx xxx

20. The insurance on the vessel should be maintained by the customer and/or owner of the vessel during
the period the contract is in effect.4
While the M/V Manila City was undergoing dry-docking and repairs within the premises of CSEW, the master, officers and
crew of M/V Manila City stayed in the vessel using their cabins as living quarters. Other employees hired by William Lines
to do repairs and maintenance work on the vessel were also present during the dry-docking.

On February 16, 1991, after subject vessel was transferred to the docking quay, it caught fire and sank, resulting to its
eventual total loss.

On February 21, 1991, William Lines, Inc. filed a complaint for damages against CSEW, alleging that the fire which broke
out in M/V Manila City was caused by CSEW's negligence and lack of care.

On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-plaintiff, after the latter had paid William
Lines, Inc. the value of the hull and machinery insurance on the M/V Manila City. As a result of such payment Prudential
was subrogated to the claim of P45 million, representing the value of the said insurance it paid.

On June 10, 1994, the trial court a quo came out with a judgment against CSEW, disposing as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendant, ordering
the latter.

1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the subrogee, the amount of Forty-five
Million (P45 million) Pesos, with interest at the legal rate until full payment is made.

2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six Million Seven Hundred Fifteen
Thousand (P56,715,000.00) Pesos representing loss of income of M/V MANILA CITY, with interest at the
legal rate until full payment is made.

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million (P11 million) as payment, in
addition to what it received from the insurance company to fully cover the injury or loss, in order to
replace the M/V MANILA CITY, with interest at the legal rate until full payment is made;

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred Twenty-Seven Thousand Thirty-nine
(P927,039.00) Pesos for the loss of fuel and lub (sic) oil on board the vessel when she was completely
gutted by fire at defendant, Cebu Shipyard's quay, with interest at the legal rate until full payment is
made;

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million Fifty-four Thousand Six Hundred
Seventy-seven Pesos and Ninety-five centavos (P3,054.677.95) as payment for the spare parts and
materials used in the M/V MANILA CITY during dry-docking with interest at the legal rate until full
payment is made;

6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred Thousand (P500,000 00) Pesos in
moral damages;

7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million (P10,000.000.00) Pesos in attorney's
fees; and to pay the costs of this suit.

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals. During the pendency of the appeal,
CSEW and William Lines presented a "Joint Motion for Partial Dismissal" with prejudice, on the basis of the amicable
settlement inked between Cebu Shipyard and William Lines only.

On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case insofar as CSEW and William Lines were
concerned.

On September 3, 1997, the Court of Appeals affirmed the appealed decision of the trial court, ruling thus:

WHEREFORE, the judgment of the lower court ordering the defendant, Cebu Shipyard and Engineering
Works, Inc. to pay the plaintiff Prudential Guarantee and Assurance, Inc., the subrogee, the sum of P45
Million, with interest at the legal rate until full payment is made, as contained in the decision of Civil Case
No. CEB-9935 is hereby AFFIRMED.
With the denial of its motion for reconsideration by the Court of Appeal's Resolution dated February 13, 1998, CSEW
found its way to this court via the present petition, contending that:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING THAT CSEW HAD
"MANAGEMENT AND SUPERVISORY CONTROL" OF THE M/V MANILA CITY AT THE TIME THE
FIRE BROKE OUT.

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN APPLYING THE DOCTRINE

OF RES IPSA LOQUITUR AGAINST CSEW.

III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND THEREBY LIABLE FOR
THE LOSS OF THE M/V MANILA CITY IS BASED FINDINGS OF FACT NOT SUPPORTED BY
EVIDENCE.

IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING CSEW'S EXPERT

EVIDENCE AS INADMISSIBLE OR OF NO PROBATIVE VALUE.

V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT PRUDENTIAL

HAS THE RIGHT OF SUBROGATION AGAINST ITS OWN INSURED.

VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AND THAT
CSEW WAS NEGLIGENT IN THE PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR
CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING CSEW'S LIABILITY FOR NEGLIGENCE
TO A MAXIMUM OF P 1 MILLION IS NOT VALID, CONTRARY TO THE APPLICABLE RULINGS OF
THIS HONORABLE COURT.

Petitioner's version of the events that led to the fire runs as follows:

On February 13, 1991, the CSEW completed the drydocking of M/V Manila City at its grave dock. It was
then transferred to the docking quay of CSEW where the remaining repair to be done was the replating of
the top of Water Ballast Tank No. 12 (Tank Top No. 12) which was subcontracted by CSEW to JNB
General Services. Tank Top No. 12 was at the rear section of the vessel, on level with the flooring of the
crew cabins located on the vessel's second deck.

At around seven o'clock in the morning of February 16, 1991, the JNB workers trimmed and cleaned the
tank framing which involved minor hotworks (welding/cutting works). The said work was completed at
about 10:00 a.m. The JNB workers then proceeded to rig the steel plates, after which they had their lunch
break. The rigging was resumed at 1:00 p.m.

While in the process of rigging the second steel plate, the JNB workers noticed smoke coming from the
passageway along the crew cabins. When one of the workers, Mr. Casas, proceeded to the passageway
to ascertain the origin of the smoke, he noticed that smoke was gathering on the ceiling of the
passageway but did not see any fire as the crew cabins on either side of the passageway were locked.
He immediately sought out the proprietor of JNB, Mr. Buenavista, and the Safety officer CSEW, Mr. Aves,
who sounded the fire alarm. CSEW's fire brigade immediately responded as well as the other fire fighting
units in Metro Cebu. However, there were no WLI representative, officer or crew to guide the firemen
inside the vessel.

Despite the combined efforts of the firemen of the Lapulapu City Fire Department, Mandaue Fire Cordova
Fire Department, Emergency Rescue Unit Foundation, and fire brigade of CSEW, the fire was not
controlled until 2:00 a.m., of the following day, February 17, 1991.

On the early morning of February 17, 1991, gusty winds rekindled the flames on the vessel and fire again
broke out. Then the huge amounts of water pumped into the vessel, coupled with the strong current,
caused the vessel to tilt until it capsized and sank.

When M/V Manila City capsized, steel and angle bars were noticed to have been newly welded along the
port side of the hull of the vessel, at the level of the crew cabins. William Lines did not previously apply for
 a permit to do hotworks on the said portion of the ship as it should have done pursuant to its work order
with CSEW.5

Respondent Prudential, on the other hand, theorized that the fire broke out in the following manner:

At around eleven o'clock in the morning of February 16, 1991, the Chief Mate of M/V Manila City was
inspecting the various works being done by CSEW on the vessel, when he saw that some workers of
CSEW were cropping out steel plates Tank Top No. 12 using acetylene, oxygen and welding torch. He
also observed that the rubber insulation wire coming out of the air-conditioning unit was already burning,
prompting him to scold the workers.

At 2:45 in the afternoon of the same day, witnesses saw smoke coming from Tank No. 12. The vessel's
reeferman reported such occurence to the Chief Mate who immediately assembled the crew members to
put out the fire. When it was too hot for them to stay on board and seeing that the fire cannot be
controlled, the vessel's crew were forced to withdraw from CSEW's docking quay.

In the morning of February 17, 1991, M/V Manila City sank. As the vessel was insured with Prudential
Guarantee, William Lines filed a claim for constructive loss, and after a thorough investigation of the
surrounding circumstances of the tragedy, Prudential Guaranteed found the said insurance claim to be
meritorious and issued a check in favor of William Lines in the amount of P 45 million pesos representing
the total value of M/V Manila City's hull and machinery insurance.6

The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for damages for the respondents, William
Lines, Inc., and Prudential for the loss of M/V Manila City. It is petitioner's submission that the finding of negligence by the
Court of Appeals is not supported by the evidence on record, and contrary to what the Court of Appeals found, petitioner
did not have management and control over M/V Manila City. Although it was brought to the premises of CSEW for annual
repair, William Lines, Inc. retained control over the vessel as the ship captain remained in command and the ship's crew
were still present. While it imposed certain rules and regulations on William Lines, it was in the exercise of due diligence
and not an indication of CSEW's exclusive control over subject vessel. Thus, CSEW maintains that it did not have
exclusive control over the M/V Manila City and the trial court and the Court of Appeals erred in applying the doctrine of res
ipsa loquitur.

Time and again, this Court had occasion to reiterate the well-established rule that factual findings by the Court of Appeals
are conclusive on the parties and are not reviewable by this Court. They are entitled to great weight and respect, even
finality, especially when, as in this case, the Court of Appeals affirmed the factual findings arrived at by the trial
court. 7 When supported by sufficient evidence, findings of fact by the Court of Appeals affirming those of the trial court,
are not to be disturbed on appeal. The rationale behind this doctrine is that review of the findings of fact of the Court of
Appeals is not a function that the Supreme Court normally undertakes. 8

Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed that the fire which caused the total loss
of subject M/V Manila City was due to the negligence of the employees and workers of CSEW. Both courts found that the
M/V Manila City was under the custody and control of petitioner CSEW, when the ill-fated vessel caught fire. The
decisions of both the lower court and the Court of Appeals set forth clearly the evidence sustaining their finding of
actionable negligence on the part of CSEW. This factual finding is conclusive on the parties. The court discerns no basis
for disturbing such finding firmly anchored on enough evidence. As held in the case of Roblett Industrial Construction
Corporation vs. Court of Appeals, "in the absence of any showing that the trial court failed to appreciate facts and
circumstances of weight and substance that would have altered its conclusion, no compelling reason exists for the Court
to impinge upon matters more appropriately within its province.9

Furthermore, in petitions for review on certiorari, only questions of law may be put into issue. Questions of fact cannot be
entertained. The finding of negligence by the Court of Appeals is a question which this Court cannot look into as it would
entail going into factual matters on which the finding of negligence was based. Such an approach cannot be allowed by
this Court in the absence of clear showing that the case falls under any of the exceptions 10 to the well-established
principle.

The finding by the trial court and the Court of Appeals that M/V Manila City caught fire and sank by reason of the
negligence of the workers of CSEW, when the said vessel was under the exclusive custody and control of CSEW is
accordingly upheld. Under the circumstances of the case, the doctrine of res ipsa loquitur applies. For the doctrine of res
ipsa loquitur to apply to a given situation, the following conditions must concur (1) the accident was of a kind which does
not ordinarily occur unless someone is negligent; and (2) that the instrumentality or agency which caused the injury was
under the exclusive control of the person charged with negligence.

The facts and evidence on record reveal the concurrence of said conditions in the case under scrutiny. First, the fire that
occurred and consumed M/V Manila City would not have happened in the ordinary course of things if reasonable care and
diligence had been exercised. In other words, some negligence must have occurred. Second, the agency charged with
negligence, as found by the trial court and the Court of Appeals and as shown by the records, is the herein petitioner,
Cebu Shipyard and Engineering Works, Inc., which had control over subject vessel when it was docketed for annual
repairs. So also, as found by the regional trial court, "other responsible causes, including the conduct of the plaintiff, and
third persons, are sufficiently eliminated by the evidence. 11

What is more, in the present case the trial court found direct evidence to prove that the workers and/or employees of
CSEW were remiss in their duty of exercising due diligence in the care of subject vessel. The direct evidence
substantiates the conclusion that CSEW was really negligent. Thus, even without applying the doctrine of res ipsa
loquitur, in light of the direct evidence on record, the ineluctable conclusion is that the petitioner, Cebu Shipyard and
Engineering Works, Inc., was negligent and consequently liable for damages to the respondent, William Lines, Inc.

Neither is there tenability in the contention of petitioner that the Court of Appeals erroneously ruled on the inadmissibility
of the expert testimonies it (petitioner) introduced on the probable cause and origin of the fire. Petitioner maintains that the
Court of Appeals erred in disregarding the testimonies of the fire experts, Messrs. David Grey and Gregory Michael
Southeard, who testified on the probable origin of the fire in M/V Manila City. Petitioner avers that since the said fire
experts were one in their opinion that the fire did not originate in the area of Tank Top No. 12 where the JNB workers
were doing hotworks but on the crew accommodation cabins on the portside No. 2 deck, the trial court and the Court of
Appeals should have given weight to such finding based on the testimonies of fire experts; petitioner argues.

But courts are not bound by the testimonies of expert witnesses. Although they may have probative value, reception in
evidence of expert testimonies is within the discretion of the court. Section 49, Rule 130 of the Revised Rules of Court,
provides:

Sec. 49. Opinion of expert witness. The opinion of a witness on a matter requiring special knowledge,
skill, experience or training which he is shown to possess, may be received in evidence.

The word "may" signifies that the use of opinion of an expert witness as evidence is a prerogative of the courts. It
is never mandatory for judges to give substantial weight to expert testimonies. If from the facts and evidence on
record, a conclusion is readily ascertainable, there is no need for the judge to resort to expert opinion evidence. In
the case under consideration, the testimonies of the fire experts were not the only available evidence on the
probable cause and origin of the fire. There were witnesses who were actually on board the vessel when the fire
occurred. Between the testimonies of the fire experts who merely based their findings and opinions on interviews
and the testimonies of those present during the fire, the latter are of more probative value. Verily, the trial court
and the Court of Appeals did not err in giving more weight to said testimonies.

On the issue of subrogation, petitioner contends that Prudential is not entitled to be subrogated to the rights of William
Lines, Inc., theorizing that (1) the fire which gutted M/V Manila City was an excluded risk and (2) it is a co-assured under
the Marine Hull Insurance Policy.

It is petitioner's submission that the loss of M/V Manila City or damage thereto is expressly excluded from the coverage of
the insurance because the same resulted from "want of due diligence by the Assured, Owners or Managers" which is not
included in the risks insured against. Again, this theory of petitioner is bereft of any factual or legal basis. It proceeds from
a wrong premise that the fire which gutted subject vessel was caused by the negligence of the employees of William
Lines, Inc. To repeat, the issue of who between the parties was negligent has already been resolved against Cebu
Shipyard and Engineering Works, Inc. Upon proof of payment by Prudential to William Lines, Inc. the former was
subrogated to the right of the latter to indemnification from CSEW. As aptly ruled by the Court of Appeals, the law on the
manner is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of the insurance
company shall be subrogated to the rights of the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss
the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. 12
Thus, when Prudential, after due verification of the merit and validity of the insurance claim of William Lines, Inc., paid the
latter the total amount covered by its insurance policy, it was subrogated to the right of the latter to recover the insured
loss from the liable party, CSEW.

Petitioner theorizes further that there can be no right of subrogation as it is deemed a co-assured under the subject
insurance policy. To buttress its stance that it is a co-assured, petitioner placed reliance on Clause 20 of the Work Order
which states:

20 The insurance on the vessel should be maintained by the customer and/or owner of the vessel during
the period the contract is in effect. 13

According to petitioner, under the aforecited clause, William Lines, Inc., agreed to assume the risk of loss of the
vessel while under dry-dock or repair and to such extent, it is benefited and effectively constituted as a co-
assured under the policy.

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order in question is clear in the sense that it
requires William Lines to maintain insurance on the vessel during the period of dry-docking or repair. Concededly, such a
stipulation works to the benefit of CSEW as the ship repairer. However, the fact that CSEW benefits from the said
stipulation does not automatically make it as a co-assured of William Lines. The intention of the parties to make each
other a co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy itself and
not from any other contract or agreement because the insurance policy denominates the assured and the beneficiaries of
the insurance. The hull and machinery insurance procured by William Lines, Inc. from Prudential named only "William
Lines, Inc." as the assured. There was no manifestation of any intention of William Lines, Inc. to constitute CSEW as a co-
assured under subject policy. It is axiomatic that when the terms of a contract are clear its stipulations control. 14 Thus,
when the insurance policy involved named only William Lines, Inc. as the assured thereunder, the claim of CSEW that it is
a co-assured is unfounded.

Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is provided that:

Subject to the conditions of this Policy, this insurance also covers loss of or damage to vessel directly
caused by the following:

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an
Assured hereunder 15 (emphasis supplied).

As correctly pointed out by respondent Prudential, if CSEW were deemed a co-assured under the policy, it would nullify
any claim of William Lines, Inc. from Prudential for any loss or damage caused by the negligence of CSEW. Certainly, no
shipowner would agree to make a shiprepairer a co-assured under such insurance policy; otherwise, any claim for loss or
damage under the policy would be invalidated. Such result could not have been intended by William Lines, Inc.

Finally, CSEW argues that even assuming that it was negligent and therefore liable to William Lines Inc., by stipulation in
the Contract or Work Order its liability is limited to One Million (P1,000,000.00) Pesos only, and Prudential a mere
subrogee of William Lines, Inc., should only be entitled to collect the sum stipulated in the said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld as valid per se; as binding as an
ordinary contract, the Court recognizes instances when reliance on such contracts cannot be favored especially where the
facts and circumstances warrant that subject stipulations be disregarded. 16 Thus, in ruling on the validity and applicability
of the stipulation limiting the liability of CSEW for negligence to One Million (P1,000,000.00) Pesos only, the facts and
circumstances vis-a-vis the nature of the provision sought to be enforced should be considered, bearing in mind the
principles of equity and fair play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five Million (P45,000,000.00) Pesos. To
determine the validity and sustainability of the claim of William Lines, Inc., for a total loss, Prudential conducted its own
inquiry. Upon thorough investigation by its hull surveyor, M/V Manila City was found to be beyond economical salvage and
repair. 17 The evaluation of the average adjuster also reported a constructive total loss. 18 The said claim of William Lines,
Inc., was then found to be valid and compensable such that Prudential paid the latter the total value of its insurance claim.
Furthermore, it was ascertained that the replacement cost of the vessel (the price of a vessel similar to M/V Manila City),
amounts to Fifty Million (P 50,000,000.00) Pesos.19
Considering the aforestated circumstances, let alone the fact that negligence on the part of petitioner has been sufficiently
proven, it would indeed be unfair and inequitable to limit the liability of petitioner to One Million Pesos only. As aptly held
by the trial court, "it is rather unconscionable if not overstrained." To allow CSEW to limit its liability to One Million Pesos
notwithstanding the fact that the total loss suffered by the assured and paid for by Prudential amounted to Forty Five
Million (P45,000,000.00) Pesos would sanction the exercise of a degree of diligence short of what is ordinarily required
because, then, it would not be difficult for petitioner to escape liability by the simple expedient of paying an amount very
much lower than the actual damage or loss suffered by William Lines, Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision, dated September 3, 1997, and
Resolution, dated February 13, 1998, of the Court of Appeals AFFIRMED. No pronouncement as to costs.1wphi1.nt

SO ORDERED.

Romero, Vitug, Panganiban and Gonzaga-Reyes, JJ., concur.

#Footnotes

___

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 94071 March 31, 1992

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 Enterprises with 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. 69135in the
amount of P300,000.00 (Renewed under Renewal Certificate No. 41997) An additional
insurance was 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'clock in 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 firewas
electrical in nature. 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 of the company so that he can file his claim. He averred that in support of his claim, he
submitted the fire clearance, the insurance policies and inventory of stocks. He further testified thatthe
three insurance companies are sister companies, and as a matter of fact when he was following-
up his claim with Equitable Insurance, the Claims Manager told him to go first to Reliance
Insurance and if said company agrees to pay, they would also pay. The same treatment was given him
by the other insurance companies. Ultimately, the three insurance companies denied plaintiffs' claim for
payment.

In its letter of denial dated March 9, 1983, (Exhibit "C" No. 8-

84) Western Guaranty Corporationthrough Claims Manager Bernard S. Razon told the 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 Vice-President 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 7-
84) 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, ExecutiveVice-
President Mary Dee Co informed Atty. Dator that Julian Sy violated Policy Condition No.
"3"which requires the insured 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.All sums of money to be paid by virtue
hereof shall bear interest at 12% per annum (pursuant toSec. 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 Corporation 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 the
plaintiff attorney's fees in the amount of P35,000.00.

All sums of money to be paid by virtue hereof shall bear interest at 12% per annum (pursuant toSec. 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 crux wherein
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 known as the "Other Insurance Clause," is uniformlycontained
in all the aforestated insurance contracts of herein petitioners, as follows:

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 theoccurrence of 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 thetime of loss or damage 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 GuarantyCorporation (Western) did
not declare respondent Reliance Surety and Insurance Co., Inc. (Reliance) and respondent Equitable Insurance
Corporation (Equitable) as co-insurers on the same stocks, while Reliance'sPolicies covering the same stocks did not
likewise declare Western and Equitable as such co-insurers. It is further admitted by petitioners that Equitable's policy
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
and two (2) policies of Reliance in the total amount of P1,000,000.00. 7

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.

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 policy, as they have not even read policies.8 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 dubiousapplicability here 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 terms of the policies;
that Yap Dam Chuan could not likewise have obtained such knowledge for the samereason, aside from the fact that
the insurance with Western was obtained before those of Reliance andEquitable; and that the conclusion of
the trial court that Reliance and Equitable are "sister companies" is anunfounded conjecture drawn from the mere fact that
Yap Kam Chuan was an agent for both companies which also had the same insurance claims adjuster. Availment of the
services of the same agents and adjusters bydifferent companies is a common practice in the insurance business and
such facts do not warrant thespeculative conclusion of the trial court.

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 areambiguous, equivocal,
or uncertain. 10 The parties must abide by the terms of the contract because such termsconstitute the
measure of the insurer's liability and compliance therewith is a condition precedent to theinsured's right of recovery from
the insurer. 11

While it is a cardinal principle of insurance law that a policy or contract of insurance is to be construed liberally
in favor of the insured and strictly against the insurer company, yet contracts of insurance, like other contracts, are to be
construed according to the sense and meaning of the terms which the parties themselves have used. 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 andshould be complied 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 thatthis 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
196516 and the contract concerns indemnity in case of loss in his money-making trade of which important
consideration he could not have been unaware as it was 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 statem
ent 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 non-disclosure 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 over-insurance 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
false declaration; a clear misrepresentation and a vital one because where the insured had beenasked to
 reveal but did not, that was deception. Otherwise stated, had the insurer known that therewere many co-
insurances, it could have hesitated or plainly desisted from entering into suchcontract.
Hence, the insured 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 co-insurances 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 in support thereof, . . . all benefits under this Policy shall
be forfeited . . . . 19

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 notcommenced
either in the Insurance Commission or any court of competent jurisdiction of notice ofsuch
rejection, or in case of arbitration taking place as provided herein, within twelve (12) monthsafter due
notice of the award made by the arbitrator or arbitrators or umpire, then the claim shall forall 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 reason of the time const
raintprovided 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 or reasons for
the denial of hisclaim, reason for which his lawyer, Atty. Dator deemed it wise to send a
letter of inquiry to thedefendant which 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 torun only from said 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 insurer, runs counter to the d
eclared 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 in 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 judgment

of respondent Court of Appeals, the same ishereby AFFIRMED.

SO ORDERED.

Melencio-Hererra and Nocon, JJ., concur.

Paras, J., took no part.

Padilla, J., took no part.

___

G.R. No. 98414 February 8, 1993

FIRST QUEZON CITY INSURANCE COMPANY, INC., petitioner,

vs.
THE HON. COURT OF APPEALS and DE DIOS MARIKINA TRANSPORTATION CO., respondents.

Ponciano U. Pitarque for petitioner.

De Dios & Taoingan Law Offices and Ponce Enrile, Cayetano, Reyes for private respondent.

GRIO-AQUINO, J.:
Before the Court is a petition filed by the First Quezon City Insurance Company, Inc., seeking to limit to P12,000.00, the
amount specified in the insurance contract, its liability to indemnify the respondent, De Dios Marikina Transportation
Company (DMTC, for short), for the damages suffered by a passenger, Jose V. del Rosario, who accidentally fell off the
bus.

The undisputed facts are:

On June 10, 1984, at about 3:00 p.m., after sending off certain seamen at the departure area of then
known as Manila International Airport (MIA), Plaintiff Jose V. del Rosario proceeded to the loading and
unloading zone for public utility bus stop, which was located in front of the MIA, to wait for a passenger
bus bound for Quezon City. While at the bus stop, the plaintiff saw a DMTC bus bearing body No. 236
and plate No. NVU-798 and which, per its signboard, was plying the Pasay to Quezon City (passing
Espaa) route. As it approach the bus stop, the bus slowed down with all its doors wide open: while
moving at a crawling pace, i.e., as slow as an "ordinary walk," it was taking several passengers, about
five or seven of them including the plaintiff, all of whom managed to board the bus while it was already at
the bus stop; plaintiff was the last one to board the bus.

While the plaintiff was still on the bus' running board with his hand on the bus door's handle bar, the
slowly moving bus sped forward at a high speed, as a result of which, the plaintiff lost his balance and fell
from the bus. As plaintiff clung instinctively to the handle bar, he was dragged by the bus along the
asphalted road for about two (2) seconds. Plaintiff screamed of pain and anguished even as the other
passengers shouted and the bus' driver, Gil Agpalo, an employee of defendant and third-party plaintiff
DMTC, abruptly stopped the bus. Then, Gil forthwith fled from the scene, leaving the bus and the injured
plaintiff behind.

Thereafter, the plaintiff was brought to the Manila Sanitarium and Hospital where he was given immediate
medical treatment at the emergency ward. The doctors performed a major surgical operation on plaintiff's
right leg. This leg was extensively lacerated: its skin and tissues were exposed and detached from the
muscles. Treatment was done under special anesthesia and consisted of debridement or cleaning repair
and suturing of the injured tissue. While at the hospital, plaintiff was febrile or feverish for about forty (40)
days. On July 12, 1984, a second major surgical operation, i.e., a skin grafting operation, was performed
on plaintiff's right leg.

Plaintiff was confined at the hospital for a total period of forty (40) days, from June 10, 1984 to August 26,
1984. During his stay at the hospital, plaintiff incurred medical expenses in the total amount of
P69,444.41. Plaintiff's medical expenses were advanced by his employer Maglines but he was required to
reimburse Maglines on a staggered basis by way of salary deductions. Plaintiff was released from the
hospital on August 29, 1984. After his release, he returned to the hospital from time to time for further
treatment and checkup. The injuries had left plaintiff with a huge, ugly scar running almost the entire
length of his right leg. Also, the plaintiff incurred lost earning by way of unearned salaries amounting to
P7,500.00 due to said physical injuries and the consequent hospital confinement.

Plaintiff filed on June 26, 1985 the aforesaid complaint against DMTC and its driver, Gil Agpalo. Agpalo
was later dropped as a party defendant because he could not be served with summons. Upon filing its
answer on August 20, 1985, defendant DMTC filed a third-party complaint against First Quezon City
Insurance Co. Inc. Sometime on September 17, 1985 this third-party defendant filed its answer to the
third-party complaint.

After the trial, the court a quo rendered the appealed decision, the decretal portion of which ordains:

WHEREFORE, the judgment is hereby rendered dismissing defendant De Dios Marikina

Transportation Co. Inc.'s counterclaim for lack of merit and ordering said defendant to
pay plaintiff Jose V. del Rosario: (a) the sum of P76,944.41, as the actual and
compensatory damages; (b) the sum of P15,000.00, as moral and exemplary damages;
and (c) the sum of P33,641.50 as attorney's fees, as well as to pay the cost of suit; and
as regards the third-party complaint herein ordering third-party defendant First Quezon
City Insurance Co., Inc. to indemnify third-party plaintiff De Dios Marikina Transportation
Co., Inc. in the sum of P12,000.00 with interest thereon at the legal rate from date of filing
of the third-party complaint on August 20, 1985, until full payment thereof. Further, there
 being no satisfactory warrant therefor, the court hereby dismisses the rest of the claims in
the complaint and third-party complaint herein. (pp. 11-13, Rollo.)

The bus company appealed to the Court of Appeals on February 11, 1991. The Court of Appeals modified the dispositive
part of the decision of the trial court as follows:

WHEREFORE, with the following modifications, first in appellee's complaint: that the award of attorney's
fees be reduced to P5,000.00 and that the cost of suit be deleted; and second, as regards the third-party
complaint, that the third-party defendant First Quezon City Insurance Co., Inc., be ordered to indemnify
third-party plaintiff DMTC, herein appellant the sum of P50,090.00 with legal interest thereon from date of
filing of the third-party complaint on August 20, 1985 until its full payment, the decision appealed from is
AFFIRMED in all other respects. No costs. (p. 19, Rollo.)

The insurance company (now the petitioner) filed a motion for reconsideration which was denied in a resolution dated
April 22, 1991.

Hence, this petition for review, assailing the appellate courts' interpretation of the provision of the insurance contract on
the limit of the insurer's liability.

We find merit in the petition.

The insurance company clearly passed the maximum limit of the petitioner's liability for damages arising from death or
bodily injury at P12,000.00 per passenger and its maximum liability per accident at P50,000.00. Since only one passenger
was injured in the accident, the insurer's liability for the damages suffered by said passenger is pegged to the amount of
P12,000.00 only. What does the limit of P50,000.00 per accident mean? It means that the insurer's liability for any single
accident will not exceed P50,000.00 regardless of the number of passengers killed or injured therein. For example, if ten
(10) passengers had been injured by the operation of the insured bus, the insurer's liability for the accident would not be
P120,000.00 (at the rate of P12,000.00 per passenger) but would be limited to only P50,000.00 for the entire accident, as
provided in the insurance contract.

The bus company may not recover from the insurance company (herein petitioner) more than P 12,000.00 per passenger
killed or injured, or fifty thousand (P50,000.00) pesos per accident even if under the judgment of the court, the erring bus
operator will have to pay more than P12,000.00 to each injured passenger. The trial court's interpretation of the insurance
contract was the correct interpretation.

WHEREFORE, the petition for review is GRANTED. The decision promulgated on February 11, 1991 by the Court of
Appeals in CA-G.R.
No. 24938, ordering the third-party defendant, First Quezon City Insurance Co., to indemnify the private respondent, De
Dios Marikina Transportation Co. Inc. (DMTC), the sum of P50,000.00 for the damages of the passenger Jose V. Del
Rosario, is hereby modified by reducing the award to P12,000.00 only. Costs against the private respondent, De Dios
Marikina Transportation Co., Inc.

SO ORDERED.

Cruz, Padilla and Bellosillo , JJ., concur.

___

G.R. No. 119599 March 20, 1997

MALAYAN INSURANCE CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS and TKC MARKETING CORPORATION, respondents.

ROMERO, J.:
Assailed in this petition for review on certiorari is the decision of the Court of Appeals in CA-G. R. No. 43023 1which
affirmed, with slight modification, the decision of the Regional Trial Court of Cebu, Branch 15.

Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171 metric tons of soya bean meal
which was loaded on board the ship MV Al Kaziemah on or about September 8, 1989 for carriage from the port of Rio del
Grande, Brazil, to the port of Manila. Said cargo was insured against the risk of loss by petitioner Malayan Insurance
Corporation for which it issued two (2) Marine Cargo policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP
97800306 amounting to P1,195,005.45, both dated September 1989.

