Delaware, U. S. A.
) , issued on September 27, of P3,000, The annual premium stipulated in
G.R. No. L-1669 August 31, 1950
PAZ LOPEZ DE CONSTANTINO v. ASIA
LIFE INSURANCE COMPANY,
G.R. No. L-1670. August 31, 1950
AGUSTINA PERALTA v. ASIA LIFE
INSURANCE COMPANY
1. INSURANCE; EFFECT OF NON-PAYMENT OF
PREMIUM DUE TO WAR; LIFE INSURANCE;
FORFEITURE OF POLICY. When
the life insurance policy provides that non-
payment of premiums will cause its forfeiture,
war doe not excuse non-payment, and does
not avoid forfeiture.
2. ID.; EFFECT OF WAR ON NON-PAYMENT OF
PREMIUMS; COURT REJECTS CONNECTICUT
AND NEW YORK RULES AND ADOPTS UNITED
STATES RULE. Rejecting the Connecticut
Rule, and the New York Rule, the court adopts
the Unites States Rule about the effects of war
upon non-payment of premiums.
3. ID.; LIFE INSURANCE; PERIODIC PAYMENT
OF PREMIUMS IS NOT AN ACTIONABLE
OBLIGATION. The periodic payment of
premiums in life insurances policies is not an
obligation of the insured enforceable by action.
These two cases, appealed from the Court of
First Instance of Manila, call for decision of the
question whether the beneficiary in a life
insurance policy may recover the amount
thereof although the insured died after
repeatedly failing to pay the stipulated
premiums, such failure having been caused by
the last war in the Pacific.
The facts are these:
First case. In consideration of the sum of
P176.04 as annual premium duly paid to it, the
Asia Life Insurance Company (a foreign
corporation incorporated under the laws of
1941, its Policy No. 93912 for P3,000, whereby
it insured the life of Arcadio Constantino for a
term of twenty years. The first premium
covered the period up to September 26, 1942.
The plaintiff Paz Lopez de Constantino was
regularly appointed beneficiary. The policy
contained these stipulations, among others:
"This POLICY OF INSURANCE is issued in
consideration of the written and printed
application herefor, a copy of which is attached
hereto and is hereby made a part hereof, and
of the payment in advance during the lifetime
and good health of the Insured of the annual
premium of One Hundred fifty-eight and 4/100
pesos Philippine currency 1 and of the payment
of a like amount upon each twenty-seventh
day of September hereafter during the term of
Twenty years or until the prior death of the
Insured. (Emphasis supplied.)
x x x
"All premium payments are due in advance and
any unpunctuality in making any such payment
shall cause this policy to lapse unless and
except as kept in force by the Grace Period
condition or under Option 4 below. (Grace of
31 days.)"
After that first payment, no further premiums
were paid. The insured died on September 22,
1944.
It is admitted that the defendant, being an
American corporation, had to close its branch
office in Manila by reason of the Japanese
occupation, i. e. from January 2 1942, until the
year 1945.
Second case. On August 1, 1938, the
defendant Asia Life Insurance Company issued
its Policy No. 78145 (Joint Life 20-Year
Endowment Participating with Accident
Indemnity), covering the lives of the spouses
Tomas Ruiz and Agustina Peralta, for the sum
the policy was regularly paid from August 1,
1938, up to and including September 30,
1941. Effective August 1, 1941 the mode of
payment of premiums was changed from
annual to quarterly, so that quarterly
premiums were paid, the last having been
delivered on November 18, 1941, said
payment covering the period up to January 31,
1942. No further payments were handed to the
insurer. Upon the Japanese occupation, the
insured and the insurer became separated by
the lines of war, and it was impossible and
illegal for them to deal with each other.
Because the insured had borrowed on the
policy an amount of P234.00 in January, 1941,
the cash surrender value of the policy was
sufficient to maintain the policy in force only
up to September 7, 1942. Tomas Ruiz died on
February 16, 1945. The plaintiff Agustina
Peralta is his beneficiary. Her demand for
payment met with defendants refusal,
grounded on non-payment of the premiums.
The policy provides in part:
"This POLICY OF INSURANCE is issued in
consideration of the written and printed
application herefor, a copy of which is attached
hereto and is hereby made a part hereof, and
of the payment in advance during the life time
and good health of the Insured of the annual
premium of Two hundred and 43/100 pesos
Philippine currency and of the payment of a
like amount upon each first day of August
hereafter during the term of Twenty years or
until the prior death of either of the Insured.
(Emphasis supplied.)
x x x
"All premium payments are due in advance and
any unpunctuality in making any such payment
shall cause this policy to lapse unless and
except as kept in force by the Grace Period
condition or under Option 4 below. (Grace of
31 days.) . . ."
Plaintiffs maintain that, as beneficiaries, they
are entitled to receive the proceeds of the
policies minus all sums due for premiums in
arrears. They allege that non-payment of the
premiums was caused by the closing of
defendants offices in Manila during the
Japanese occupation and the impossible
circumstances created by war.
Defendant on the other hand asserts that the
policies had lapsed for non-payment of
premiums, in accordance with the contract of
the parties and the law applicable to the
situation.
The lower court absolved the defendant. Hence
this appeal.
The controversial point has never been decided
in this jurisdiction. Fortunately, this court has
had the benefit of extensive and exhaustive
memoranda including those of amici curiae.
The matter has received careful consideration,
inasmuch as it affects the interest of thousands
of policy-holders and the obligations of many
insurance companies operating in this country.
Since the year 1917, the Philippine law on
Insurance was found in Act No. 2427, as
amended, and the Civil Code. 2 Act No. 2427
was largely copied from the Civil Code of
California. 3 And this court has heretofore
announced its intention to supplement the
statutory laws with general principles
prevailing on the subject in the United States.
4 Co., 106 N. Y., 560, 564." (Young v. Midland
In Young v. Midland Textile Insurance Co. (30
Phil., 617), we said that "contracts of
insurance are contracts of indemnity upon the
terms and conditions specified in the policy.
The parties have a right to impose such
reasonable conditions at the time of the
making of the contract as they may deem wise
and necessary. The rate of premium is
measured by the character of the risk
assumed. The insurance company, for a
comparatively small consideration, undertakes
to guarantee the insured against loss or
damage, upon the terms and conditions agreed
upon, and upon no other, and when called
upon to pay, in case of loss, the insurer,
therefore, may justly insist upon a fulfillment
of these terms. If the insured cannot bring
himself within the conditions of the policy, he
is not entitled to recover for the loss. The
terms of the policy constitute the measure of
the insurers liability, and in order to recover
the insured must show himself within those
terms; and if it appears that the contract has
been terminated by a violation, on the part of
the insured, of its conditions, then there can be
no right of recovery. The compliance of the
insured with the terms of the contract is a
condition precedent to the right of recovery."
Recall of the above pronouncements is
appropriate because the policies in question
stipulate that "all premium payments are due
in advance and any unpunctuality in making
any such payment shall cause this policy to
lapse." Wherefore, it would seem that pursuant
to the express terms of the policy, non-
payment of premium produces its avoidance.
"The conditions of contracts of insurance, when
plainly expressed in a policy, are binding upon
the parties and should be enforced by the
courts, if the evidence brings the case clearly
within their meaning and intent. It tends to
bring the law itself into disrepute when, by
astute and subtle distinctions, a plain case is
attempted to be taken without the operation of
a clear, reasonable, and material obligation of
the contract. Mack v. Rochester German Ins.
Textile Insurance Co., 30 Phil., 617, 622.)
In Glaraga v. Sun Life Ass. Co. (49 Phil., 737),
this court held that a life policy was avoided
because the premium had not been paid within
the time fixed, since by its express terms, non-
payment of any premium when due or within
the thirty-day period of grace, ipso facto
caused the policy to lapse. This goes to show
that although we take the view that insurance
policies should be conserved 5 and should not
lightly be thrown out, still we do not hesitate to
enforce the agreement of the parties.
"Forfeitures of insurance policies are not
favored, but courts cannot for that reason
alone refuse to enforce an insurance contract
according to its meaning." (45 C. J. S., p.