While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to Manila, the civil authorities
arrested and detained it because of a lawsuit on a question of ownership and possession. As a result, private respondent
notified petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for the amount of
US$916,886.66, representing the dollar equivalent on the policies, for non-delivery of the cargo. Private respondent
likewise sought the assistance of petitioner on what to do with the cargo.

Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by the policies. Private respondent,
accordingly, advised petitioner that it might tranship the cargo and requested an extension of the insurance coverage until
actual transhipment, which extension was approved upon payment of additional premium. The insurance coverage was
extended under the same terms and conditions embodied in the original policies while in the process of making
arrangements for the transhipment of the cargo from Durban to Manila, covering the period October 4 - December 19,
1989.

However, on December 11, 1989, the cargo was sold in Durban, South Africa, for US$154.40 per metric ton or a total of
P10,304,231.75 due to its perishable nature which could no longer stand a voyage of twenty days to Manila and another
twenty days for the discharge thereof. On January 5, 1990, private respondent forthwith reduced its claim to
US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate of P22.0138 per $1.00) representing private
respondent's loss after the proceeds of the sale were deducted from the original claim of $916,886.66 or P20,184,159.55.

Petitioner maintained its position that the arrest of the vessel by civil authorities on a question of ownership was an
excepted risk under the marine insurance policies. This prompted private respondent to file a complaint for damages
praying that aside from its claim, it be reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for
the loan it obtained to finance the shipment totalling P942,269.30. In addition, private respondent asked for moral
damages amounting to P200,000.00, exemplary damages amounting to P200,000.00 and attorney's fees equivalent to
30% of what will be awarded by the court.

The lower court decided in favor of private respondent and required petitioner to pay, aside from the insurance claim,
consequential and liquidated damages amounting to P1,024,233.88, exemplary damages amounting to P100,000.00,
reimbursement in the amount equivalent to 10% of whatever is recovered as attorney's fees as well as the costs of the
suit. On private respondent's motion for reconsideration, petitioner was also required to further pay interest at the rate of
12% per annum on all amounts due and owing to the private respondent by virtue of the lower court decision counted
from the inception of this case until the same is paid.

On appeal, the Court of Appeals affirmed the decision of the lower court stating that with the deletion of Clause 12 of the
policies issued to private respondent, the same became automatically covered under subsection 1.1 of Section 1 of the
Institute War Clauses. The arrests, restraints or detainments contemplated in the former clause were those effected by
political or executive acts. Losses occasioned by riot or ordinary judicial processes were not covered therein. In other
words, arrest, restraint or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out detention by
ordinary legal processes. Hence, arrests by civil authorities, such as what happened in the instant case, is an excepted
risk under Clause 12 of the Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of the
Institute Cargo Clause and the consequent adoption or institution of the Institute War Clauses (Cargo), the arrest and
seizure by judicial processes which were excluded under the former policy became one of the covered risks.

The appellate court added that the failure to deliver the consigned goods in the port of destination is a loss compensable,
not only under the Institute War Clause but also under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the
insurance policies, as read in relation to Section 130 of the Insurance Code and as held in Williams v. Cole. 2

Furthermore, the appellate court contended that since the vessel was prevented at an intermediate port from completing
the voyage due to its seizure by civil authorities, a peril insured against, the liability of petitioner continued until the goods
could have been transhipped. But due to the perishable nature of the goods, it had to be promptly sold to minimize loss.
Accordingly, the sale of the goods being reasonable and justified, it should not operate to discharge petitioner from its
contractual liability.

Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance policies.

2. In ruling that there was constructive total loss over the cargo.

3. In ruling that petitioner was in bad faith in declining private respondent's claim.

4. In giving undue reliance to the doctrine that insurance policies are strictly construed against the insurer.

In assigning the first error, petitioner submits the following: (a) an arrest by civil authority is not compensable since the
term "arrest" refers to "political or executive acts" and does not include a loss caused by riot or by ordinary judicial
process as in this case; (b) the deletion of the Free from capture or Seizure Clause would leave the assured covered
solely for the perils specified by the wording of the policy itself; (c) the rationale for the exclusion of an arrest pursuant to
judicial authorities is to eliminate collusion between unscrupulous assured and civil authorities.

As to the second assigned error, petitioner submits that any loss which private respondent may have incurred was in the
nature and form of unrecovered acquisition value brought about by a voluntary sacrifice sale and not by arrest, detention
or seizure of the ship.

As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its honest belief that the arrest of
the vessel was not a compensable risk under the policies issued. In fact, petitioner supported private respondent by
accommodating the latter's request for an extension of the insurance coverage, notwithstanding that it was then under no
legal obligation to do so.

Private respondent, on the other hand, argued that when it appealed its case to the Court of Appeals, petitioner did not
raise as an issue the award of exemplary damages. It cannot now, for the first time, raise the same before this Court.
Likewise, petitioner cannot submit for the first time on appeal its argument that it was wrong for the Court of Appeals to
have ruled the way it did based on facts that would need inquiry into the evidence. Even if inquiry into the facts were
possible, such was not necessary because the coverage as ruled upon by the Court of Appeals is evident from the very
terms of the policies.

It also argued that petitioner, being the sole author of the policies, "arrests" should be strictly interpreted against it
because the rule is that any ambiguity is to be taken contra proferentum. Risk policies should be construed reasonably
and in a manner as to make effective the intentions and expectations of the parties. It added that the policies clearly
stipulate that they cover the risks of non-delivery of an entire package and that it was petitioner itself that invited and
granted the extensions and collected premiums thereon.

The resolution of this controversy hinges on the interpretation of the "Perils" clause of the subject policies in relation to the
excluded risks or warranty specifically stated therein.

By way of a historical background, marine insurance developed as an all-risk coverage, using the phrase "perils of the
sea" to encompass the wide and varied range of risks that were covered. 3 The subject policies contain the "Perils" clause
which is a standard form in any marine insurance policy. Said clause reads:

Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and to take
upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers, Thieves,
Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the Sea, Arrests, Restraints and
Detainments of all Kings, Princess and Peoples, of what Nation, Condition, or quality soever, Barratry of
the Master and Mariners, and of all other Perils, Losses, and Misfortunes, that have come to hurt,
detriment, or damage of the said goods and merchandise or any part thereof . AND in case of any loss or
misfortune it shall be lawful to the ASSURED, their factors, servants and assigns, to sue, labour, and
travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and
ship, & c., or any part thereof, without prejudice to this INSURANCE; to the charges whereof the said
COMPANY, will contribute according to the rate and quantity of the sum herein INSURED. AND it is
expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or preserving
 the Property insured shall be considered as a Waiver, or Acceptance of Abandonment. And it is agreed
by the said COMPANY, that this writing or Policy of INSURANCE shall be of as much Force and Effect as
the surest Writing or policy of INSURANCE made in LONDON. And so the said MALAYAN INSURANCE
COMPANY., INC., are contented, and do hereby promise and bind themselves, their Heirs, Executors,
Goods and Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for the true
Performance of the Premises; confessing themselves paid the Consideration due unto them for this
INSURANCE at and after the rate arranged. (Emphasis supplied)

The exception or limitation to the "Perils" clause and the "All other perils" clause in the subject policies is specifically
referred to as Clause 12 called the "Free from Capture & Seizure Clause" or the F.C. & S. Clause which reads, thus:

Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences thereof or of
any attempt thereat; also from the consequences of hostilities and warlike operations, whether there be a
declaration of war or not; but this warranty shall not exclude collision, contact with any fixed or floating
object (other than a mine or torpedo), stranding, heavy weather or fire unless caused directly (and
independently of the nature of the voyage or service which the vessel concerned or, in the case of a
collision, any other vessel involved therein is performing) by a hostile act by or against a belligerent power
and for the purpose of this warranty "power" includes any authorities maintaining naval, military or air
forces in association with power.

Further warranted free from the consequences of civil war, revolution, insurrection, or civil strike arising
therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to form part of
this insurance. (Emphasis supplied)

However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute War Clauses (Cargo) was
deemed incorporated which, in subsection 1.1 of Section 1, provides:

1. This insurance covers:

1.1 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; but this warranty shall not exclude collision,
contact with any fixed or floating object (other than a mine or torpedo), stranding, heavy weather or fire
unless caused directly (and independently of the nature on voyage or service which the vessel concerned
or, in the case of a collision any other vessel involved therein is performing) by a hostile act by or against
a belligerent power; and for the purpose of this warranty "power" includes any authority maintaining naval,
military or air forces in association with a power. Further warranted free from the consequences of civil
war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy.

According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the Institute War Clauses (Cargo),
among others, means that any "capture, arrest, detention, etc." pertained exclusively to warlike operations if this Court
strictly construes the heading of the said clauses. However, it also claims that the parties intended to include arrests, etc.
even if it were not the result of hostilities or warlike operations. It further claims that on the strength of jurisprudence on the
matter, the term "arrests" would only cover those arising from political or executive acts, concluding that whether private
respondent's claim is anchored on subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S.
Clause, the arrest of the vessel by judicial authorities is an excluded risk.4

This Court cannot agree with petitioner's assertions, particularly when it alleges that in the "Perils" Clause, it assumed the
risk of arrest caused solely by executive or political acts of the government of the seizing state and thereby excludes
"arrests" caused by ordinary legal processes, such as in the instant case.

With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses, however, this Court agrees with the
Court of Appeals and the private respondent that "arrest" caused by ordinary judicial process is deemed included among
the covered risks. This interpretation becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses
provided that "this insurance covers the risks excluded from the Standard Form of English Marine Policy by the clause
"Warranted free of capture, seizure, arrest, etc. . . ." or the F.C. & S. Clause. Jurisprudentially, "arrests" caused by
ordinary judicial process is also a risk excluded from the Standard Form of English Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process is not included in the covered
risk simply because the F.C. & S. Clause under the Institute War Clauses can only be operative in case of hostilities or
warlike operations on account of its heading "Institute War Clauses." This Court agrees with the Court of Appeals when it
held that ". . . . Although the F.C. & S. Clause may have originally been inserted in marine policies to protect against risks
of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed. 1975]), its interpretation
in recent years to include seizure or detention by civil authorities seems consistent with the general purposes of the
clause, . . . ." 5 In fact, petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included
"arrest" even if it were not a result of hostilities or warlike operations. 6 In this regard, since what was also excluded in the
deleted F.C. & S. Clause was "arrest" occasioned by ordinary judicial process, logically, such "arrest" would now become
a covered risk under subsection 1.1 of Section 1 of the Institute War Clauses, regardless of whether or not said "arrest" by
civil authorities occurred in a state of war.

Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well as that of subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo). 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 . . . ." 7 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 were not a result of hostilities or warlike operations. 8

This Court cannot help the impression that petitioner is overly straining its interpretation of the provisions of the policy in
order to avoid being liable for private respondent's claim.

This Court finds it pointless for petitioner to maintain its position that it only insures risks of "arrest" occasioned by
executive or political acts of government which is interpreted as not referring to those caused by ordinary legal processes
as contained in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest occasioned by executive
or political acts of the government and naturally, also those caused by ordinary legal processes; and, thereafter
incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now includes in the coverage risks of arrest
due to executive or political acts of a government but then still excludes "arrests" occasioned by ordinary legal processes
when subsection 1.1 of Section 1 of said Clauses should also have included "arrests" previously excluded from the
coverage of the F.C. & S. Clause.

It has been held that 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 avoided. 9 Likewise, it must be borne in mind that such contracts
are invariably prepared by the companies and must be accepted by the insured in the form in which they are
written. 10 Any construction of a marine policy rendering it void should be avoided. 11 Such policies will, therefore, be
construed strictly against the company in order to avoid a forfeiture, unless no other result is possible from the language
used. 12

If a marine insurance company desires to limit or restrict the operation of the general provisions of its contract by special
proviso, exception, or exemption, it should express such limitation in clear and unmistakable language. 13 Obviously, 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) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial process was expressly
indicated as an exception in the subject policies, there would have been no controversy with respect to the interpretation
of the subject clauses.

Be that as it may, exceptions to the general coverage are construed most strongly against the company. 14 Even an
express exception in a policy is to be construed against the underwriters by whom the policy is framed, and for whose
benefit the exception is introduced. 15

An insurance contract should be so interpreted as to carry out the purpose for which the parties entered into the contract
which is, to insure against risks of loss or damage to the goods. Such interpretation should result from the natural and
reasonable meaning of language in the policy. 16 Where restrictive provisions are open to two interpretations, that which is
most favorable to the insured is adopted. 17

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. 18 A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity therein should be resolved against the insurer; in other words, it
should be construed liberally in favor of the insured and strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a way as to preclude the insurer from noncompliance with
its obligations. 19

In view of the foregoing, this Court sees no need to discuss the other issues presented.

WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Regalado, Puno, Mendoza, and Torres, Jr., JJ., concur.

__

G.R. No. 91666 July 20, 1990

WESTERN GUARANTY CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, PRISCILLA E. RODRIGUEZ, and DE DIOS TRANSPORTATION CO.,
INC., respondents.

Narciso E. Ramirez for petitioner.

Alejandro Z. Barin and Carlos C. Fernando for private respondent.

FELICIANO, J.:

At around 4:30 in the afternoon of 27 March 1982, while crossing Airport Road on a pedestrian lane on her way to work,
respondent Priscilla E. Rodriguez was struck by a De Dios passenger bus owned by respondent De Dios Transportation
Co., Inc., then driven by one Walter Saga y Aspero The bus driver disregarded the stop signal given by a traffic policeman
to allow pedestrians to cross the road. Priscilla was thrown to the ground, hitting her forehead. She was treated at the
Protacio Emergency Hospital and later on hospitalized at the San Juan De Dios Hospital. Her face was permanently
disfigured, causing her serious anxiety and moral distress. Respondent bus company was insured with petitioner Western
Guaranty Corporation ("Western") under its Master Policy which provided, among other things, for protection against third
party liability, the relevant section reading as follows:

Section 1. Liability to the Public Company will, subject to the Limits of Liability, pay all sums necessary
to discharge liability of the insured in respect of

(a) death of or bodily injury to or damage to property of any passenger as defined herein.

(b) death of or bodily injury or damage to property of any THIRD PARTY as defined herein in any
accident caused by or arising out of the use of the Schedule Vehicle, provided that the liability shall have
first been determined. In no case, however, shall the Company's total payment under both Section I and
Section 11 combined exceed the Limits of Liability set forth herein. With respect to death of or bodily
injury to any third party or passenger, the company's payment per victim in any one accident shall not
exceed the limits indicated in the Schedule of indemnities provided for in this policy excluding the cost of
additional medicines, and such other burial and funeral expenses that might have been incurred.
(Emphasis supplied)

Respondent Priscilla Rodriguez filed a complaint for damages before the Regional Trial Court of Makati against De Dios
Transportation Co. and Walter A. Saga Respondent De Dios Transportation Co., in turn, filed a third-party complaint
against its insurance carrier, petitioner Western. On 6 August 1985, the trial court rendered a decision in favor of
respondent Priscilla E. Rodriguez, the dispositive portion of which read:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendants, ordering the
latter to pay the former, jointly and severally, and for the third-party defendant to pay to the plaintiff, by
 way of contribution, indemnity or subrogation whatever amount may be left unpaid by the defendant De
Dios Transportation Company, Inc. to the extent of not more than P50,000.00, as follows:

a) The sum of P2,776.00 as actual damages representing doctor's fees, hospitalization and medicines;

b) the sum of P1,500.00 by way of compensation for loss of earning during plaintiffs incapacity to work;

c) the sum of P10,000.00 as and by way of moral damages ;

d) the sum of P10,000.00 as and by way of attorney's fees ;and

e) the cost of suit.

On appeal, the Court of Appeals affirmed in toto the decision of the trial court. Petitioner moved for the reconsideration of
the appellate court's decision. In a Resolution dated 10 January 1990, the Court of Appeals denied the motion for
reconsideration petition for lack of merit.

Petitioner Western is now before us on a Petition for Review alleging that the Court of Appeals erred in holding petitioner
liable to pay beyond the limits set forth in the Schedule of Indemnities and in finding Western liable for loss of earnings,
moral damages and attorney's fees. Succinctly stated, it is petitioner Western's position that it cannot be held liable for
loss of earnings, moral damages and attorney's fees because these items are not among those included in the Schedule
of Indemnities set forth in the insurance policy.

Deliberating on the instant Petition for Review, we consider that petitioner Western has failed to show any reversible error
on the part of the Court of Appeals in rendering its Decision dated 26 April 1989 and its Resolution dated 10 January
1990.

An examination of Section 1 entitled "Liability to the Public", quoted above, of the Master Policy issued by petitioner
Western shows that that Section defines the scope of the liability of insurer Western as well as the events which generate
such liability. The scope of liability of Western is marked out in comprehensive terms: "all sums necessary to discharge
liability of the insured in respect of [the precipitating events]" The precipitating events which generate liability on the part
of the insurer, either in favor of a passenger or a third party, are specified in the following terms: (1) death of, or (2) bodily
injury to, or (3) damage to property of, the passenger or the third party. Where no death, no bodily injury and no damage
to property resulted from the casualty ("any accident caused by or arising out of the use of the Schedule Vehicle"), no
liability is created so far as concerns the insurer, petitioner Western.

The "Schedule of Indemnities for Death and/or Bodily Injury" attached to the Master Policy, which petitioner Western
invokes, needs to be quoted in full:

Schedule of Indemnities for Death and/or Bodily Injury:

The following schedule of indemnities should be observed in the settlement of claims for death, bodily injuries of,
professional fees and hospital charges, for services rendered to traffic accident victims under CMVLI coverage:

DEATH P12,000.00
INDEMNITY

PERMANENT
DISABLEMENT

DESCRIPTION Amount
OF
DISABLEMENT

Loss of two P6,000.00

limbs
Loss of both
hands, or all
fingers and

both thumbs 6,000.00

Loss of both feet 6,000.00

Loss of one 6,000.00

hand and one
foot

Loss of sight of 6,000.00

both eyes

Injuries resulting
in being
permanently

bedridden 6,000.00

Any other injury

causing
permanent

total 6,000.00
disablement

Loss of arm or 4,200.00

above elbow

Loss of arm 3,000.00

between elbow
and wrist

Loss of hand P2,550.00

Loss of four 2,550.00

fingers and
thumb of one
hand

Loss of four 2,100.00

fingers

Loss of leg at or 3,600.00

above knee

Loss of leg 2,400.00

below knee

Loss of one foot 2,400.00

Loss of toes-all 900.00

of one foot

Loss of thumb 900.00

Loss of index 600.00

finger

Loss of sight of 1,800.00

one eye
 Loss of hearing 3,000.00
both ears

Loss of hearing- 450.00

one ear

Total of Accommodation of Professional Attendance

Extended Services Fees or

Rendered Charges

HOSPITAL ROOM Maximum P

of 45 36.00/day
days/year-

Laboratory
fees, drugs

x-rays, etc.
300.0 0

SURGICAL Major 1,000.00

Operation

EXPENSES Medium 500.00

Operation

Minor 100.00
Operation

ANAESTHESIOLOGIST Major
Operation
300.00

LOGISTS' FEES Medium

Operation
150.00

Minor
Operation
50.00

OPERATING Major 150.00

Operation

ROOM Medium 100.00

Operation

Minor 40.00
Operation

MEDICAL For daily

visits of

EXPENSES Practitioner 20.00

or

Specialist /day

Total
amount of
 medical

expenses
must not
exceed

(for single
period of

confinement) 400.00 1

It will be seen that the above quoted Schedule of Indemnities establishes monetary limits which Western may invoke in
case of occurrence of the particular kinds of physical injury there listed, e.g.:

loss of P6,000.00;
both
feet

loss of P2,400.00;
one
foot

loss of P1,800.00;
sight of
one
eye

It must be stressed, however, that the Schedule of Indemnities does not purport to limit, or to enumerate exhaustively, the
species of bodily injury occurrence of which generate liability for petitioner Western. A car accident may, for instance,
result in injury to internal organs of a passenger or third party, without any accompanying amputation or loss of an
external member (e.g., a foot or an arm or an eye). But such internal injuries are surely covered by Section I of the Master
Policy, since they certainly constitute bodily injuries.

Petitioner Western in effect contends before this Court, as it did before the Court of Appeals, that because the Schedule
of Indemnities limits the amount payable for certain kinds of expenses "hospital room", "surgical expenses",
"anaesthesiologists' fee", "operating room" and "medical expenses" that Schedule should be read as excluding liability for
any other type of expense or damage or loss even though actually sustained or incurred by the third party victim. We are
not persuaded by Western's contention.

Firstly, the Schedule of Indemnities does not purport to restrict the kinds of damages that may be awarded against
Western once liability has arisen. Section 1, quoted above, does refer to certain "Limits of Liability" which in the case of
the third party liability section of the Master Policy, is apparently P50,000.00 per person per accident. Within this over-all
quantitative limit, all kinds of damages allowable by law" actual or compensatory damages"; "moral damages'; "nominal
damages"; "temperate or moderate damages"; "liquidated damages"; and "exemplary damages" 2 may be awarded by
a competent court against the insurer once liability is shown to have arisen, and the essential requisites or conditions for
grant of each species of damages are present. It appears to us self-evident that the Schedule of Indemnities was not
intended to be an enumeration, much less a closed enumeration, of the specific kinds of damages which may be awarded
under the Master Policy Western has issued. Accordingly, we agree with the Court of Appeals that:

... we cannot agree with the movant that the schedule was meant to be an exclusive enumeration of the
nature of the damages for which it would be liable under its policy. As we see it, the schedule was merely
meant to set limits to the amounts the movant would be liable for in cases of claims for death, bodily
injuries of, professional services and hospital charges, for services rendered to traffic accident victims,'
and not necessarily exclude claims against the insurance policy for other kinds of damages, such as
those in question.

Secondly, the reading urged by Western of the Schedule of Indemnities comes too close to working fraud upon both the
insured and the third party beneficiary of Section 1, quoted above. For Western's reading would drastically and without
warning limit the otherwise unlimited (save for the over-all quantitative limit of liability of P50,000.00 per person per
accident) and comprehensive scope of liability assumed by the insurer Western under Section 1: "all sums necessary to
discharge liability of the insured in respect of [bodily injury to a third party]". This result- which is not essentially different
from taking away with the left hand what had been given with the right hand we must avoid as obviously repugnant to
public policy. If what Western now urges is what Western intended to achieve by its Schedule of Indemnities, it was
incumbent upon Western to use language far more specific and precise than that used in fact by Western, so that the
insured, and potential purchasers of its Master Policy, and the Office of the Insurance Commissioner, may be properly
informed and act accordingly.

Petitioner Western would have us construe the Schedule of Indemnities as comprising contractual limitations of liability
which, as already noted, is comprehensively defined in Section 1 Liability to the Public" of the Master Policy. It is
wellsettled, however, that contractual limitations of liability found in insurance contracts should be regarded by courts with
a jaundiced eye and extreme care and should be so construed as to preclude the insurer from evading compliance with its
just obligations. 3

Finally, an insurance contract is a contract of adhesion. The rule is well entrenched in our jurisprudence that the terms of
such contract are to be construed strictly against the party which prepared the contract, which in this case happens to be
petitioner Western. 4

ACCORDINGLY, the Court Resolved to DENY the Petition for Review for lack of merit Costs against petitioner.

Fernan (Chairman), Gutierrez, Jr., Bidin and Cortes, JJ., concur.

__
G.R. No. L-4611 December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO.,
LTD., defendant-appellant.

Delgado, Flores & Macapagal for appellant.

Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile & Contreras for appellee.

REYES, J. B. L., J.:

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said province, seeking
to recover the proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance
Co., Ltd., upon certain bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the
original case were destroyed during the liberation of the region, and were reconstituted in 1946. After a trial that lasted
several years, the Court of First Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads as
follows:

Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the
former

(a) Under the first cause of action, the sum of P146,394.48;

(b) Under the second cause of action, the sum of P150,000;

(c) Under the third cause of action, the sum of P5,000;

(d) Under the fourth cause of action, the sum of P15,000; and
 (e) Under the fifth cause of action, the sum of P40,000;

all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the Insurance Act from
September 26, 1940, until each is paid, with costs against the defendant.

The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on Appeal, 166-167.)

From the decision, the defendant Insurance Company appealed directly to this Court.

The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas
Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in
which the appellee dealth extensively. They had been, with their contents, insured with the defendant Company since
1937, and the lose made payable to the Philippine National Bank as mortgage of the hemp and crops, to the extent of its
interest. On June, 1940, the insurance stood as follows:

Policy No. Property Insured Amount

2637164 (Exhibit
Bodega No. 1 (Building) P15,000.00
"LL")

Bodega No. 2 (Building) 10,000.00

Bodega No. 3 (Building) 25,000.00

2637165 (Exhibit "JJ")
Bodega No. 4 (Building) 10,000.00

Hemp Press moved by steam engine 5,000.00

Merchandise contents (copra and empty sacks of Bodega

2637345 (Exhibit "X") 150,000.00
No. 1)

2637346 (Exhibit "Y") Merchandise contents (hemp) of Bodega No. 3 150,000.00

2637067 (Exhibit
Merchandise contents (loose hemp) of Bodega No. 4 5,000.00
"GG")

Total P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and
completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren. Plaintiff-appellee informed the
insurer by telegram on the same date; and on the next day, the fire adjusters engaged by appellant insurance company
arrived and proceeded to examine and photograph the premises, pored over the books of the insured and conducted an
extensive investigation. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to
the full amount of the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties
and conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by other
persons in connivance with him.

With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother, Qua Chee Pao,
and some employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire
to the destroyed warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision
dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance money proceeded to its trial and
termination in the Court below, with the result noted at the start of this opinion. The Philippine National Bank's complaint in
intervention was dismissed because the appellee had managed to pay his indebtedness to the Bank during the pendecy
of the suit, and despite the fire losses.

In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were
avoided for breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of
the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions
read as follows:
 Memo. of Warranty. The undernoted Appliances for the extinction of fire being kept on the premises insured
hereby, and it being declared and understood that there is an ample and constant water supply with sufficient
pressure available at all seasons for the same, it is hereby warranted that the said appliances shall be maintained
in efficient working order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is
allowed on the premium chargeable under this policy.

Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement of
building, protected, with not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover
in convenient places, the hydrants being supplied with water pressure by a pumping engine, or from some other
source, capable of discharging at the rate of not less than 200 gallons of water per minute into the upper story of
the highest building protected, and a trained brigade of not less than 20 men to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee
should have eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby,
belonging to the municipality of Tabaco.

We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the
so-called fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never
existed from the very beginning, the appellant neverthless issued the policies in question subject to such warranty, and
received the corresponding premiums. It would be perilously close to conniving at fraud upon the insured to allow
appellant to claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect,
of which it was informed, and after it had misled the defendant into believing that the policies were effective.

The insurance company was aware, even before the policies were issued, that in the premises insured there were only
two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of TAbaco, contrary to the
requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents
inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That
such inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the discount on the
premium to which the insured was entitled, since the discount depended on the number of hydrants, and the fire fighting
equipment available (See "Scale of Allowances" to which the policies were expressly made subject). The law, supported
by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611-612) to be as follows:

It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of
existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge
constitutes a waiver of conditions in the contract inconsistent with the facts, and the insurer is stopped thereafter
from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any
showing to the contrary, that an insurance company intends to executed a valid contract in return for the premium
received; and when the policy contains a condition which renders it voidable at its inception, and this result is
known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding
contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have
taken his money without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.)

The reason for the rule is not difficult to find.

The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a
policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured
believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related
to positive fraud, as to the abhorent to fairminded men. It would be to allow the company to treat the policy as
valid long enough to get the preium on it, and leave it at liberty to repudiate it the next moment. This cannot be
deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true
intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to
be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).

The inequitableness of the conduct observed by the insurance company in this case is heightened by the fact that after
the insured had incurred the expense of installing the two hydrants, the company collected the premiums and issued him
a policy so worded that it gave the insured a discount much smaller than that he was normaly entitledto. According to the
"Scale of Allowances," a policy subject to a warranty of the existence of one fire hydrant for every 150 feet of external wall
entitled the insured to a discount of 7 1/2 per cent of the premium; while the existence of "hydrants, in compund"
(regardless of number) reduced the allowance on the premium to a mere 2 1/2 per cent. This schedule was logical, since
a greater number of hydrants and fire fighting appliances reduced the risk of loss. But the appellant company, in the
particular case now before us, so worded the policies that while exacting the greater number of fire hydrants and
appliances, it kept the premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double
benefit. No reason is shown why appellant's premises, that had been insured with appellant for several years past,
suddenly should be regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of appellant's own
scale of allowances. Such abnormal treatment of the insured strongly points at an abuse of the insurance company's
selection of the words and terms of the contract, over which it had absolute control.

These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable to the present
case. It is not a question here whether or not the parties may vary a written contract by oral evidence; but whether
testimony is receivable so that a party may be, by reason of inequitable conduct shown, estopped from enforcing
forfeitures in its favor, in order to forestall fraud or imposition on the insured.

Receipt of Premiums or Assessments afte Cause for Forfeiture Other than Nonpayment. It is a well settled rule
of law that an insurer which with knowledge of facts entitling it to treat a policy as no longer in force, receives and
accepts a preium on the policy, estopped to take advantage of the forfeiture. It cannot treat the policy as void for
the purpose of defense to an action to recover for a loss thereafter occurring and at the same time treat it as valid
for the purpose of earning and collecting further premiums." (29 Am. Jur., 653, p. 657.)

It would be unconscionable to permit a company to issue a policy under circumstances which it knew rendered
the policy void and then to accept and retain premiums under such a void policy. Neither law nor good morals
would justify such conduct and the doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire
vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.)

Moreover, taking into account the well known rule that ambiguities or obscurities must be strictly interpreted aganst the
prty that caused them, 1the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the
appliances called for in the insured premises, since its initial expression, "the undernoted appliances for the extinction of
fire being kept on the premises insured hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission
of the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply.

The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally rejected, since the
appellant's argument thereon is based on the assumption that the insured was bound to maintain no less than eleven
hydrants (one per 150 feet of wall), which requirement appellant is estopped from enforcing. The supposed breach of the
wter pressure condition is made to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in
3 seconds; appellant thereupon inferring that the maximum quantity obtainable from the hydrants was 100 gallons a
minute, when the warranty called for 200 gallons a minute. The transcript shows, however, that Serra repeatedly refused
and professed inability to estimate the rate of discharge of the water, and only gave the "5-gallon per 3-second" rate
because the insistence of appellant's counsel forced the witness to hazard a guess. Obviously, the testimony is worthless
and insufficient to establish the violation claimed, specially since the burden of its proof lay on appellant.