150.) .
Nevertheless, it is contended for plaintiff that
inasmuch as the non-payment of premium was
the consequence of war, it should be excused
and should not cause the forfeiture of the
policy.
Professor Vance of Yale, in his standard
treatise on Insurance, says that in determining
the effect of non-payment of premiums
occasioned by war, the American cases may be
divided into three groups, according as they
support the so-called Connecticut Rule, the
New York Rule, or the United States Rule.
The first holds the view that "there are two
elements in the consideration for which the
annual premium is paid First, the mere
protection for the year, and, second, the
privilege of renewing the contract for each
succeeding year by paying the premium for
that year at the time agreed upon. According
to this view of the contract, the payment of
premiums is a condition precedent, the non-
performance of which, even when performance
would be illegal, necessarily defeats the right
to renew the contract."
The second rule, apparently followed by the
greater number of decisions, holds that "war
between states in which the parties reside
merely suspends the contracts of life
insurance, and that, upon tender of all
premiums due by the insured or his
representative after the war has terminated,
the contract revives and becomes fully
operative."
The United States rule declares that the
contract is not merely suspended, but is
abrogated by reason of nonpayment of
premiums, since the time of the payments is
peculiarly of the essence of the contract. It
additionally holds that it would be unjust to
allow the insurer to retain the reserve value of
the policy, which is the excess of the premiums
paid over the actual risk carried during the
years when the policy had been in force. This
rule was announced in the well-known Statham
6 case which, in the opinion of Professor
Vance, is the correct rule. 7
The appellants and some amici curi contend
that the New York rule should be applied here.
The appellee and other amici curiae contend
that the United States doctrine is the orthodox
view.
We have read and re-read the principal cases
upholding the different theories. Besides the
respect and high regard we have always
entertained for decisions of the Supreme Court
of the United States, we cannot resist the
conviction that the reasons expounded in its
decision of the Statham case are logically and
juridically sound. Like the instant case, the
policy involved in the Statham decision
specifies that non-payment on time shall cause
the policy to cease and determine. Reasoning
out that punctual payments were essential, the
court said:
". . . it must be conceded that promptness of
payment is essential in the business of life
insurance. All the calculations of the insurance
company are based on the hypothesis of
prompt payments. They not only calculate on
the receipt of the premiums when due, but on
compounding interest upon them. It is on this
basis that they are enabled to offer assurance
at the favorable rates they do. Forfeiture for
non-payment is a necessary means of
protecting themselves from embarrassment.
Unless it were enforceable, the business would
be thrown into confusion. It is like the
forfeiture of shares in mining enterprises, and
all other hazardous undertakings. There must
be power to cut off unprofitable members, or
the success of the whole scheme is
endangered. The insured parties are associates
in a great scheme. This associated relation
exists whether the company be a mutual one
or not. Each is interested in the engagements
of all; for out of the co- existence of many
risks arises the law of average, which underlies
the whole business. An essential feature of this
scheme is the mathematical calculations
referred to, on which the premiums and
amounts assured are based. And these
calculations, again, are based on the
assumption of average mortality, and of
prompt payments and compound interest
thereon. Delinquency cannot be tolerated nor
redeemed, except at the option of the
company. This has always been the
understanding and the practice in this
department of business. Some companies, it is
true, accord a grace of thirty days, or other
fixed period, within which the premium in
arrear may be paid, on certain conditions of
continued good health, etc. But this is a matter
of stipulation, or of discretion, on the part of
the particular company. When no stipulation
exists, it is the general understanding that
time is material, and that the forfeiture is
absolute if the premium be not paid. The
extraordinary and even desperate efforts
sometimes made, when an insured person is in
extremes to meet a premium coming due,
demonstrates the common view of this
matter.
"The case, therefore, is one in which time is
material and of the essence of the contract.
Non-payment at the day involves absolute
forfeiture if such be the terms of the contract,
as is the case here. Courts cannot with safety
vary the stipulation of the parties by
introducing equities for the relief of the insured
against their own negligence."
In another part of the decision, the United
States Supreme Court considers and rejects
what is, in effect, the New York theory in the
following words and phrases:
"The truth is, that the doctrine of the revival of
contracts suspended during the war is one
based on considerations of equity and justice,
and cannot be invoked to revive a contract
which it would be unjust or inequitable to
revive.
"In the case of life insurance, besides the
materiality of time in the performance of the
contract, another strong reason exists why the
policy should not be revived. The parties do
not stand on equal ground in reference to such
a revival. It would operate most unjustly
against the company. The business of
insurance is founded on the law of average;
that of life insurance eminently so. The
average rate of mortality is the basis on which
it rests. By spreading their risks over a large
number of cases, the companies calculate on
this average with reasonable certainty and
safety. Anything that interferes with it
deranges the security of the business. If every
policy lapsed by reason of the war should be
revived, and all the back premiums should be
paid, the companies would have the benefit of
this average amount of risk. But the good risks
are never heard from; only the bar are sought
to be revived, where the person insured is
either dead or dying. Those in health can get
new policies cheaper than to pay arrearages on
the old. To enforce a revival of the bad cases,
whilst the company necessarily lose the cases
which are desirable, would be manifestly
unjust. An insured person, as before stated,
does not stand isolated and alone. His case is
connected with and co-related to the cases of
all others insured by the same company. The
nature of the business, as a whole, must be
looked at to understand the general equities of
the parties."
The above consideration certainly lend
themselves to the approval of fair-minded
men. Moreover, if, as alleged, the
consequences of war should not prejudice the
insured, neither should they bear down on the
insurer.
Urging adoption of the New York theory,
counsel for plaintiff point out that the
obligation of the insured to pay premiums was
excused during the war owing to impossibility
of performance, and that consequently no
unfavorable consequences should follow from
such failure.

The appellee answers, quite plausibly, that the
periodic payment of premiums, at least those
after the first, is not an obligation of the
insured, so much so that it is not a debt
enforceable by action of the insurer.
"Under an Oklahoma decision, the annual
premium due is not a debt. It is not an
obligation upon which the insurer can maintain
an action against insured; nor is its settlement
governed by the strict rule controlling payment
of debts. So, the court in a Kentucky case
declares, in the opinion, that it is not a debt. . .
. The fact that it is payable annually or semi-
annually, or at any other stipulated time, does
not of itself constitute a promise to pay, either
express or implied. In case of non-payment,
the policy is forfeited, except so far as the
forfeiture may be saved by agreement, by
waiver, estoppel, or by statute. The payment
of the premium is entirely optional, while a
debt may be enforced at law, and the fact that
the premium is agreed to be paid is without
force, in the absence of an unqualified and
absolute agreement to pay a specified sum at
some certain time. In the ordinary policy there
is no promise to pay, but it is optional with the
insured whether he will continue the policy or
forfeit it." (3 Couch, Cyc. on Insurance, Sec.
623, p. 1996.)
"It is well settled that a contract of insurance is
sui generis. While the insured by an
observance of the conditions may hold the
insurer to his contract, the latter has not the
power or right to compel the insured to
maintain the contract relation with it longer
than he chooses. Whether the insured will
continue it or not is optional with him. There
being no obligation to pay for the premium,
they did not constitute a debt." Noble v.
Southern States M. D. Ins. Co., 157 Ky., 46;
162 S. W., 528) (Emphasis ours.)
It should be noted that the parties contracted
not only for peacetime conditions but also for
times of war, because the policies contained
provisions applicable expressly to wartime
days. The logical inference, therefore, is that
the parties contemplated uninterrupted
operation of the contract even if armed conflict
should ensue.
For the plaintiffs, it is again argued that in view
of the enormous growth of insurance business
since the Statham decision, it could now be
relaxed and even disregarded. It is stated "that
the relaxation of rules relating to insurance is
in direct proportion to the growth of the
business. If there were only 100 men, for
example, insured by a Company or a mutual
Association, the death of one will distribute the
insurance proceeds among the remaining 99
policy- holders. Because the loss which each
survivor will bear will be relatively great, death
from certain agreed or specified causes may be
deemed not a compensable loss. But if the
policy-holders of the Company or Association
should be 1,000,000 individuals, it is clear that
the death of one of them will not seriously
prejudice each one of the 999,999 surviving
insured. The loss to be borne by each
individual will be relatively small."