As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was organized, and
drilled, from time to give, altho not maintained as a permanently separate unit, which the warranty did not require.
Anyway, it would be unreasonable to expect the insured to maintain for his compound alone a fire fighting force that many
municipalities in the Islands do not even possess. There is no merit in appellant's claim that subordinate membership of
the business manager (Co Cuan) in the fire brigade, while its direction was entrusted to a minor employee unders the
testimony improbable. A business manager is not necessarily adept at fire fighting, the qualities required being different
for both activities.

Under the second assignment of error, appellant insurance company avers, that the insured violated the "Hemp Warranty"
provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since appellee admitted that there were 36
cans (latas) of gasoline in the building designed as "Bodega No. 2" that was a separate structure not affected by the fire. It
is well to note that gasoline is not specifically mentioned among the prohibited articles listed in the so-called "hemp
warranty." The cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid
products having a flash point below 300o Fahrenheit", and is decidedly ambiguous and uncertain; for in ordinary parlance,
"Oils" mean "lubricants" and not gasoline or kerosene. And how many insured, it may well be wondered, are in a position
to understand or determine "flash point below 003o Fahrenheit. Here, again, by reason of the exclusive control of the
insurance company over the terms and phraseology of the contract, the ambiguity must be held strictly against the insurer
and liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).

Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by experts
who know and can anticipate the hearing and possible complications of every contingency. So long as insurance
 companies insist upon the use of ambiguous, intricate and technical provisions, which conceal rather than frankly
disclose, their own intentions, the courts must, in fairness to those who purchase insurance, construe every
ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)

An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose for
which the policy was procured (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264).

We see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly and
unmistakably, in the language and terms that the general public can readily understand, without resort to obscure esoteric
expression (now derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American
Assurance Co. (17 Phil. 555, 561):

If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the
policy.

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

Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad, habra de ser tenido
en cuenta que al seguro es, practicamente un contrato de los llamados de adhesion y por consiguiente en caso
de duda sobre la significacion de las clausulas generales de una poliza redactada por las compafijas sin la
intervencion alguna de sus clientes se ha de adoptar de acuerdo con el articulo 1268 del Codigo Civil, la
interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la empresa aseguradora, que
debia haberse explicado mas claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but equally so for the
insurer; in fact, it is mere so for the latter, since its dominant bargaining position carries with it stricter responsibility.

Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental to his business,
being no more than a customary 2 day's supply for the five or six motor vehicles used for transporting of the stored
merchandise (t. s. n., pp. 1447-1448). "It is well settled that the keeping of inflammable oils on the premises though
prohibited by the policy does not void it if such keeping is incidental to the business." Bachrach vs. British American Ass.
Co., 17 Phil. 555, 560); and "according to the weight of authority, even though there are printed prohibitions against
keeping certain articles on the insured premises the policy will not be avoided by a violation of these prohibitions, if the
prohibited articles are necessary or in customary use in carrying on the trade or business conducted on the premises." (45
C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the "Hemp Warranty" forbade
storage only "in the building to which this insurance applies and/or in any building communicating therewith", and it is
undisputed that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned and where
the gasoline was found, stood isolated from the other insured bodegas.

The charge that the insured failed or refused to submit to the examiners of the insurer the books, vouchers, etc.
demanded by them was found unsubstantiated by the trial Court, and no reason has been shown to alter this finding. The
insured gave the insurance examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and the examiner even kept
and photographed some of the examined books in his possession. What does appear to have been rejected by the
insured was the demand that he should submit "a list of all books, vouchers, receiptsand other records" (Age 4, Exhibit 9-
c); but the refusal of the insured in this instance was well justified, since the demand for a list of all the vouchers (which
were not in use by the insured) and receipts was positively unreasonable, considering that such listing was superfluous
because the insurer was not denied access to the records, that the volume of Qua Chee Gan's business ran into millions,
and that the demand was made just after the fire when everything was in turmoil. That the representatives of the
insurance company were able to secure all the date they needed is proved by the fact that the adjuster Alexander Stewart
was able to prepare his own balance sheet (Exhibit L of the criminal case) that did not differ from that submitted by the
insured (Exhibit J) except for the valuation of the merchandise, as expressly found by the Court in the criminal case for
arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the decision of the arson
case (Exhibit WW) acquiting Qua Choc Gan, appellee in the present proceedings. The decision states (Exhibit WW, p.
11):

Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi como su existencia
de copra y abaca en las bodega al tiempo del incendio durante el periodo comprendido desde el 1.o de enero al
21 de junio de 1940 y ha encontrado que Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en
Tabaco. Segun Steward al llegar a este conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J'
que le ha entregado el mismo acusado Que Choc Gan en relacion con sus libros y lo ha encontrado correcto a
excepcion de los precios de abaca y copra que alli aparecen que no estan de acuerdo con los precios en el
mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue preparado por el mismo testigo.

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer, the Court
referred the controversy to a government auditor, Apolonio Ramos; but the latter reached a different result from the other
two. Not only that, but Ramos reported two different valuations that could be reached according to the methods employed
(Exhibit WW, p. 35):

La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promovar el comercio y la
finanza, pero en el caso presente ha resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado
del examen hecho por los contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo
examinado las mismas partidas y los mismos libros dichos contadores hayan de llegara dos conclusiones que
difieron sustancialmente entre si. En otras palabras, no solamente la comprobacion hecha por Stewart difiere de
la comprobacion hecha por Ramos sino que, segun este ultimo, su comprobacion ha dado lugar a dos resultados
diferentes dependiendo del metodo que se emplea.

Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer attempted to bolster its
case with alleged photographs of certain pages of the insurance book (destroyed by the war) of insured Qua Chee Gan
(Exhibits 26-A and 26-B) and allegedly showing abnormal purchases of hemp and copra from June 11 to June 20, 1940.
The Court below remained unconvinced of the authenticity of those photographs, and rejected them, because they were
not mentioned not introduced in the criminal case; and considering the evident importance of said exhibits in establishing
the motive of the insured in committing the arson charged, and the absence of adequate explanation for their omission in
the criminal case, we cannot say that their rejection in the civil case constituted reversible error.

The next two defenses pleaded by the insurer, that the insured connived at the loss and that the fraudulently inflated
the quantity of the insured stock in the burnt bodegas, are closely related to each other. Both defenses are predicted
on the assumption that the insured was in financial difficulties and set the fire to defraud the insurance company,
presumably in order to pay off the Philippine National Bank, to which most of the insured hemp and copra was pledged.
Both defenses are fatally undermined by the established fact that, notwithstanding the insurer's refusal to pay the value of
the policies the extensive resources of the insured (Exhibit WW) enabled him to pay off the National Bank in a short time;
and if he was able to do so, no motive appears for attempt to defraud the insurer. While the acquittal of the insured in the
arson case is not res judicataon the present civil action, the insurer's evidence, to judge from the decision in the criminal
case, is practically identical in both cases and must lead to the same result, since the proof to establish the defense of
connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that required in order to
convict the insured of the crime of arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).

As to the defense that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in
the fire claims, the insurer's case rests almost exclusively on the estimates, inferences and conclusionsAs to the defense
that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in the fire claims, the
insurer's case rests almost exclusively on the estimates, inferences and conclusions of its adjuster investigator, Alexander
D. Stewart, who examined the premises during and after the fire. His testimony, however, was based on inferences from
the photographs and traces found after the fire, and must yield to the contradictory testimony of engineer Andres Bolinas,
and specially of the then Chief of the Loan Department of the National Bank's Legaspi branch, Porfirio Barrios, and of
Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly before the fire, while inspecting
them for the mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these witnesses, and the
appellant insurer has failed to substantiate its charges aganst their character. In fact, the insurer's repeated accusations
that these witnesses were later "suspended for fraudulent transactions" without giving any details, is a plain attempt to
create prejudice against them, without the least support in fact.

Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp burned (t. s. n., pp.
1468, 1470), rebutted appellant's attacks on the refusal of the Court below to accept its inferences from the remains
shown in the photographs of the burned premises. It appears, likewise, that the adjuster's calculations of the maximum
contents of the destroyed warehouses rested on the assumption that all the copra and hemp were in sacks, and on the
result of his experiments to determine the space occupied by definite amounts of sacked copra. The error in the estimates
thus arrived at proceeds from the fact that a large amount of the insured's stock were in loose form, occupying less space
than when kept in sacks; and from Stewart's obvious failure to give due allowance for the compression of the material at
the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of the overlying stock, as shown by engineer Bolinas. It
is probable that the errors were due to inexperience (Stewart himself admitted that this was the first copra fire he had
investigated); but it is clear that such errors render valueles Stewart's computations. These were in fact twice passed
upon and twice rejected by different judges (in the criminal and civil cases) and their concordant opinion is practically
conclusive.

The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the opinions stated
therein were based on ex parte investigations made at the back of the insured; and the appellant did not present at the
trial the original testimony and documents from which the conclusions in the report were drawn.lawphi1.net

Appellant insurance company also contends that the claims filed by the insured contained false and fraudulent statements
that avoided the insurance policy. But the trial Court found that the discrepancies were a result of the insured's erroneous
interpretation of the provisions of the insurance policies and claim forms, caused by his imperfect knowledge of English,
and that the misstatements were innocently made and without intent to defraud. Our review of the lengthy record fails to
disclose reasons for rejecting these conclusions of the Court below. For example, the occurrence of previous fires in the
premises insured in 1939, altho omitted in the claims, Exhibits EE and FF, were nevertheless revealed by the insured in
his claims Exhibits Q (filed simultaneously with them), KK and WW. Considering that all these claims were submitted to
the smae agent, and that this same agent had paid the loss caused by the 1939 fire, we find no error in the trial Court's
acceptance of the insured's explanation that the omission in Exhibits EE and FF was due to inadvertance, for the insured
could hardly expect under such circumstances, that the 1939 would pass unnoticed by the insurance agents. Similarly, the
20 per cent overclaim on 70 per cent of the hemo stock, was explained by the insured as caused by his belief that he was
entitled to include in the claim his expected profit on the 70 per cent of the hemp, because the same was already
contracted for and sold to other parties before the fire occurred. Compared with other cases of over-valuation recorded in
our judicial annals, the 20 per cent excess in the case of the insured is not by itself sufficient to establish fraudulent intent.
Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger than the
actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China
Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85
while the goods insured were inventoried at O13,113. Certainly, the insured's overclaim of 20 per cent in the case at bar,
duly explained by him to the Court a quo, appears puny by comparison, and can not be regarded as "more than
misstatement, more than inadvertence of mistake, more than a mere error in opinion, more than a slight exaggeration"
(Tan It vs. Sun Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the
overchange of 20 per cent was claimed only on a part (70 per cent) of the hemp stock; had the insured acted with
fraudulent intent, nothing prevented him from increasing the value of all of his copra, hemp and buildings in the same
proportion. This also applies to the alleged fraudulent claim for burned empty sacks, that was likewise explained to our
satisfaction and that of the trial Court. The rule is that to avoid a policy, the false swearing must be wilful and with intent to
defraud (29 Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent would not authorize
the collection of the expected profit under the terms of the polices, and the trial Court correctly deducte the same from its
award.

We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed. Costs against the
appellant. So ordered.

Paras, C. J., Padilla, Montemayor, Reyes, A., Jugo, Labrador, and Concepcion, J

__

G.R. No. 92383 July 17, 1992

SUN INSURANCE OFFICE, LTD., petitioner,

vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:
The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face value of P200,000.00. Two months
later, he was dead with a bullet wound in his head. As beneficiary, his wife Nerissa Lim sought payment on the policy but
her claim was rejected. The petitioner agreed that there was no suicide. It argued, however that there was no accident
either.

Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on October 6, 1982, at about 10 o'clock
in the evening, after his mother's birthday party. According to Nalagon, Lim was in a happy mood (but not drunk) and was
playing with his handgun, from which he had previously removed the magazine. As she watched television, he stood in
front of her and pointed the gun at her. She pushed it aside and said it might he loaded. He assured her it was not and
then pointed it to his temple. The next moment there was an explosion and Lim slumped to the floor. He was dead before
he fell. 1

The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was sustained. 2 The petitioner was
sentenced to pay her P200,000.00, representing the face value of the policy, with interest at the legal rate; P10,000.00 as
moral damages; P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory damages; and P5,000.00 as
attorney's fees, plus the costs of the suit. This decision was affirmed on appeal, and the motion for reconsideration was
denied. 3 The petitioner then came to this Court to fault the Court of Appeals for approving the payment of the claim and
the award of damages.

The term "accident" has been defined as follows:

The words "accident" and "accidental" have never acquired any technical signification in law, and when used in an
insurance contract are to be construed and considered according to the ordinary understanding and common usage and
speech of people generally. In-substance, the courts are practically agreed that the words "accident" and "accidental"
mean that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual, and
unforeseen. The definition that has usually been adopted by the courts is that 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 case, and therefore not expected. 4

An accident is an event which happens without any human agency or, if happening through human agency, an event
which, under the circumstances, is unusual to and not expected by the person to whom it happens. It has also been
defined as an injury which happens by reason of some violence or casualty to the injured without his design, consent, or
voluntary co-operation. 5

In light of these definitions, the Court is convinced that the incident that resulted in Lim's death was indeed an accident.
The petitioner, invoking the case of De la Cruz v. Capital Insurance, 6 says that "there is no accident when a deliberate act
is performed unless some additional, unexpected, independent and unforeseen happening occurs which produces or
brings about their injury or death." There was such a happening. This was the firing of the gun, which was the additional
unexpected and independent and unforeseen occurrence that led to the insured person's death.

The petitioner also cites one of the four exceptions provided for in the insurance contract and contends that the private
petitioner's claim is barred by such provision. It is there stated:

Exceptions

The company shall not be liable in respect of

1. Bodily injury

xxx xxx xxx

b. consequent upon

i) The insured person attempting to commit suicide or willfully exposing himself to needless peril except in
an attempt to save human life.

To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the petitioner contends that the insured
willfully exposed himself to needless peril and thus removed himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril are in pari materia because they both
signify a disregard for one's life. The only difference is in degree, as suicide imports a positive act of ending such life
whereas the second act indicates a reckless risking of it that is almost suicidal in intent. To illustrate, a person who walks
a tightrope one thousand meters above the ground and without any safety device may not actually be intending to commit
suicide, but his act is nonetheless suicidal. He would thus be considered as "willfully exposing himself to needless peril"
within the meaning of the exception in question.

The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim had willfully exposed himself to
needless peril and so came under the exception. The theory is that a gun is per se dangerous and should therefore be
handled cautiously in every case.

That posture is arguable. But what is not is that, as the secretary testified, Lim had removed the magazine from the gun
and believed it was no longer dangerous. He expressly assured her that the gun was not loaded. It is submitted that Lim
did not willfully expose himself to needless peril when he pointed the gun to his temple because the fact is that he thought
it was not unsafe to do so. The act was precisely intended to assure Nalagon that the gun was indeed harmless.

The contrary view is expressed by the petitioner thus:

Accident insurance policies were never intended to reward the insured for his tendency to show off or for
his miscalculations. They were intended to provide for contingencies. Hence, when I miscalculate and
jump from the Quezon Bridge into the Pasig River in the belief that I can overcome the current, I have
wilfully exposed myself to peril and must accept the consequences of my act. If I drown I cannot go to the
insurance company to ask them to compensate me for my failure to swim as well as I thought I could. The
insured in the case at bar deliberately put the gun to his head and pulled the trigger. He wilfully exposed
himself to peril.