The answer to this is that as there are (in the
example) one million policy-holders, the
"losses" to be considered will not be the death
of one but the death of ten thousand, since the
proportion of 1 to 100 should be maintained.
And certainly such losses for 10,000 deaths will
not be "relatively small."
After perusing the Insurance Act, we are firmly
persuaded that the non-payment of premiums
is such a vital defense of insurance companies
that since the very beginning, said Act No.
2427 expressly preserved it, by providing that
after the policy shall have been in force for two
years, it shall become incontestable (i. e. the
insurer shall have no defense) except for
fraud, non-payment of premiums, and military
or naval service in time of war (sec. 184 [b],
Insurance Act). And when Congress recently
amended this section (Rep. Act No. 171), the
defense of fraud was eliminated, while the
defense of nonpayment of premiums was
preserved. Thus the fundamental character of
the undertaking to pay premiums and the high
importance of the defense of non-payment
thereof, was specifically recognized.
In keeping with such legislative policy, we feel
no hesitation to adopt the United States Rule,
which is in effect a variation of the Connecticut
rule for the sake of equity. In this connection,
it appears that the first policy had no reserve
value, and that the equitable values of the
second had been practically returned to the
insured in the form of loan and advance for
premium.
For all the foregoing, the lower courts decision
absolving the defendant from all liability on the
policies in question, is hereby affirmed, without
costs.
G.R. No. L-44059. October 28, 1977.
THE INSULAR LIFE ASSURANCE COMPANY,
LTD., v. CARPONIA T. EBRADO and
PASCUALA VDA. DE EBRADO
This is a novel question in insurance law: Can
a common-law wife named as beneficiary in
the life insurance policy of a legally married
man claim the proceeds thereof in case of
death of the latter?
On September 1, 1968, Buenaventura Cristor
Ebrado was issued by The Insular Life
Assurance Co., Ltd., Policy No. 009929 on a
whole-life plan for P5,882.00 with a rider for
Accidental Death Benefits for the same
amount. Buenaventura C. Ebrado designated
Carponia T. Ebrado as the revocable
beneficiary in his policy. He referred to her as
his wife.
On October 21, 1969, Buenventura C. Ebrado
died as a result of an accident when he was hit
by a falling branch of a tree. As the insurance
policy was in force, The Insular Life Assurance
Co., Ltd. stands liable to pay the coverage of
the policy in an amount of P11,745.73,
representing the face value of the policy in the
amount of P5,882.00 plus the additional
benefits for accidental death also in the
amount of P5,882.00 and the refund of P18.00
paid for the premium due November, 1969,
minus the unpaid premiums and interest
thereon due for January and February, 1969,
in the sum of P36.27.
Carponia T. Ebrado filed with the insurer a
claim for the proceeds of the policy as the
designated beneficiary therein, although she
admits that she and the insured Buenaventura
C. Ebrado were merely living as husband and
wife without the benefit of marriage. Pascuala
Vda. de Ebrado also filed her claim as the
widow of the deceased insured. She asserts
that she is the one entitled to the insurance
proceeds, not the common-law wife, Carponia
T. Ebrado.
In doubt as to whom the insurance proceeds
shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for
Interpleader before the Court of First Instance
of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial
conference was held on July 8, 1972, after
which, a pre-trial order was entered reading as
follows:
"During the pre-trial conference, the parties
manifested to the court that there is no
possibility of amicable settlement. Hence, the
Court proceeded to have the parties submit
their evidence for the purposes of the pre-trial
and make admissions for the purpose of pre-
trial. During this conference, parties Carponia
T. Ebrado and Pascuala Ebrado agreed and
stipulated: 1) that the deceased Buenaventura
Ebrado was married to Pascuala Ebrado with
whom she has six (legitimate) namely;
Hernando, Cresencio, Elsa, Erlinda, Felizardo
and Helen, all surnamed Ebrado; 2) that during
the lifetime of the deceased, he was insured
with Insular Life Assurance Co. Under Policy
No. 009929 whole life plan, dated September
1, 1968 for the sum of P5,882.00 with the
rider for accidental death benefit as evidenced
by Exhibits A for plaintiffs and Exhibit 1 for the
defendant Pascuala and Exhibit 7 for Carponia
Ebrado; 3) that during the lifetime of
Buenaventura Ebrado, he was living with his
common-law wife, Carponia Ebrado, with
whom she had 2 children although he was not
legally separated from his legal wife; 4) that
Buenaventura Ebrado died by accident on
October 21, 1969 as evidenced by the death
certificate Exhibit 3 and affidavit of the police
report of his death Exhibit 5; 5) that
complainant Carponia Ebrado filed claim with
the Insular Life Assurance Co. which was
contested by Pascuala Ebrado who also filed
claim for the proceeds of said policy; 6) that in
view of the adverse claims the insurance
company filed this action against the two
herein claimants Carponia and Pascuala
Ebrado; 7) that there is now due from the
Insular Life Assurance Co. as proceeds of the
policy P11,745.73; 8) that the beneficiary
designated by the insured in the policy is
Carponia Ebrado and the insured made
reservation to change the beneficiary but
although the insured made the option to
change the beneficiary, same was never
changed up to the time of his death and the
legal wife did not have any opportunity to write
the company that there was reservation to
change the designation of the beneficiary; 9)
the parties agreed that a decision be rendered
based on this agreement and stipulation of
facts as to who among the two claimants is
entitled to the policy.
"Upon motion of the parties, they are given ten
(10) days to file their simultaneous
memoranda from the receipt of this order.
SO ORDERED."
On September 25, 1972, the trial court
rendered judgment declaring, among others,
Carponia T. Ebrado disqualified from becoming
beneficiary of the insured Buenaventura Cristor
Ebrado and directing the payment of the
insurance proceeds to the estate of the
deceased insured. The trial court held:j
"It is patent from the last paragraph of Art.
739 of the Civil Code that a criminal conviction
for adultery or concubinage is not essential in
order to establish the disqualification
mentioned therein. Neither is it also necessary
that a finding of such guilt or commission of
those acts be made in a separate independent
action brought for the purpose. The guilt of the
donee (beneficiary) may be proved by
preponderance of evidence in the same
proceeding (the action brought to declare the
nullity of the donation).
It is, however, essential that such adultery or
concubinage exists at the time defendant
Carponia T. Ebrado was made beneficiary in
the policy in question for the disqualification
and incapacity to exist and that it is only
necessary that such fact be established by
preponderance of evidence in the trial. Since it
is agreed in their stipulation above-quoted that
the deceased insured and defendant Carponia
T. Ebrado were living together as husband and
wife without being legally married and that the
marriage of the insured with the other
defendant Pascuala Vda. de Ebrado was valid
and still existing at the time the insurance in
question was purchased there is no question
that defendant Carponia T. Ebrado is
disqualified from becoming the beneficiary of
the policy in question and as such she is not
entitled to the proceeds of the insurance upon
the death of the insured."
From this judgment, Carponia T. Ebrado
appealed to the Court of Appeals, but on July
11, 1976, the Appellate Court certified the case
to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance
Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended)
does not contain any specific provision grossly
resolutory of the prime question at hand.
Section 50 of the Insurance Act which provides
that" (t)he insurance shall be applied
exclusively to the proper interest of the person
in whose name it is made" 1 cannot be validly
seized upon to hold that the same includes the
beneficiary. The word interest" highly suggests
that the provision refers only to the insured"
and not to the beneficiary, since a contract of
insurance is personal in character. 2
Otherwise, the prohibitory laws against illicit
relationships especially on property and
descent will be rendered nugatory, as the
same could easily be circumvented by modes
of insurance. Rather, the general rules of civil
law should be applied to resolve this void in
the Insurance Law Article 2011 of the New Civil
Code states: "The contract of insurance is
governed by special laws. Matters not
expressly provided for in such special laws
shall be regulated by this Code." When not
otherwise specifically provided for by the
Insurance Law, the contract of life insurance is
governed by the general rules of the civil law
regulating contracts. 3 And under Article 2012
of the same Code, "any person who is
forbidden from receiving any donation under
Article 739 cannot be named beneficiary of a
life insurance policy by the person who cannot
make a donation to him." 4 Common-law
spouses are, definitely, barred from receiving
donations from each other. Article 739 of the
new Civil Code provides:
"The following donations shall be void:
"1. Those made between persons who were
guilty of adultery or concubinage at the time of
donation;
"Those made between persons found guilty of
the same criminal offense, in consideration
thereof;
"3. Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
"In the case referred to in No. 1, the action for
declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of
the donee may be proved by preponderance of
evidence in the same action."
2. In essence, a life insurance policy is no
different from a civil donation insofar as the
beneficiary is concerned. Both are founded
upon the same consideration: liberality. A
beneficiary is like a donee, because from the
premiums of the policy which the insured pays
out of liberality, the beneficiary will receive the
proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of
the new Civil Code should equally operate in
life insurance contracts. The mandate of Article
2012 cannot be laid aside: any person who
cannot receive a donation cannot be named as
beneficiary in the life insurance policy of the
person who cannot make the donation. 5
Under American law, a policy of life insurance
is considered as a testament and in construing
it, the courts will, so far as possible treat it as
a will and determine the effect of a clause
designating the beneficiary by rules under
which wills are interpreted. 6
3. Policy considerations and dictates of
morality rightly justify the institution of a
barrier between common-law spouses in
regard to property relations since such
relationship ultimately encroaches upon the
nuptial and filial rights of the legitimate family.
There is every reason to hold that the bar in
donations between legitimate spouses and
those between illegitimate ones should be
enforced in life insurance policies since the
same are based on similar consideration. As
above pointed out, a beneficiary in a life
insurance policy is no different from a donee.
Both the recipients of pure beneficence. So
long as marriage remains the threshold of
family laws, reason and morality dictate that
the impediments imposed upon married couple
should likewise be imposed upon extra-marital
relationship. If legitimate relationship is
circumscribed by these legal disabilities, with
more reason should an illicit relationship be
restricted by these disabilities. Thus, in
Matabuena v. Cervantes, 7 this Court, through
Justice Fernando, said:
"If the policy of the law is, in the language of
the opinion of the then Justice J.B.L. Reyes of
that court (Court of Appeals), `to prohibit
donations in favor of the other consort and his
descendants because of fear and undue and
improper pressure and influence upon the
donor, a prejudice deeply rooted in our ancient
law;" por-que no se enganen desponjandose el
uno al otro por amor que han de consuno
(According to) the Partidas (Part IV, Tit. XI,
LAW IV), reiterating the rationale `No Mutuato
amore invicem spoliarentur of the Pandects
(Bk, 24, Titl. 1 De donat, inter virum et
uxorem); then there is very reason to apply
the same prohibitive policy to persons living
together as husband and wife without the
benefit of nuptials. For it is not to be doubted
that assent to such irregular connection for
thirty years bespeaks greater influence of one
party over the other, so that the danger that
the law seeks to avoid is correspondingly
increased. Moreover, as already pointed out by
Ulpian (in his lib. 32 ad Sabinum, fr. 1), `it
would not be just that such donations should
subsist, lest the condition of those who
incurred guilt should turn out to be better. So
long as marriage remains the cornerstone of
our family law, reason and morality alike
demand that the disabilities attached to
marriage should likewise attach to
concubinage.
It is hardly necessary to add that even in the
absence of the above pronouncement, any
other conclusion cannot stand the test of
scrutiny. It would be to indict the framers of
the Civil Code for a failure to apply a laudable
rule to a situation which in its essentials cannot
be distinguished. Moreover, if it is at all to be
differentiated the policy of the law which
embodies a deeply rooted notion of what is
just and what is right would be nullified if such
irregular relationship instead of being visited
with disabilities would be attended with
benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is
every any occasion where the principle of
statutory construction that what is within the
spirit of the law is as much a part of it as what
is written, this is it. Otherwise the basic
purpose discernible in such codal provision
would not be attained. Whatever omission may
be apparent in an interpretation purely literal
of the language used must be remedied by an
adherence to its avowed objective."
4. We do not think that a conviction for
adultery or concubinage is exacted before the
disabilities mentioned in Article 739 may
effectuate. More specifically, with regard to the
disability on "persons who were guilty of
adultery or concubinage at the time of the
donation," Article 739 itself provides:
"In the case referred to in No. 1, the action for
declaration of nullity may be brought by the
spouse of the donor or donee; and the guilt of
the donee may be proved by preponderance of
evidence in the same action."
The underscored clause neatly conveys that no
criminal conviction for the disqualifying offense
is a condition precedent. In fact, it cannot even
be gleaned from the aforequoted provision that
a criminal prosecution is needed. On the
contrary, the law plainly states that the guilt of
the party may be proved "in the same action"
for declaration of nullity of donation. And, it
would be sufficient if evidence preponderates
upon the guilt of the consort for the offense
indicated. The quantum of proof in criminal
cases is not demanded.
In the case before Us, the requisite proof of
common-law relationship between the insured
and the beneficiary has been conveniently
supplied by the stipulations between the
parties in the pre-trial conference of the case.
It case agreed upon and stipulated therein that
the deceased insured Buenaventura C. Ebrado
was married to Pascuala Ebrado with whom
she has six legitimate children; that during his
lifetime, the deceased insured was living with
his common-law wife, Carponia Ebrado, with
whom he has two children. These stipulations
are nothing less than judicial admissions
which, as a consequence, no longer require
proof and cannot be contradicted. 8 A fortiori,
on the basis of these admissions, a judgment
may be validly rendered without going through
the rigors of a trial for the sole purpose of
proving the illicit liaison between the insured
and the beneficiary. In fact, in that pre-trial,
the parties even agreed "that a decision be
rendered based on this agreement and
stipulation of facts as to who among the two
claimants is entitled to the policy."
ACCORDINGLY, the appealed judgment of the
lower court is hereby affirmed. Carponia T.
Ebrado is hereby declared disqualified to be
the beneficiary of the late Buenaventura C.
Ebrado in his life insurance policy. As a
consequence, the proceeds of the policy are
hereby held payable to the estate of the
deceased insured. Costs against Carponia T.
Ebrado.
SO ORDERED.
G.R. No. L-4611 December 17, 1955
QUA CHEE GAN v. LAW UNION AND ROCK
INSURANCE CO., LTD., represented by its
agent, WARNER, BARNES AND CO., LTD.
SYLLABUS
1. INSURANCE; BREACH OF WARRANTY;
WHEN INSURER BARRED FROM CLAIMING
POLICIES VOID "AB INITIO." The insurer is
barred by estoppel to claim violation of the so-
called fire hydrant warranty where, knowing
fully well that the number of hydrants
demanded in the warranty never existed from
the very beginning, it nevertheless issued the
policies subject to such warranty, and received
the corresponding premiums.
2. ID.; ID.; EVIDENCE; PAROL EVIDENCE RULE
NOT APPLICABLE. The parol evidence rule is
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 contract
shown, estopped from enforcing forfeitures in
its favor, in order to forestall fraud or
imposition on the insured.
3. ID.; AMBIGUITIES IN THE TERMS OF THE
CONTRACT, HOW CONSTRUED. The contract
of insurance is one of perfect good faith
(uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so
for the latter, since its dominant bargaining
position carries with it stricter responsibility.
By reason of the exclusive control of the
insurance company over the terms and
phraseology of the insurance contract, the
ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured,
specially to avoid a forfeiture (44 C. J. S., pp.
1166-1175; 29 Am. Jur. 180).