The Court certainly agrees that a drowned man cannot go to the insurance company to ask for compensation. That might
frighten the insurance people to death. We also agree that under the circumstances narrated, his beneficiary would not be
able to collect on the insurance policy for it is clear that when he braved the currents below, he deliberately exposed
himself to a known peril.

The private respondent maintains that Lim did not. That is where she says the analogy fails. The petitioner's hypothetical
swimmer knew when he dived off the Quezon Bridge that the currents below were dangerous. By contrast, Lim did not
know that the gun he put to his head was loaded.

Lim was unquestionably negligent and that negligence cost him his own life. But it should not prevent his widow from
recovering from the insurance policy he obtained precisely against accident. There is nothing in the policy that relieves the
insurer of the responsibility to pay the indemnity agreed upon if the insured is shown to have contributed to his own
accident. Indeed, most accidents are caused by negligence. There are only four exceptions expressly made in the
contract to relieve the insurer from liability, and none of these exceptions is applicable in the case at bar. **

It bears noting that insurance contracts are as a rule supposed to be interpreted liberally in favor of the assured. There is
no reason to deviate from this rule, especially in view of the circumstances of this case as above analyzed.

On the second assigned error, however, the Court must rule in favor of the petitioner. The basic issue raised in this case
is, as the petitioner correctly observed, one of first impression. It is evident that the petitioner was acting in good faith then
it resisted the private respondent's claim on the ground that the death of the insured was covered by the exception. The
issue was indeed debatable and was clearly not raised only for the purpose of evading a legitimate obligation. We hold
therefore that the award of moral and exemplary damages and of attorney's fees is unjust and so must be disapproved.

In order that a person may be made liable to the payment of moral damages, the law requires that his act
be wrongful. The adverse result of an action does not per se make the act wrongful and subject the act or
to the payment of moral damages. The law could not have meant to impose a penalty on the right to
litigate; such right is so precious that moral damages may not be charged on those who may exercise it
erroneously. For these the law taxes costs. 7

The fact that the results of the trial were adverse to Barreto did not alone make his act in bringing the
action wrongful because in most cases one party will lose; we would be imposing an unjust condition or
limitation on the right to litigate. We hold that the award of moral damages in the case at bar is not
justified by the facts had circumstances as well as the law.
 If a party wins, he cannot, as a rule, recover attorney's fees and litigation expenses, since it is not the fact
of winning alone that entitles him to recover such damages of the exceptional circumstances enumerated
in Art. 2208. Otherwise, every time a defendant wins, automatically the plaintiff must pay attorney's fees
thereby putting a premium on the right to litigate which should not be so. For those expenses, the law
deems the award of costs as sufficient. 8

WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as it holds the petitioner liable to
the private respondent in the sum of P200,000.00 representing the face value of the insurance contract, with interest at
the legal rate from the date of the filing of the complaint until the full amount is paid, but MODIFIED with the deletion of all
awards for damages, including attorney's fees, except the costs of the suit.

SO ORDERED.

Grio-Aquino, Medialdea and Bellosillo, JJ., concur.

__

G.R. No. 112360 July 18, 2000

RIZAL SURETY & INSURANCE COMPANY, petitioner,

vs.
COURT OF APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.

DECISION

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to annul and set aside the July
15, 1993 Decision1 and October 22, 1993 Resolution2 of the Court of Appeals3 in CA-G.R. CV NO. 28779, which modified
the Ruling4 of the Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106.

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance Policy No. 45727 in favor
of Transworld Knitting Mills, Inc. (Transworld), initially for One Million (1,000,000.00) Pesos and eventually increased to
One Million Five Hundred Thousand (1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13,
1981.

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

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

xxx xxx xxx

Said building of four-span lofty one storey in height with mezzanine portions is constructed of reinforced concrete and
hollow blocks and/or concrete under galvanized iron roof and occupied as hosiery mills, garment and lingerie factory,
transistor-stereo assembly plant, offices, warehouse and caretaker's quarters.

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

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

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

On May 26, 1982, private respondent brought against the said insurance companies an action for collection of sum of
money and damages, docketed as Civil Case No. 46106 before Branch 161 of the then Court of First Instance of Rizal;
praying for judgment ordering Rizal Insurance and New India to pay the amount of 2,747, 867.00 plus legal interest,
400,000.00 as attorney's fees, exemplary damages, expenses of litigation of 50,000.00 and costs of suit. 6

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

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

"ACCORDINGLY, judgment is hereby rendered as follows:

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

(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic) Knitting Mills, Inc. the
amount of P826, 500.00 representing the actual value of the losses suffered by it; and

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

SO ORDERED."8

Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting Mills, Inc., went to the Court of
Appeals, which came out with its decision of July 15, 1993 under attack, the decretal portion of which reads:

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

No costs.

SO ORDERED."9

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

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

Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for Reconsideration before the Court
of Appeals, and on October 22, 1993, the Court of Appeals reconsidered its decision of July 15, 1993, as regards the
imposition of interest, ruling thus:

"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the imposition of legal interest is concerned,
that, on the assessment against New India Assurance Company on the amount of P1,818,604.19 and that against Rizal
Surety & Insurance Company on the amount of P470,328.67, from May 26, 1982 when the complaint was filed until
payment is made. The rest of the said decision is retained in all other respects.

SO ORDERED."10

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

I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING WHERE THE BULK OF
THE BURNED PROPERTIES WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE INSURANCE
POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.

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

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

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated upon protected only the contents of the main building
(four-span),12 and did not include those stored in the two-storey annex building. On the other hand, the private respondent
theorized that the so called "annex" was not an annex but was actually an integral part of the four-span building13 and
therefore, the goods and items stored therein were covered by the same fire insurance policy.

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

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

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

"First, said properties must be contained and/or stored in the areas occupied by Transworld and second, said areas must
form part of the building described in the policy xxx"14

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

The Court is mindful of the well-entrenched doctrine that factual findings by the Court of Appeals are conclusive on the
parties and not reviewable by this Court, and the same carry even more weight when the Court of Appeals has affirmed
the findings of fact arrived at by the lower court.15

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

"Two-storey building constructed of partly timber and partly concrete hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the lofty storey building and thence by property fence wall." 16
Verily, the two-storey building involved, a permanent structure which adjoins and intercommunicates with the "first right
span of the lofty storey building",17 formed part thereof, and meets the requisites for compensability under the fire
insurance policy sued upon.

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

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

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

"Art.1377. The interpretation of obscure words or stipulations in a contract shall not favor the party who caused the
obscurity"

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

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

Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company, Inc. vs. Vda. De Songco,21 to
wit:

"'This rigid application of the rule on ambiguities has become necessary in view of current business practices.1wphi1The
courts cannot ignore that nowadays monopolies, cartels and concentration of capital, endowed with overwhelming
economic power, manage to impose upon parties dealing with them cunningly prepared 'agreements' that the weaker
party may not change one whit, his participation in the 'agreement' being reduced to the alternative to 'take it or leave it'
labelled since Raymond Saleilles 'contracts by adherence' (contrats [sic] d'adhesion), in contrast to these entered into by
parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are
prime example) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting
the weaker party from abuses and imposition, and prevent their becoming traps for the unwary (New Civil Code, Article
24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942.)'"22

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

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

Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc. vs. Court of Appeals,24 held
that the issue of negligence of the shipping line, which issue had already been passed upon in a case filed by one of the
insurers, is conclusive and can no longer be relitigated in a similar case filed by another insurer against the same shipping
line on the basis of the same factual circumstances. Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been negligent, or so negligent as to have
proximately caused the collision between them, was an issue that was actually, directly and expressly raised, controverted
and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the 'Don Carlos' to
have been negligent rather than the 'Yotai Maru' and, as already noted, that Decision was affirmed by this Court in G.R.
No. L-48839 in a Resolution dated 6 December 1987. The Reyes Decision thus became final and executory
approximately two (2) years before the Sison Decision, which is assailed in the case at bar, was promulgated. Applying
the rule of conclusiveness of judgment, the question of which vessel had been negligent in the collision between the two
(2) vessels, had long been settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206-R. Private
respondent Go Thong was certainly bound by the ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the Decision of this Court affirming the Reyes Decision."25

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

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

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

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

SO ORDERED.

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

Footnotes

__
G.R. No. 78860 May 28, 1990

PERLA COMPANIA DE SEGUROS, INC., petitioner,

vs.
HONORABLE COURT OF APPEALS and MILAGROS CAYAS, respondents.

Yabut, Arandia & Associates for petitioner.

Dolorfino and Dominguez Law Offices for private respondent.

FERNAN, C.J.:

This is a petition for review on certiorari of the decision of the Court of Appeals 1 affirming in toto the decision of the
Regional Trial Court of Cavite, Branch XVI, 2 the dispositive portion of which states:

IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering defendant Perla Compania de
Seguros, Inc. to pay plaintiff Milagros Cayas the sum of P50,000.00 under its maximum liability as
 provided for in the insurance policy; and the sum of P5,000.00 as reasonable attorney's fee with costs
against said defendant.

SO ORDERED. 3

Private respondent Milagros Cayas was the registered owner of a Mazda bus with serial No. TA3H4 P-000445 and plate
No. PUB-4G-593. 4 Said passenger vehicle was insured with Perla Compania de Seguros, Inc. (PCSI) under policy No.
LTO/60CC04241 issued on February 3, 1978. 5

On December 17, 1978, the bus figured in an accident in Naic, Cavite injuring several of its passengers. One of them, 19-
year old Edgardo Perea, sued Milagros Cayas for damages in the Court of First Instance of Cavite, Branch 6 docketed as
Civil Case No. NC-794; while three others, namely: Rosario del Carmen, Ricardo Magsarili and Charlie Antolin, agreed to
a settlement of P4,000.00 each with Milagros Cayas.

At the pre-trial of Civil Case No. NC-794, Milagros Cayas failed to appear and hence, she was declared as in default. After
trial, the court rendered a decision 7 in favor of Perea with its dispositive portion reading thus:

WHEREFORE, under our present imperatives, judgment is hereby rendered in favor of the plaintiffs and
against the defendant Milagros Cayas who is hereby ordered to compensate the plaintiff' Edgar Perea
with damages in the sum of Ten Thousand (Pl0,000.00) Pesos for the medical predicament he found
himself as damaging consequences of defendant Milagros Cayas complete lack of diligence of a good
father of a family' when she secured the driving services of one Oscar Figueroa on December, 17, 1978;
the sum of Ten Thousand (P10,000.00) Pesos for exemplary damages; the sum of Five Thousand
(P5,000.00) Pesos for moral damages; the sum of Seven Thousand (P7,000.00) Pesos for Attorney's
fees, under the imperatives of the monetary power of the peso today;

With costs against the defendant.

SO ORDERED.

When the decision in Civil Case No. NC-794 was about to be executed against her, Milagros Cayas filed a complaint
against PCSI in the Office of the Insurance Commissioner praying that PCSI be ordered to pay P40,000.00 for all the
claims against her arising from the vehicular accident plus legal and other expenses. 8Realizing her procedural mistake,
she later withdrew said complaint. 9

Consequently, on November 11, 1981, Milagros Cayas filed a complaint for a sum of money and damages against PCSI
in the Court of First Instance of Cavite (Civil Case No. N-4161). She alleged therein that to satisfy the judgment in Civil
Case No. NC-794, her house and lot were levied upon and sold at public auction for P38,200; 10 that to avoid numerous
suits and the "detention" of the insured vehicle, she paid P4,000 to each of the following injured passengers: Rosario del
Carmen, Ricardo Magsarili and Charlie Antolin; that she could not have suffered said financial setback had the counsel for
PCSI, who also represented her, appeared at the trial of Civil Case No. NC-794 and attended to the claims of the three
other victims; that she sought reimbursement of said amounts from the defendant, which notwithstanding the fact that her
claim was within its contractual liability under the insurance policy, refused to make such re-imbursement; that she
suffered moral damages as a consequence of such refusal, and that she was constrained to secure the services of
counsel to protect her rights. She prayed that judgment be rendered directing PCSI to pay her P50,000 for compensation
of the injured victims, such sum as the court might approximate as damages, and P6,000 as attorney's fees.

In view of Milagros Cayas' failure to prosecute the case, the court motu propio ordered its dismissal without
prejudice. 11 Alleging that she had not received a copy of the answer to the complaint, and that "out of sportsmanship",
she did not file a motion to hold PCSI in default, Milagros Cayas moved for the reconsideration of the dismissal order.
Said motion for reconsideration was acted upon favorably by the court in its order of March 31, 1982.

About two months later, Milagros Cayas filed a motion to declare PCSI in default for its failure to file an answer. The
motion was granted and plaintiff was allowed to adduce evidence ex-parte. On July 13, 1982, the court rendered judgment
by default ordering PCSI to pay Milagros Cayas P50,000 as compensation for the injured passengers, P5,000 as moral
damages and P5,000 as attorney's fees.

Said decision was set aside after the PCSI filed a motion therefor. Trial of the case ensued. In due course, the court
promulgated a decision in Civil Case No. N-4161, the dispositive portion of which was quoted earlier, finding that:
 In disavowing its obligation to plaintiff under the insurance policy, defendant advanced the proposition
that before it can be made to pay, the liability must first be determined in an appropriate court action. And
so plaintiffs liability was determined in that case filed against her by Perea in the Naic CFI. Still, despite
this determination of liability, defendant sought escape from its obligation by positing the theory that
plaintiff Milagros Cayas lost the Naic case due to her negligence because of which, efforts exerted by
defendant's lawyers in protecting Cayas' rights proved futile and rendered nugatory. Blame was laid
entirely on plaintiff by defendant for losing the Naic case. Defendant labored under the impression that
had Cayas cooperated fully with defendant's lawyers, the latter could have won the suit and thus relieved
of any obligation to Perea Defendant's posture is stretching the factual circumstances of the Naic case
too far. But even accepting defendant's postulate, it cannot be said, nor was it shown positively and
convincingly, that if the Naic case had proceeded on trial on the merits, a decision favorable to Milagros
Cayas could have been obtained. Nor was it definitely established that if the pre-trial was undertaken in
that case, defendant's lawyers could have mitigated the claim for damages by Perea against Cayas. 12

The court, however, held that inasmuch as Milagros Cayas failed to establish that she underwant moral suffering and
mental anguish to justify her prayer for damages, there should be no such award. But, there being proof that she was
compelled to engage the services of counsel to protect her rights under the insurance policy, the court allowed attorney's
fees in the amount of P5,000.

PCSI appealed to the Court of Appeals, which, in its decision of May 8, 1987 affirmed in toto the lower court's decision. Its
motion for reconsideration having been denied by said appellate court, PCSI filed the instant petition charging the Court of
Appeals with having erred in affirming in toto the decision of the lower court.

At the outset, we hold as factual and therefore undeserving of this Court's attention, petitioner's assertions that private
respondent lost Civil Case No. NC-794 because of her negligence and that there is no proof that the decision in said case
has been executed. Said contentions, having been raised and threshed out in the Court of Appeals and rejected by it, may
no longer be addressed to this Court.

Petitioner's other contentions are primarily concerned with the extent of its liability to private respondent under the
insurance policy. This, we consider to be the only issue in this case.

Petitioner seeks to limit its liability only to the payment made by private respondent to Perea and only up to the amount of
P12,000.00. It altogether denies liability for the payments made by private respondents to the other three (3) injured
passengers Rosario del Carmen, Ricardo Magsarili and Charlie Antolin in the amount of P4,000.00 each or a total of
P12,000.00.

There is merit in petitioner's assertions.