4. ID.; ID.; WARRANTY AGAINST STORAGE OF
GASOLINE. In the present case, gasoline is
not specifically mentioned among the
prohibited articles listed in the so-called "hemp
warranty." The clause relied upon by the
insurer speaks of "oils" and is decidedly
ambiguous and uncertain; for in ordinary
parlance, "oils" mean "lubricants" and not
gasoline or kerosene. Besides, the gasoline
kept by the insured was only incidental to his
business, being no more than a customary 2
days supply for the five or six motor vehicles
used for transporting of the stored
merchandise, and it is well settled rule that the
keeping of inflammable oils on the premises,
through prohibited by the policy, does not void
it if such keeping is incidental to the business.
(Bachrach v. British American Ass. Co., 17 Phil.
555, 660.)
5. ID.; FALSE CLAIMS THAT AVOIDS THE
POLICY. The rule is that to avoid a policy,
the claim filed by the insured must contain
false and fraudulent statements with intent to
defraud the insurer.
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 Fire of undetermined origin that broke out in
Company appealed directly to this Court. the early morning of July 21, 1940, and lasted
almost one week, gutted and completely
The record shows that before the last war, destroyed Bodegas Nos. 1, 2 and 4, with the
plaintiff-appellee owned four warehouses or merchandise stored theren. Plaintiff-appellee
bodegas (designated as Bodegas Nos. 1 to 4) informed the insurer by telegram on the same
in the municipality of Tabaco, Albay, used for date; and on the next day, the fire adjusters
the storage of stocks of copra and of hemp, engaged by appellant insurance company
baled and loose, in which the appellee dealth arrived and proceeded to examine and
extensively. They had been, with their photograph the premises, pored over the
contents, insured with the defendant Company books of the insured and conducted an
since 1937, and the lose made payable to the extensive investigation. The plaintiff having
Philippine National Bank as mortgage of the submitted the corresponding fire claims,
hemp and crops, to the extent of its interest. totalling P398,562.81 (but reduced to the full
On June, 1940, the insurance stood as follows: amount of the insurance, P370,000), the
Insurance Company resisted payment,
claiming violation of warranties and conditions,
Policy
Property Insured Amount
filing of fraudulent claims, and that the fire had
No. been deliberately caused by the insured or by
other persons in connivance with him.
263716
4
Bodega No. 1 (Building) P15,000.00
(Exhibi With counsel for the insurance company acting
t "LL") as private prosecutor, Que Chee Gan, with his
brother, Qua Chee Pao, and some employees
Bodega No. 2 (Building) 10,000.00 of his, were indicted and tried in 1940 for the
crime of arson, it being claimed that they had
263716 Bodega No. 3 (Building) 25,000.00 set fire to the destroyed warehouses to collect
5
the insurance. They were, however, acquitted
(Exhibi Bodega No. 4 (Building) 10,000.00
t "JJ") by the trial court in a final decision dated July
Hemp Press moved by 9, 1941 (Exhibit WW). Thereafter, the civil suit
5,000.00 to collect the insurance money proceeded to its
steam engine
trial and termination in the Court below, with
263734 the result noted at the start of this opinion.
Merchandise contents (copra
5 The Philippine National Bank's complaint in
and empty sacks of Bodega 150,000.00
(Exhibi
No. 1) intervention was dismissed because the
t "X")
appellee had managed to pay his indebtedness
263734 to the Bank during the pendecy of the suit, and
despite the fire losses.
6 Merchandise contents (hemp)
150,000.00
(Exhibi of Bodega No. 3
t "Y")
In its first assignment of error, the insurance
263706 company alleges that the trial Court should
7 Merchandise contents (loose have held that the policies were avoided for
5,000.00 breach of warranty, specifically the one
(Exhibi hemp) of Bodega No. 4
t "GG") 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
Total P370,000.00 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,
receipts and 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 judicata on 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.
G.R. Nos. L-21821-22, L-211824-27 May
31, 1966.
DIOSDADO C. TY v. FILIPINAS COMPAA
 DE SEGUROS, ET AL.
SYLLABUS
1. CONTRACTS; INSURANCE; AGREEMENT
CONTAINED IN INSURANCE POLICY IS THE
LAW BETWEEN THE PARTIES. The
agreement contained in the policy is the law
between the parties, and the Court cannot go
beyond the clear and express conditions
thereof. Thus where the terms of the policy are
clear, express, and specific that only
amputation of the hand should be considered
as a loss thereof, an interpretation that would
include the fracture or other temporary
disability not covered by the policy would be
unwarranted.
2. ID.; ID.; PARTIES BOUND BY CLEAR TERMS
OF CONTRACT. Where the terms of the
policy is clear enough to inform the insured
entering into that contract that the loss to be
considered a disability entitled to indemnity
must be severance or amputation of that
affected member from the body of the insured,
the latter cannot come to the courts and claim
that he was misled by the terms of the
contract.
These are appeals instituted by Diosdado C. Ty
from a single decision of the Court of First
Instance of Manila Civil Cases Nos. 26343,
26344, 26404, 26405, 26406, 26442 which
were tried together), dismissing the six
separate complaints he filed against six
insurance companies (Filipinas Compania de
Seguros, Peoples Surety & Insurance Co, Inc.,
South Sea Surety & Insurance Co., Inc., The
Philippine Guaranty Company, Inc., Universal
Insurance & Indemnity Co., and Plaridel Surety
& Insurance Co., Inc.) for collection from each
of them, of the sum of P650.00, as
compensation for the disability of his left hand.
The facts of these cases are not controverted:
Plaintiff-appellant was an employee of
Broadway Cotton Factory at Grace Park,
Caloocan City, working as mechanic-operator,
with a monthly salary of P185.00. In the latter
part of 1953, he took Personal Accident Policies
from several insurance companies, among
which are herein defendants-appellees, on
different dates, 1 effective for 12 months.
During the effectivity of these policies, or on
December 24, 1953, a fire broke out in the
factory where plaintiff was working. As he was
trying to put out said fire with the help of a fire
extinguisher, a heavy object fell upon his left
hand. Plaintiff received treatment at the
National Orthopedic Hospital from December
26, 1953 to February 8, 1954, for the following
injuries, to wit:
(1) Fracture, simple, proximal phalanx, index
finger, left;
(2) Fracture, compound, communite proximal
phalanx, middle finger, left and 2nd phalanx,
simple;
(3) Fracture, compound, communite phalanx,
4th finger, left;
(4) Fracture, simple, middle phalanx, middle
finger, left;
(5) Lacerated wound, sutured, volar aspect,
small finger, left;
(6) Fracture, simple chip, head, 1st phalanx,
5th digit, left.
which injuries, the attending surgeon certified,
would cause temporary total disability of
appellants left hand.
As the insurance companies refused to pay his
claim for compensation under the policies by
reason of the said disability of his left hand, Ty
filed actions in the Municipal Court of Manila,
which rendered favorable decision. On appeal
to the Court of First Instance by the insurance
companies, the cases were dismissed on the
ground that under the uniform terms of the
insurance policies, partial disability of the
insured caused by loss of either hand to be
compensable, the loss must result in the
amputation of that hand. Hence, these appeals
by the insured.
Plaintiff-appellant is basing his claim for
indemnity under the provision of the insurance
contract uniform in all the cases, which
reads:jgc:chanrobles.com.ph
"INDEMNITY FOR TOTAL OR PARTIAL
DISABILITY"
"If the Insured sustains any Bodily Injury
which is effected solely through violent,
external, visible and accidental means, and
which shall not prove fatal but shall result,
independently of all other causes and within
sixty (60) days from the occurrence thereof, in
Total or Partial Disability of the Insured, the
Company shall pay, subject to the exceptions
as provided for hereinafter, the amount set
opposite such injury:
x x x
"PARTIAL DISABILITY
x x x
"LOSS OF:
x x x
"Either hand P650.00
x x x
"The loss of a hand shall mean the loss by
amputation through the bones of the wrist."
Appellant contends that to be entitled to
indemnification under the foregoing provision,
it is enough that the insured is disabled to such
an extent that he cannot substantially perform
all acts or duties of the kind necessary in the
prosecution of his business. It is argued that
what is compensable is the disability and not
the amputation of the hand. The definition of
what constitutes loss of hand, placed in the
contract, according to appellant, consequently,
makes the provision ambiguous and calls for
the interpretation thereof by this Court.
This is not the first time that the proper
construction of this provision, which is
uniformly carried in personal accident policies
has been questioned. Herein appellant himself
has already brought this matter to the
attention of this Court in connection with the
other accident policies which he took and
under which he had tried to collect indemnity,
for the identical injury that is the basis of the
claims in these cases. And, we had already
ruled:
"While we sympathize with the plaintiff or his
employer, for whose benefit the policies were
issued, we can not go beyond the clear and
express conditions of the insurance policies, all
of which defined partial disability as loss of
either hand by amputation through the bones
of the wrist. There was no such amputation in
the case at bar. All that was found by the trial
court, which is not disputed on appeal, was
that physical injuries caused temporary total
disability of plaintiffs left hand. Note that the
disability of plaintiffs hand was merely
temporary, having been caused by fractures of
the index, the middle and the fourth fingers of
the left hand.
"We might add that the agreement contained
in the insurance policies is the law between the
parties. As the terms of the policies are clear,
express and specific that only amputation of
the left hand should be considered as a loss
thereof, an interpretation that would include
the mere fracture or temporary disability not
covered by the policies would certainly be
unwarranted." 2
We find no reason to depart from the foregoing
ruling on the matter. Plaintiff-appellant cannot
come to the court and claimed that he was
misled by the terms of the contract. The
provision is clear enough to inform the party
entering into that contract that the loss to be
considered a disability entitled to indemnity,
must be severance or amputation of that
affected member from the body of the Insured.
Wherefore, finding no error in the decision
appealed from, the same is hereby affirmed,
without costs. So ordered.
G.R. No. 76452 July 26, 1994
PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY and RODRIGO DE LOS REYES v.
HON. ARMANDO ANSALDO, in his capacity
as Insurance Commissioner, and RAMON
MONTILLA PATERNO, JR.
SYLLABUS
1. COMMERCIAL LAW; LAW ON INSURANCE;
INSURANCE COMMISSIONER; JURISDICTION;
CONTRACT OF AGENCY BETWEEN INSURANCE
COMPANY AND AGENT, NOT INCLUDED. The
main issue to be resolved is whether or not the
resolution of the legality of the Contract of
Agency falls within the jurisdiction of the
Insurance Commissioner. The general
regulatory authority of the Insurance
Commissioner is described in Section 414 of
the Insurance Code. A plain reading of the
above-quoted provisions show that the
Insurance Commissioner has the authority to
regulate the business of insurance, as defined
in Section 2[2] thereof. Since the contract of
agency entered into between Philamlife and its
agents is not included within the meaning of an
insurance business, Section 2 of the Insurance
Code cannot be invoked to give jurisdiction
over the same to the Insurance Commissioner.
Expressio unius est exclusio alterius. The
quasi-judicial power of the Insurance
Commissioner under Section 416 of the
Insurance Code is likewise not applicable in
this case. The quasi-judicial power of the
Insurance Commissioner is limited by law "to
claims and complaints involving any loss,
damage or liability for which an insurer may be
answerable under any kind of policy or contract
of insurance, . . . ." Hence, this power does not
cover the relation affecting the insurance
company and its agents but is limited to
adjudicating claims and complaints filed by the
insured against the insurance company. While
the subject of Insurance Agents and Brokers is
discussed under Chapter IV, Title I of the
Insurance Code, the provisions of said Chapter
speak only of the licensing requirements and
limitations imposed on insurance agents and
brokers. The Insurance Code does not have
provisions governing the relations between
insurance companies and their agents.
2. ID.; ID.; AGENTS; CLASSIFICATION;
GOVERNING RULES. An insurance company
may have two classes of agents who sell its
insurance policies: (1) salaried employees who
keep definite insurance policies: (1) salaried
employees who keep definite hours and work
under the control and supervision of the
company; and (2) registered representatives,
who work on commission basis. Under the first
category, the relationship between the
insurance company and its agent is governed
by the Contract of Employment and the
provisions of the Labor Code, while under the
second category, the same is governed by the
Contract of Agency and the provisions of the
Civil Code on the Agency. Disputes involving
the latter are cognizable by the regular courts.
This is a petition for certiorari and prohibition
under Rule 65 of the Revised Rules of Court,
with preliminary injunction or temporary
restraining order, to annul and set aside the
Order dated November 6, 1986 of the
Insurance Commissioner and the entire
proceedings taken in I.C. Special Case No. 1-
86.

We grant the petition.
I and affidavit, verifying his letters of April 17,
The instant case arose from a letter-complaint
of private respondent Ramon M. Paterno, Jr.
dated April 17, 1986, to respondent
Commissioner, alleging certain problems
encountered by agents, supervisors, managers
and public consumers of the Philippine
American Life Insurance Company (Philamlife)
as a result of certain practices by said
company.
In a letter dated April 23, 1986, respondent
Commissioner requested petitioner Rodrigo de
los Reyes, in his capacity as Philamlifes
president, to comment on respondent
Paternos letter.
In a letter dated April 29, 1986 to respondent
Commissioner, petitioner De los Reyes
suggested that private respondent "submit
some sort of a `bill of particulars listing and
citing actual cases, facts, dates, figures,
provisions of law, rules and regulations, and all
other pertinent date which are necessary to
enable him to prepare an intelligent reply"
(Rollo, p. 37). A copy of this letter was sent by
the Insurance Commissioner to private
respondent for his comments thereon.
On May 16, 1986, respondent Commissioner
received a letter from private respondent
maintaining that his letter-complaint of April
17, 1986 was sufficient in form and substance,
and requested that a hearing thereon be
conducted.
Petitioner De los Reyes, in his letter to
respondent Commissioner dated June 6, 1986,
reiterated his claim that private respondents
letter of May 16, 1986 did not supply the
information he needed to enable him to answer
the letter-complaint.
On July 14, a hearing on the letter-complaint
was held by respondent Commissioner on the
validity of the Contract of Agency complained
of by private Respondent.
In said hearing, private respondent was
required by respondent Commissioner to
specify the provisions of the agency contract
which he claimed to be illegal.
On August 4, private respondent submitted a
letter of specification to respondent
Commissioner dated July 31, 1986, reiterating
his letter of April 17, 1986 and praying that the
provisions on charges and fees stated in the
Contract of Agency executed between
Philamlife and its agents, as well as the
implementing provisions as published in the
agents handbook, agency bulletins and
circulars, be declared as null and void. He also
asked that the amounts of such charges and
fees already deducted and collected by
Philamlife in connection therewith be
reimbursed to the agents, with interest at the
prevailing rate reckoned from the date when
they were deducted.
Respondent Commissioner furnished petitioner
De los Reyes with a copy of private
respondents letter of July 31, 1986, and
requested his answer thereto.
Petitioner De los Reyes submitted an Answer
dated September 8, 1986, stating inter alia
that:
(1) Private respondents letter of August 11,
1986 does not contain any of the particularly
information which Philamlife was seeking from
him and which he promised to submit.
(2) That since the Commissions quasi-judicial
power was being invoked with regard to the
complaint, private respondent must file a
verified formal complaint before any further
proceedings.
In his letter dated September 9, 1986, private
respondent asked for the resumption of the
hearing on his complaint.
On October 1, private respondent executed
1986 and July 31, 1986.
In a letter dated October 14, 1986, Manuel
Ortega, Philamlifes Senior Assistant Vice-
President and Executive Assistant to the
President, asked that respondent Commission
first rule on the questions of the jurisdiction of
the Insurance Commissioner over the subject
matter of the letters-complaint and the legal
standing of private Respondent.
On October 27, respondent Commissioner
notified both parties of the hearing of the case
on November 5, 1985.
On November 3, Manuel Ortega filed a Motion
to Quash Subpoena/Notice on the following
grounds:
"I. The Subpoena/Notice has no legal basis and
is premature because:
(1) No complaint sufficient in form and
contents has been filed;
(2) No summons has been issued nor received
by the respondent De los Reyes, and hence, no
jurisdiction has been acquired over his person;
(3) No answer has been filed, and hence, the
hearing scheduled on November 5, 1985 in the
subpoena/notice, and wherein the respondent
is required to appear, is premature and lacks
legal basis.