The insurance policy involved explicitly limits petitioner's liability to P12,000.00 per person and to P50,000.00 per
accident. 13 Pertinent provisions of the policy also state:

SECTION I-Liability to the Public

xxx xxx xxx

3. The Limit of Liability stated in Schedule A as applicable (a) to THIRD PARTY is the
limit of the Company's liability for all damages arising out of death, bodily injury and
damage to property combined so sustained as the result of any one accident; (b) "per
person" for PASSENGER liability is the limit of the Company's liability for all damages
arising out of death or bodily injury sustained by one person as the result of any one
accident: (c) "per accident" for PASSENGER liability is, subject to the above provisions
respecting per person, the total limit of the Company's liability for all such damages
arising out of death or bodily injury sustained by two or more persons as the result of any
one accident.

Conditions Applicable to All Sections

xxx xxx xxx

 5. No admission, offer, promise or payment shall be made by or on behalf of the insured
without the written consent of the Company which shall be entitled, if it so desires, to take
over and conduct in his (sic) name the defense or settlement of any claim, or to
prosecute in his (sic) name for its own benefit any claim for indemnity or damages or
otherwise, and shall have full discretion in the conduct of any proceedings in the
settlement of any claim, and the insured shall give all such information and assistance as
the Company may require. If the Company shall make any payment in settlement of any
claim, and such payment includes any amount not covered by this Policy, the Insured
shall repay the Company the amount not so covered.

We have ruled in Stokes vs. Malayan Insurance Co., Inc., 14 that the terms of the contract constitute the measure of the
insurer's liability and compliance therewith is a condition precedent to the insured's right of recovery from the insurer.

In the case at bar, the insurance policy clearly and categorically placed petitioner's liability for all damages arising out of
death or bodily injury sustained by one person as a result of any one accident at P12,000.00. Said amount complied with
the minimum fixed by the law then prevailing, Section 377 of Presidential Decree No. 612 (which was retained by P.D. No.
1460, the Insurance Code of 1978), which provided that the liability of land transportation vehicle operators for bodily
injuries sustained by a passenger arising out of the use of their vehicles shall not be less than P12,000. In other words,
under the law, the minimum liability is P12,000 per passenger. Petitioner's liability under the insurance contract not being
less than P12,000.00, and therefore not contrary to law, morals, good customs, public order or public policy, said
stipulation must be upheld as effective, valid and binding as between the parties. 15

In like manner, we rule as valid and binding upon private respondent the condition above-quoted requiring her to secure
the written permission of petitioner before effecting any payment in settlement of any claim against her. There is nothing
unreasonable, arbitrary or objectionable in this stipulation as would warrant its nullification. The same was obviously
designed to safeguard the insurer's interest against collusion between the insured and the claimants.

In her cross-examination before the trial court, Milagros Cayas admitted, thus:

Atty. Yabut:

q With respect to the other injured passengers of your bus wherein you made payments you did
not secure the consent of defendant (herein petitioner) Perla Compania de Seguros when you
made those payments?

a I informed them about that

q But they did not give you the written authority that you were supposed to pay those claims?

a No, sir . l6

It being specifically required that petitioner's written consent be first secured before any payment in settlement of any
claim could be made, private respondent is precluded from seeking reimbursement of the payments made to del Carmen,
Magsarili and Antolin in view of her failure to comply with the condition contained in the insurance policy.

Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application
in the present case. 17 Thus, it was error on the part of the trial and appellate courts to have disregarded the stipulations of
the parties and to have substituted their own interpretation of the insurance policy. In Phil. American General Insurance
Co., Inc vs. Mutuc, 18 we ruled that contracts which are the private laws of the contracting parties should be fulfilled
according to the literal sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of
the contracting parties, for contracts are obligatory, no matter what form they may be, whenever the essential requisites
for their validity are present.

Moreover, we stated in Pacific Oxygen & Acetylene Co. vs. Central Bank," 19 that the first and fundamental duty of the
courts is the application of the law according to its express terms, interpretation being called for only when such literal
application is impossible.

We observe that although Milagros Cayas was able to prove a total loss of only P44,000.00, petitioner was made liable for
the amount of P50,000.00, the maximum liability per accident stipulated in the policy. This is patent error. An insurance
indemnity, being merely an assistance or restitution insofar as can be fairly ascertained, cannot be availed of by any
accident victim or claimant as an instrument of enrichment by reason of an accident. 20

Finally, we find no reason to disturb the award of attorney's fees.

WHEREFORE, the decision of the Court of Appeals is hereby modified in that petitioner shall pay Milagros Cayas the
amount of Twelve Thousand Pesos (P12,000. 00) plus legal interest from the promulgation of the decision of the lower
court until it is fully paid and attorney's fees in the amount of P5,000.00. No pronouncement as to costs.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes JJ., concur.

G.R. No. 78860 May 28, 1990

PERLA COMPANIA DE SEGUROS, INC., petitioner,

vs.
HONORABLE COURT OF APPEALS and MILAGROS CAYAS, respondents.

Yabut, Arandia & Associates for petitioner.

Dolorfino and Dominguez Law Offices for private respondent.

FERNAN, C.J.:

This is a petition for review on certiorari of the decision of the Court of Appeals 1 affirming in toto the decision of the
Regional Trial Court of Cavite, Branch XVI, 2 the dispositive portion of which states:

IN VIEW OF THE FOREGOING, judgment is hereby rendered ordering defendant Perla Compania de
Seguros, Inc. to pay plaintiff Milagros Cayas the sum of P50,000.00 under its maximum liability as
provided for in the insurance policy; and the sum of P5,000.00 as reasonable attorney's fee with costs
against said defendant.

SO ORDERED. 3

Private respondent Milagros Cayas was the registered owner of a Mazda bus with serial No. TA3H4 P-000445 and plate
No. PUB-4G-593. 4 Said passenger vehicle was insured with Perla Compania de Seguros, Inc. (PCSI) under policy No.
LTO/60CC04241 issued on February 3, 1978. 5

On December 17, 1978, the bus figured in an accident in Naic, Cavite injuring several of its passengers. One of them, 19-
year old Edgardo Perea, sued Milagros Cayas for damages in the Court of First Instance of Cavite, Branch 6 docketed as
Civil Case No. NC-794; while three others, namely: Rosario del Carmen, Ricardo Magsarili and Charlie Antolin, agreed to
a settlement of P4,000.00 each with Milagros Cayas.

At the pre-trial of Civil Case No. NC-794, Milagros Cayas failed to appear and hence, she was declared as in default. After
trial, the court rendered a decision 7 in favor of Perea with its dispositive portion reading thus:

WHEREFORE, under our present imperatives, judgment is hereby rendered in favor of the plaintiffs and
against the defendant Milagros Cayas who is hereby ordered to compensate the plaintiff' Edgar Perea
with damages in the sum of Ten Thousand (Pl0,000.00) Pesos for the medical predicament he found
himself as damaging consequences of defendant Milagros Cayas complete lack of diligence of a good
father of a family' when she secured the driving services of one Oscar Figueroa on December, 17, 1978;
the sum of Ten Thousand (P10,000.00) Pesos for exemplary damages; the sum of Five Thousand
(P5,000.00) Pesos for moral damages; the sum of Seven Thousand (P7,000.00) Pesos for Attorney's
fees, under the imperatives of the monetary power of the peso today;
 With costs against the defendant.

SO ORDERED.

When the decision in Civil Case No. NC-794 was about to be executed against her, Milagros Cayas filed a complaint
against PCSI in the Office of the Insurance Commissioner praying that PCSI be ordered to pay P40,000.00 for all the
claims against her arising from the vehicular accident plus legal and other expenses. 8Realizing her procedural mistake,
she later withdrew said complaint. 9

Consequently, on November 11, 1981, Milagros Cayas filed a complaint for a sum of money and damages against PCSI
in the Court of First Instance of Cavite (Civil Case No. N-4161). She alleged therein that to satisfy the judgment in Civil
Case No. NC-794, her house and lot were levied upon and sold at public auction for P38,200; 10 that to avoid numerous
suits and the "detention" of the insured vehicle, she paid P4,000 to each of the following injured passengers: Rosario del
Carmen, Ricardo Magsarili and Charlie Antolin; that she could not have suffered said financial setback had the counsel for
PCSI, who also represented her, appeared at the trial of Civil Case No. NC-794 and attended to the claims of the three
other victims; that she sought reimbursement of said amounts from the defendant, which notwithstanding the fact that her
claim was within its contractual liability under the insurance policy, refused to make such re-imbursement; that she
suffered moral damages as a consequence of such refusal, and that she was constrained to secure the services of
counsel to protect her rights. She prayed that judgment be rendered directing PCSI to pay her P50,000 for compensation
of the injured victims, such sum as the court might approximate as damages, and P6,000 as attorney's fees.

In view of Milagros Cayas' failure to prosecute the case, the court motu propio ordered its dismissal without
prejudice. 11 Alleging that she had not received a copy of the answer to the complaint, and that "out of sportsmanship",
she did not file a motion to hold PCSI in default, Milagros Cayas moved for the reconsideration of the dismissal order.
Said motion for reconsideration was acted upon favorably by the court in its order of March 31, 1982.

About two months later, Milagros Cayas filed a motion to declare PCSI in default for its failure to file an answer. The
motion was granted and plaintiff was allowed to adduce evidence ex-parte. On July 13, 1982, the court rendered judgment
by default ordering PCSI to pay Milagros Cayas P50,000 as compensation for the injured passengers, P5,000 as moral
damages and P5,000 as attorney's fees.

Said decision was set aside after the PCSI filed a motion therefor. Trial of the case ensued. In due course, the court
promulgated a decision in Civil Case No. N-4161, the dispositive portion of which was quoted earlier, finding that:

In disavowing its obligation to plaintiff under the insurance policy, defendant advanced the proposition
that before it can be made to pay, the liability must first be determined in an appropriate court action. And
so plaintiffs liability was determined in that case filed against her by Perea in the Naic CFI. Still, despite
this determination of liability, defendant sought escape from its obligation by positing the theory that
plaintiff Milagros Cayas lost the Naic case due to her negligence because of which, efforts exerted by
defendant's lawyers in protecting Cayas' rights proved futile and rendered nugatory. Blame was laid
entirely on plaintiff by defendant for losing the Naic case. Defendant labored under the impression that
had Cayas cooperated fully with defendant's lawyers, the latter could have won the suit and thus relieved
of any obligation to Perea Defendant's posture is stretching the factual circumstances of the Naic case
too far. But even accepting defendant's postulate, it cannot be said, nor was it shown positively and
convincingly, that if the Naic case had proceeded on trial on the merits, a decision favorable to Milagros
Cayas could have been obtained. Nor was it definitely established that if the pre-trial was undertaken in
that case, defendant's lawyers could have mitigated the claim for damages by Perea against Cayas. 12

The court, however, held that inasmuch as Milagros Cayas failed to establish that she underwant moral suffering and
mental anguish to justify her prayer for damages, there should be no such award. But, there being proof that she was
compelled to engage the services of counsel to protect her rights under the insurance policy, the court allowed attorney's
fees in the amount of P5,000.

PCSI appealed to the Court of Appeals, which, in its decision of May 8, 1987 affirmed in toto the lower court's decision. Its
motion for reconsideration having been denied by said appellate court, PCSI filed the instant petition charging the Court of
Appeals with having erred in affirming in toto the decision of the lower court.

At the outset, we hold as factual and therefore undeserving of this Court's attention, petitioner's assertions that private
respondent lost Civil Case No. NC-794 because of her negligence and that there is no proof that the decision in said case
has been executed. Said contentions, having been raised and threshed out in the Court of Appeals and rejected by it, may
no longer be addressed to this Court.

Petitioner's other contentions are primarily concerned with the extent of its liability to private respondent under the
insurance policy. This, we consider to be the only issue in this case.

Petitioner seeks to limit its liability only to the payment made by private respondent to Perea and only up to the amount of
P12,000.00. It altogether denies liability for the payments made by private respondents to the other three (3) injured
passengers Rosario del Carmen, Ricardo Magsarili and Charlie Antolin in the amount of P4,000.00 each or a total of
P12,000.00.

There is merit in petitioner's assertions.

The insurance policy involved explicitly limits petitioner's liability to P12,000.00 per person and to P50,000.00 per
accident. 13 Pertinent provisions of the policy also state:

SECTION I-Liability to the Public

xxx xxx xxx

3. The Limit of Liability stated in Schedule A as applicable (a) to THIRD PARTY is the
limit of the Company's liability for all damages arising out of death, bodily injury and
damage to property combined so sustained as the result of any one accident; (b) "per
person" for PASSENGER liability is the limit of the Company's liability for all damages
arising out of death or bodily injury sustained by one person as the result of any one
accident: (c) "per accident" for PASSENGER liability is, subject to the above provisions
respecting per person, the total limit of the Company's liability for all such damages
arising out of death or bodily injury sustained by two or more persons as the result of any
one accident.

Conditions Applicable to All Sections

xxx xxx xxx

5. No admission, offer, promise or payment shall be made by or on behalf of the insured

without the written consent of the Company which shall be entitled, if it so desires, to take
over and conduct in his (sic) name the defense or settlement of any claim, or to
prosecute in his (sic) name for its own benefit any claim for indemnity or damages or
otherwise, and shall have full discretion in the conduct of any proceedings in the
settlement of any claim, and the insured shall give all such information and assistance as
the Company may require. If the Company shall make any payment in settlement of any
claim, and such payment includes any amount not covered by this Policy, the Insured
shall repay the Company the amount not so covered.

We have ruled in Stokes vs. Malayan Insurance Co., Inc., 14 that the terms of the contract constitute the measure of the
insurer's liability and compliance therewith is a condition precedent to the insured's right of recovery from the insurer.

In the case at bar, the insurance policy clearly and categorically placed petitioner's liability for all damages arising out of
death or bodily injury sustained by one person as a result of any one accident at P12,000.00. Said amount complied with
the minimum fixed by the law then prevailing, Section 377 of Presidential Decree No. 612 (which was retained by P.D. No.
1460, the Insurance Code of 1978), which provided that the liability of land transportation vehicle operators for bodily
injuries sustained by a passenger arising out of the use of their vehicles shall not be less than P12,000. In other words,
under the law, the minimum liability is P12,000 per passenger. Petitioner's liability under the insurance contract not being
less than P12,000.00, and therefore not contrary to law, morals, good customs, public order or public policy, said
stipulation must be upheld as effective, valid and binding as between the parties. 15

In like manner, we rule as valid and binding upon private respondent the condition above-quoted requiring her to secure
the written permission of petitioner before effecting any payment in settlement of any claim against her. There is nothing
unreasonable, arbitrary or objectionable in this stipulation as would warrant its nullification. The same was obviously
designed to safeguard the insurer's interest against collusion between the insured and the claimants.

In her cross-examination before the trial court, Milagros Cayas admitted, thus:

Atty. Yabut:

q With respect to the other injured passengers of your bus wherein you made payments you did
not secure the consent of defendant (herein petitioner) Perla Compania de Seguros when you
made those payments?

a I informed them about that

q But they did not give you the written authority that you were supposed to pay those claims?

a No, sir . l6

It being specifically required that petitioner's written consent be first secured before any payment in settlement of any
claim could be made, private respondent is precluded from seeking reimbursement of the payments made to del Carmen,
Magsarili and Antolin in view of her failure to comply with the condition contained in the insurance policy.

Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds application
in the present case. 17 Thus, it was error on the part of the trial and appellate courts to have disregarded the stipulations of
the parties and to have substituted their own interpretation of the insurance policy. In Phil. American General Insurance
Co., Inc vs. Mutuc, 18 we ruled that contracts which are the private laws of the contracting parties should be fulfilled
according to the literal sense of their stipulations, if their terms are clear and leave no room for doubt as to the intention of
the contracting parties, for contracts are obligatory, no matter what form they may be, whenever the essential requisites
for their validity are present.

Moreover, we stated in Pacific Oxygen & Acetylene Co. vs. Central Bank," 19 that the first and fundamental duty of the
courts is the application of the law according to its express terms, interpretation being called for only when such literal
application is impossible.

We observe that although Milagros Cayas was able to prove a total loss of only P44,000.00, petitioner was made liable for
the amount of P50,000.00, the maximum liability per accident stipulated in the policy. This is patent error. An insurance
indemnity, being merely an assistance or restitution insofar as can be fairly ascertained, cannot be availed of by any
accident victim or claimant as an instrument of enrichment by reason of an accident. 20

Finally, we find no reason to disturb the award of attorney's fees.

WHEREFORE, the decision of the Court of Appeals is hereby modified in that petitioner shall pay Milagros Cayas the
amount of Twelve Thousand Pesos (P12,000. 00) plus legal interest from the promulgation of the decision of the lower
court until it is fully paid and attorney's fees in the amount of P5,000.00. No pronouncement as to costs.

SO ORDERED.

Gutierrez, Jr., Feliciano, Bidin and Cortes JJ., concur.

___

G.R. No. 138941 October 8, 2001

AMERICAN HOME ASSURANCE COMPANY, petitioner,

vs.
TANTUCO ENTERPRISES, INC., respondent.

PUNO, J.:
Before us is a Petition for Review on Certiorari assailing the Decision of the Court of Appeals in CA-G.R. CV No. 52221
promulgated on January 14, 1999, which affirmed in toto the Decision of the Regional Trial Court, Branch 53, Lucena City
in Civil Case No. 92-51 dated October 16, 1995.

Respondent Tantuco Enterprises, Inc. is engaged in the coconut oil milling and refining industry. It owns two oil mills. Both
are located at factory compound at Iyam, Lucena City. It appears that respondent commenced its business operations
with only one oil mill. In 1988, it started operating its second oil mill. The latter came to be commonly referred to as the
new oil mill.

The two oil mills were separately covered by fire insurance policies issued by petitioner American Home Assurance Co.,
Philippine Branch.1 The first oil mill was insured for three million pesos (P3,000,000.00) under Policy No. 306-7432324-3
for the period March 1, 1991 to 1992.2 The new oil mill was insured for six million pesos (P6,000,000.00) under Policy No.
306-7432321-9 for the same term.3 Official receipts indicating payment for the full amount of the premium were issued by
the petitioner's agent.4

A fire that broke out in the early morning of September 30,1991 gutted and consumed the new oil mill. Respondent
immediately notified the petitioner of the incident. The latter then sent its appraisers who inspected the burned premises
and the properties destroyed. Thereafter, in a letter dated October 15, 1991, petitioner rejected respondent's claim for the
insurance proceeds on the ground that no policy was issued by it covering the burned oil mill. It stated that the description
of the insured establishment referred to another building thus: "Our policy nos. 306-7432321-9 (Ps 6M) and 306-7432324-
4 (Ps 3M) extend insurance coverage to your oil mill under Building No. 5, whilst the affected oil mill was under Building
No. 14. "5

A complaint for specific performance and damages was consequently instituted by the respondent with the RTC, Branch
53 of Lucena City. On October 16, 1995, after trial, the lower court rendered a Decision finding the petitioner liable on the
insurance policy thus:

"WHEREFORE, judgment is rendered in favor of the plaintiff ordering defendant to pay plaintiff:

(a) P4,406,536.40 representing damages for loss by fire of its insured property with interest at the legal rate;

(b) P80,000.00 for litigation expenses;

(c) P300,000.00 for and as attorney's fees; and

(d) Pay the costs.

SO ORDERED."6

Petitioner assailed this judgment before the Court of Appeals. The appellate court upheld the same in a Decision
promulgated on January 14, 1999, the pertinent portion of which states:

"WHEREFORE, the instant appeal is hereby DISMISSED for lack of merit and the trial court's Decision dated
October 16, 1995 is hereby AFFIRMED in toto.

SO ORDERED."7

Petitioner moved for reconsideration. The motion, however, was denied for lack of merit in a Resolution promulgated on
June 10, 1999.

Hence, the present course of action, where petitioner ascribes to the appellate court the following errors:

"(1) The Court of Appeals erred in its conclusion that the issue of non-payment of the premium was beyond its
jurisdiction because it was raised for the first time on appeal."8

"(2) The Court of Appeals erred in its legal interpretation of 'Fire Extinguishing Appliances Warranty' of the
policy."9
 "(3) With due respect, the conclusion of the Court of Appeals giving no regard to the parole evidence rule and the
principle of estoppel is erroneous."10

The petition is devoid of merit.

The primary reason advanced by the petitioner in resisting the claim of the respondent is that the burned oil mill is not
covered by any insurance policy. According to it, the oil mill insured is specifically described in the policy by its boundaries
in the following manner:

"Front: by a driveway thence at 18 meters distance by Bldg. No. 2.

Right: by an open space thence by Bldg. No. 4.

Left: Adjoining thence an imperfect wall by Bldg. No. 4.

Rear: by an open space thence at 8 meters distance."

However, it argues that this specific boundary description clearly pertains, not to the burned oil mill, but to the other mill. In
other words, the oil mill gutted by fire was not the one described by the specific boundaries in the contested policy.

What exacerbates respondent's predicament, petitioner posits, is that it did not have the supposed wrong description or
mistake corrected. Despite the fact that the policy in question was issued way back in 1988, or about three years before
the fire, and despite the "Important Notice" in the policy that "Please read and examine the policy and if incorrect, return it
immediately for alteration," respondent apparently did not call petitioner's attention with respect to the misdescription.

By way of conclusion, petitioner argues that respondent is "barred by the parole evidence rule from presenting evidence
(other than the policy in question) of its self-serving intention (sic) that it intended really to insure the burned oil mill," just
as it is "barred by estoppel from claiming that the description of the insured oil mill in the policy was wrong, because it
retained the policy without having the same corrected before the fire by an endorsement in accordance with its Condition
No. 28."

These contentions can not pass judicial muster.

In construing the words used descriptive of a building insured, the greatest liberality is shown by the courts in giving effect
to the insurance.11 In view of the custom of insurance agents to examine buildings before writing policies upon them, and
since a mistake as to the identity and character of the building is extremely unlikely, the courts are inclined to consider
that the policy of insurance covers any building which the parties manifestly intended to insure, however inaccurate the
description may be.12

Notwithstanding, therefore, the misdescription in the policy, it is beyond dispute, to our mind, that what the parties
manifestly intended to insure was the new oil mill. This is obvious from the categorical statement embodied in the policy,
extending its protection:

"On machineries and equipment with complete accessories usual to a coconut oil mill including stocks of copra,
copra cake and copra mills whilst contained in the new oil mill building, situate (sic) at UNNO. ALONG NATIONAL
HIGH WAY, BO. IYAM, LUCENA CITY UNBLOCKED.''13 (emphasis supplied.)

If the parties really intended to protect the first oil mill, then there is no need to specify it as new.

Indeed, it would be absurd to assume that respondent would protect its first oil mill for different amounts and leave
uncovered its second one. As mentioned earlier, the first oil mill is already covered under Policy No. 306-7432324-4
issued by the petitioner. It is unthinkable for respondent to obtain the other policy from the very same company. The latter
ought to know that a second agreement over that same realty results in its over insurance.

The imperfection in the description of the insured oil mill's boundaries can be attributed to a misunderstanding between
the petitioner's general agent, Mr. Alfredo Borja, and its policy issuing clerk, who made the error of copying the boundaries
of the first oil mill when typing the policy to be issued for the new one. As testified to by Mr. Borja:
 "Atty. G. Camaligan:

Q: What did you do when you received the report?

A: I told them as will be shown by the map the intention really of Mr. Edison Tantuco is to cover the new oil
mill that is why when I presented the existing policy of the old policy, the policy issuing clerk just merely (sic)
copied the wording from the old policy and what she typed is that the description of the boundaries from the
old policy was copied but she inserted covering the new oil mill and to me at that time the important thing
is that it covered the new oil mill because it is just within one compound and there are only two oil
mill[s] and so just enough, I had the policy prepared. In fact, two policies were prepared having the same date
one for the old one and the other for the new oil mill and exactly the same policy period, sir."14 (emphasis
supplied)

It is thus clear that the source of the discrepancy happened during the preparation of the written contract.

These facts lead us to hold that the present case falls within one of the recognized exceptions to the parole evidence rule.
Under the Rules of Court, a party may present evidence to modify, explain or add to the terms of the written agreement if
he puts in issue in his pleading, among others, its failure to express the true intent and agreement of the parties
thereto.15 Here, the contractual intention of the parties cannot be understood from a mere reading of the instrument. Thus,
while the contract explicitly stipulated that it was for the insurance of the new oil mill, the boundary description written on
the policy concededly pertains to the first oil mill. This irreconcilable difference can only be clarified by admitting
evidence aliunde, which will explain the imperfection and clarify the intent of the parties.

Anent petitioner's argument that the respondent is barred by estoppel from claiming that the description of the insured oil
mill in the policy was wrong, we find that the same proceeds from a wrong assumption. Evidence on record reveals that
respondent's operating manager, Mr. Edison Tantuco, notified Mr. Borja (the petitioner's agent with whom respondent
negotiated for the contract) about the inaccurate description in the policy. However, Mr. Borja assured Mr. Tantuco that
the use of the adjective new will distinguish the insured property. The assurance convinced respondent, despite the
impreciseness in the specification of the boundaries, the insurance will cover the new oil mill. This can be seen from the
testimony on cross of Mr. Tantuco:

"ATTY. SALONGA:

Q: You mentioned, sir, that at least in so far as Exhibit A is concern you have read what the policy contents.
(sic)

Kindly take a look in the page of Exhibit A which was marked as Exhibit A-2 particularly the boundaries of the
property insured by the insurance policy Exhibit A, will you tell us as the manager of the company whether the
boundaries stated in Exhibit A-2 are the boundaries of the old (sic) mill that was burned or not.

A: It was not, I called up Mr. Borja regarding this matter and he told me that what is important is the word
new oil mill. Mr. Borja said, as a matter of fact, you can never insured (sic) one property with two (2) policies, you
will only do that if you will make to increase the amount and it is by indorsement not by another policy, sir., 16

We again stress that the object of the court in construing a contract is to ascertain the intent of the parties to the contract
and to enforce the agreement which the parties have entered into. In determining what the parties intended, the courts will
read and construe the policy as a whole and if possible, give effect to all the parts of the contract, keeping in mind always,
however, the prime rule that in the event of doubt, this doubt is to be resolved against the insurer. In determining the intent
of the parties to the contract, the courts will consider the purpose and object of the contract. 17

In a further attempt to avoid liability, petitioner claims that respondent forfeited the renewal policy for its failure to pay the
full amount of the premium and breach of the Fire Extinguishing Appliances Warranty.

The amount of the premium stated on the face of the policy was P89,770.20. From the admission of respondent's own
witness, Mr. Borja, which the petitioner cited, the former only paid it P75,147.00, leaving a difference of P14,623.20. The
deficiency, petitioner argues, suffices to invalidate the policy, in accordance with Section 77 of the Insurance Code. 18

The Court of Appeals refused to consider this contention of the petitioner. It held that this issue was raised for the first
time on appeal, hence, beyond its jurisdiction to resolve, pursuant to Rule 46, Section 18 of the Rules of Court. 19
Petitioner, however, contests this finding of the appellate court. It insists that the issue was raised in paragraph 24 of its
Answer, viz.:

"24. Plaintiff has not complied with the condition of the policy and renewal certificate that the renewal premium
should be paid on or before renewal date."

Petitioner adds that the issue was the subject of the cross-examination of Mr. Borja, who acknowledged that the paid
amount was lacking by P14,623.20 by reason of a discount or rebate, which rebate under Sec. 361 of the Insurance Code
is illegal.

The argument fails to impress. It is true that the asseverations petitioner made in paragraph 24 of its Answer ostensibly
spoke of the policy's condition for payment of the renewal premium on time and respondent's non-compliance with it. Yet,
it did not contain any specific and definite allegation that respondent did not pay the premium, or that it did not pay the full
amount, or that it did not pay the amount on time.

Likewise, when the issues to be resolved in the trial court were formulated at the pre-trial proceedings, the question of the
supposed inadequate payment was never raised. Most significant to point, petitioner fatally neglected to present, during
the whole course of the trial, any witness to testify that respondent indeed failed to pay the full amount of the premium.
The thrust of the cross-examination of Mr. Borja, on the other hand, was not for the purpose of proving this fact. Though it
briefly touched on the alleged deficiency, such was made in the course of discussing a discount or rebate, which the
agent apparently gave the respondent. Certainly, the whole tenor of Mr. Borja's testimony, both during direct and cross
examinations, implicitly assumed a valid and subsisting insurance policy. It must be remembered that he was called to the
stand basically to demonstrate that an existing policy issued by the petitioner covers the burned building.

Finally, petitioner contends that respondent violated the express terms of the Fire Extinguishing Appliances Warranty. The
said warranty provides:

"WARRANTED that during the currency of this Policy, Fire Extinguishing Appliances as mentioned below shall be
maintained in efficient working order on the premises to which insurance applies:

- PORTABLE EXTINGUISHERS

- INTERNAL HYDRANTS

- EXTERNAL HYDRANTS

- FIRE PUMP

- 24-HOUR SECURITY SERVICES

BREACH of this warranty shall render this policy null and void and the Company shall no longer be liable for any loss
which may occur."20

Petitioner argues that the warranty clearly obligates the insured to maintain all the appliances specified therein. The
breach occurred when the respondent failed to install internal fire hydrants inside the burned building as warranted. This
fact was admitted by the oil mill's expeller operator, Gerardo Zarsuela.

Again, the argument lacks merit. We agree with the appellate court's conclusion that the aforementioned warranty did not
require respondent to provide for all the fire extinguishing appliances enumerated therein. Additionally, we find that neither
did it require that the appliances are restricted to those mentioned in the warranty. In other words, what the warranty
mandates is that respondent should maintain in efficient working condition within the premises of the insured property, fire
fighting equipments such as, but not limited to, those identified in the list, which will serve as the oil mill's first line of
defense in case any part of it bursts into flame.

To be sure, respondent was able to comply with the warranty. Within the vicinity of the new oil mill can be found the
following devices: numerous portable fire extinguishers, two fire hoses, 21 fire hydrant,22 and an emergency fire
engine.23 All of these equipments were in efficient working order when the fire occurred.
It ought to be remembered that not only are warranties strictly construed against the insurer, but they should, likewise, by
themselves be reasonably interpreted.24 That reasonableness is to be ascertained in light of the factual conditions
prevailing in each case. Here, we find that there is no more need for an internal hydrant considering that inside the burned
building were: (1) numerous portable fire extinguishers, (2) an emergency fire engine, and (3) a fire hose which has a
connection to one of the external hydrants.

IN VIEW WHEREOF, finding no reversible error in the impugned Decision, the instant petition is hereby DISMISSED.

SO ORDERED.

Davide Jr., C. J., Pardo, and Ynares-Santiago, JJ., concur.

Kapunan, J., on official leave.