II. The Insurance Commission has no
jurisdiction over:
(1) the subject matter or nature of the action;
and
(2) over the parties involved" (rollo, p. 102).
In the Order dated November 6, 1986,
respondent Commissioner denied the Motion to
Quash. The dispositive portion of said Order
reads:
NOW, THEREFORE, finding the position of
complainant thru counsel tenable and
considering the fact that the instant case is an
informal administrative litigation falling outside
the operation of the aforecited memorandum
circular but cognizable by this Commission, the
hearing officer, in open session ruled as it is
hereby ruled to deny the Motion to Quash
Subpoena/Notice for lack of merit (Rollo, p.
109).
Hence, this petition.
II
The main issue to be resolved is whether or
not the resolution of the legality of the
Contract of Agency falls within the jurisdiction
of the Insurance Commissioner.
Private respondent contends that the
Insurance Commissioner has jurisdiction to
take cognizance of the complaint in the
exercise of its quasi-judicial powers. The
Solicitor General, upholding the jurisdiction of
the Insurance Commissioner, claims that under
Sections 414 and 415 of the Insurance Code,
the Commissioner has authority to nullify the
alleged illegal provisions of the Contract of
Agency.
III
The general regulatory authority of the
Insurance Commissioner is described in
Section 414 of the Insurance Code, to wit:
"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, . . . ."
On the other hand, Section 415 provides:
"In addition to the administrative sanctions
provided elsewhere in this Code, the Insurance
Commissioner is hereby authorized, at his
discretion, to impose upon insurance
companies, their directors and/or officers
and/or agents, for any willful failure or refusal
to comply with, or violation of any provision of
this Code, or any order, instruction, regulation
or ruling of the Insurance Commissioner, or
any commission of irregularities, and/or
conducting business in an unsafe or unsound
manner as may be determined by the
Insurance Commissioner, the following:
(a) fines not in excess of five hundred pesos a
day; and
(b) suspension, or after due hearing, removal
of directors and/or officers and/or agents."
A plain reading of the above-quoted provisions
show that the Insurance Commissioner has the
authority to regulate the business of insurance,
which is defined as follows:
"(2) The term doing an insurance business or
transacting an insurance business, within the
meaning of this Code, shall include (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 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. (Insurance Code, Sec.
2 [2]; Emphasis supplied.).
Since the contract of agency entered into
between Philamlife and its agents is not
included within the meaning of an insurance
business, Section 2 of the Insurance Code
cannot be invoked to give jurisdiction over the
same to the Insurance Commissioner.
Expressio unius est exclusio alterius.
With regard to private respondents contention
that the quasi-judicial power of the Insurance
Commissioner under Section 416 of the
Insurance Code applies in his case, we likewise
rule in the negative. Section 416 of the Code in
pertinent part, provides:
"The Commissioner shall have the power to
adjudicate claims and complaints involving any
loss, damage or liability for which an insurer
may be answerable under any kind of policy or
contract of insurance, or for which such insurer
may be liable under a contract of suretyship,
or for which a insurer may be used under any
contract or reinsurance it may have entered
into, or for which a mutual benefit association
may be held liable under the membership
certificates it has issued to its members, where
the amount of any such loss, damage or
liability, excluding interest, costs and
attorneys fees, being claimed or sued upon
any kind of insurance, bond, reinsurance
contract, or membership certificate does not
exceed in any single claim one hundred
thousand pesos."
A reading of the said section shows that the
quasi-judicial power of the Insurance
Commissioner is limited by law "to claims and
complaints involving any loss, damage or
liability for which an insurer may be
answerable under any kind of policy or contract
of insurance, . . . ." Hence, this power does not
cover the relation affecting the insurance
company and its agents but is limited to
adjudicating claims and complaints filed by the
insured against the insurance company.
While the subject of Insurance Agents and
Brokers is discussed under Chapter IV, Title I
of the Insurance Code, the provisions of said
Chapter speak only of the licensing
requirements and limitations imposed on
insurance agents and brokers.
The Insurance Code does not have provisions
governing the relations between insurance
companies and their agents. It follows that the
Insurance Commissioner cannot, in the
exercise of its quasi-judicial powers, assume
jurisdiction over controversies between the
insurance companies and their agents.
We have held in the cases of Great Pacific Life
Assurance Corporation v. Judico, 180 SCRA
445 (1989(, and Investment Planning
Corporation of the Philippines v. Social Security
Commission, 21 SCRA 904 (1962), that an
insurance company may have two classes of
agents who sell its insurance policies: (1)
salaried employees who keep definite
insurance policies: (1) salaried employees who
keep definite hours and work under the control
and supervision of the company; and (2)
registered representatives, who work on
commission basis.
Under the first category, the relationship
between the insurance company and its agent
is governed by the Contract of Employment
and the provisions of the Labor Code, while
under the second category, the same is
governed by the Contract of Agency and the
provisions of the Civil Code on the Agency.
Disputes involving the latter are cognizable by
the regular courts.
WHEREFORE, the petition is GRANTED. The
Order dated November 6, 1986 of the
Insurance Commission is SET ASIDE.
SO ORDERED.
G.R. No. L-16215. June 29, 1963.
SIMEON DEL ROSARIO v. THE EQUITABLE
INSURANCE AND CASUALTY CO., INC.
SYLLABUS
1. INSURANCE; INDEMNITY; AMBIGUITY IN
TERMS AND CONDITIONS OF A LIFE ACCIDENT
POLICY RESOLVED AGAINST INSURER.
Where there is an ambiguity with respect to
the terms and conditions of a policy, the same
will be resolved against the one responsible
thereof. Generally, the insured, has little, if
any, participation in the preparation of the
policy, together with the drafting of its terms
and conditions. The interpretation of obscure
stipulations in a contract should not favor the
party who caused the obscurity (Art. 1377,
N.C.C.) which, in the case at bar, is the
insurance company.
DECISION
On February 7, 1957, the defendant Equitable
Insurance and Casualty Co., Inc., issued
Personal Accident Policy No. 7136 on the life of
Francisco del Rosario, alias Paquito Bolero, son
of herein plaintiff-appellee, binding itself to pay
the sum of P1,000.00 to P3,000.00, as
indemnity for the death of the insured. The
pertinent provisions of the Policy, recite:
Part I. Indemnity for Death
If the insured sustains any bodily injury which
is effected solely through violent, external,
visible and accidental means, and which shall
result, independently of all other causes and
within sixty (60) days from the occurrence
thereof, in the Death of the Insured, the
Company shall pay the amount set opposite
such injury:
SECTION 1. Injury sustained other than those
specified below unless excepted hereinafter
P1,000.00
SECTION 2. Injury sustained by the wrecking
or disablement of a railroad passenger car or
street railway car in or on which the insured is
traveling as a fare-paying passenger P1,500.00
SECTION 3. Injury sustained by the burning of
a church, theatre, public library or municipal
administration building while the Insured is
therein at the commencement of the fire
P2,000.00
SECTION 4. Injury sustained by the wrecking
or disablement of a regular passenger elevator
car in which the Insured is being conveyed as a
passenger (Elevator in mines excluded)
P2,500.00
SECTION 5. Injury sustained by a stroke of
lightning or by a cyclone P3,000.00
x x x
Part VI. Exceptions
This policy shall not cover disappearance of the
Insured nor shall it cover Death, Disability,
Hospital fees, or Loss of Time, caused to the
insured:
. . . (h) By drowning except as a consequence
of the wrecking or disablement in the
Philippine waters of a passenger steam or
motor vessel in which the Insured is traveling
as a fare-paying passenger; . . ."
A rider to the Policy contained the following:
"IV. DROWNING
It is hereby declared and agreed that
exemption clause letter (h) embodied in Part
VI of the policy is hereby waived by the
company, and to form a part of the provision
covered by the policy."
On February 24, 1957, the insured Francisco
del Rosario alias Paquito Bolero, while on board
the motor launch "ISLAMA" together with 33
others, including his beneficiary in the Policy,
Remedios Jayme, were forced to jump off said
launch on account of fire which broke out on
said vessel, resulting to the death by
drowning, of the insured and beneficiary in the
waters of Jolo.
On April 13, 1957, Simeon del Rosario, father
of the insured, and as the sole heir, filed a
claim for payment with defendant company,
and on September 13, 1957, defendant
company paid to him (plaintiff) the sum of
P1,000.00, pursuant to Section 1 of Part 1 of
the policy. The receipt signed by plaintiff reads
"RECEIVED of the EQUITABLE INSURANCE &
CASUALTY CO, INC., the sum of PESOS ONE
THOUSAND (P1,000.00) Philippine Currency,
being settlement in full for all claims and
demands against said Company as a result of
an accident which occurred on February 26,
1957, insured under our ACCIDENT Policy No.
7136, causing the death of the Assured.
In view of the foregoing, this policy is hereby
surrendered and CANCELLED.
LOSS COMPUTATION
Amount of Insurance P1,000.00"
On the same date (September 13, 1957), Atty.
Vicente J. Francisco, wrote defendant company
acknowledging receipt by his client (plaintiff
herein), of the P1,000.00, but informing said
company that said amount was not the correct
one. Atty. Francisco claimed
"The amount payable under the policy, I
believe should be P1,500.00 under the
provision of Section 2, part 1 of the policy,
based on the rule of pari materia as the death
of the insured occurred under the
circumstances similar to that provided under
the aforecited section."
Defendant company, upon receipt of the letter,
referred the matter to the Insurance
Commissioner, who rendered an opinion that
the liability of the company was only
P1,000.00, pursuant to Section 1, Part 1 of the
Provisions of the policy (Exh. F, or 3). Because
of the above opinion, defendant insurance
company refused to pay more than P1,000.00.
In the meantime, Atty. Vicente Francisco, in a
subsequent letter to the insurance company,
asked for P3,000.00 which the Company
refused to pay. Hence, a complaint for the
recovery of the balance of P2,000.00 more was
instituted with the CFI of Rizal (Pasay City,
Branch VIII), praying for a further sum of
P10,000.00 as attorneys fees, expenses of
litigation and costs.
Defendant Insurance Company presented a
Motion to Dismiss, alleging that the demand or
claim as set forth in the complaint had already
been released, plaintiff having received the full
amount due as appearing in the policy and as
per opinion of the Insurance Commissioner. An
opposition to the motion to dismiss was
presented by plaintiff, and other pleadings
were subsequently filed by the parties. On
December 28, 1957, the trial court deferred
action on the motion to dismiss until
termination of the trial of the case, it
appearing that the ground thereof was not
indubitable. In the Answer to the complaint,
defendant company practically admitted all the
allegations therein, denying only those which
stated that under the policy its liability was
P3,000.00.
On September 1, 1958, the trial court
promulgated an amended Decision, the
pertinent portions of which read
"x x x
Since the contemporaneous and subsequent
acts of the parties show that it was not their
intention that the payment of P1,000.00 to the
plaintiff and the signing of the loss receipt
exhibit 1 would be considered as releasing the
defendant completely from its liability on the
policy in question, said intention of the parties
should prevail over the contents of the loss
receipt 1 (Articles 1370 and 1371, New Civil
Code).
". . . Under the terms of this policy, defendant
company agreed to pay P1,000.00 to
P3,000.00 as indemnity for the death of the
insured. The insured died of drowning. Death
by drowning is covered by the policy the
pertinent provisions of which reads as follows:
x x x
Part I of the policy fixes specific amounts as
indemnities in case of deaths resulting from
bodily injury which is effected solely thru
violence, external, visible and accidental
means but, Part I of the Policy is not
applicable in case of death by drowning
because death by drowning is not one resulting
from bodily injury which is affected solely thru
violent, external, visible and accidental means
as Bodily Injury means a cut, a bruise, or a
wound and drowning is death due to
suffocation and not any cut, bruise or wound.
x x x
Besides, on the face of the policy Exhibit A
itself, death by drowning is a ground for
recovery a part from the bodily injury because
death by bodily injury is covered by Part I of
the policy while death by drowning is covered
by Part VI thereof. But while the policy
mentions specific amounts that may be
recovered for death for bodily injury, yet, there
is no specific amount mentioned in the policy
for death thru drowning although the latter is,
under Part VI of the policy, a ground for
recovery thereunder. Since the defendant has
bound itself to pay P1,000.00 to P3,000.00 as
indemnity for the death of the insured but the
policy does not positively state any definite
amount that may be recovered in case of death
by drowning, there is an ambiguity in this
respect in the policy, which ambiguity must be
interpreted in favor of the insured and strictly
against the insurer so as to a low a greater
indemnity.
x x x
. . . plaintiff is therefore entitled to recover
P3,000.00. The defendant had already paid the
amount of P1.000.00 to the plaintiff so that
there still remains a balance of P2,000.00 of
the amount to which plaintiff is entitled to
recover under the policy exhibit A.
The plaintiff asks for an award of P10,000.00
as attorneys fees and expenses of litigation.
However, since it is evident that the defendant
had not acted in bad faith in refusing to pay
plaintiffs claim, the Court cannot award
plaintiffs claim for attorneys fees and
expenses of litigation.
IN VIEW OF THE FOREGOING, the Court
hereby reconsiders and sets aside its decision
dated July 21, 1958 and hereby renders
judgment ordering the defendant to pay
plaintiff the sum of Two Thousand (P2,000.00)
Pesos and to pay the costs."
The above judgment was appealed to the
Court of Appeals on three (3) counts. Said
Court, in a Resolution dated September 29,
1959, elevated the case to this Court, stating
that the genuine issue is purely legal in nature.
All the parties agree that indemnity has to be
paid. The conflict centers on how much should
the indemnity be. We believe that under the
proven facts and circumstances, the findings
and conclusions of the trial court are well
taken, for they are supported by the generally
accepted principles or rulings on insurance,
which enunciate that where there is an
ambiguity with respect to the terms and
conditions of a policy, the same will be
resolved against the one responsible thereof. It
should be recalled in this connection, that
generally, the insured, has little, if any,
participation in the preparation of the policy,
together with the drafting of its terms and
conditions. The interpretation of obscure
stipulations in a contract should not favor the
party who caused the obscurity (Art. 1377,
N.C.C.), which, in the case at bar, is the
insurance company.
". . . And so it has been generally held that the
terms in an insurance policy, which are
ambiguous, equivocal or uncertain . . . are to
be construed strictly 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 a forfeiture is
involved, (29 Am. Jur. 181) and the reason for
this rule 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 expert and legal advisers
employed by, and acting exclusively in the
interest of, the insurance company (44 C. J. S.
1174). Calanoc v. Court of Appeals, Et. Al. 98
Phil., 79."
". . . Where two interpretations, equally fair, of
languages used in an insurance policy may be
made, that which allows the greater indemnity
will prevail. (LEngel v. Scotish Union & Nat. F.
Ins. Co. 48 Fla. 82, 37 So. 462, 67 LRA 581,
111 Am. St. Rep. 70, 5 Ann. Cas. 749)."cralaw
virtua1aw library
At any event, the policy under consideration,
covers death or disability by accidental means,
and the appellant insurance company agreed
to pay P1,000.00 to P3,000.00, as indemnity
for death of the insured.
In view of the conclusions reached, it would
seem unnecessary to discuss the other issues
raised in the appeal.
The judgment appealed from is hereby
affirmed. Without costs.
G.R. No. L-21380 May 20, 1966
MISAMIS LUMBER CORPORATION v.
CAPITAL INSURANCE & SURETY CO., INC.
SYLLABUS
1. INSURANCE; MOTOR VEHICLES;
STIPULATION LIMITING INSURERS LIABILITY.
The insurance policy stipulated that if the
insured authorizes the repair of the damaged
motor vehicle, the liability of the insurer is
limited to P150.00. The literal meaning of this
stipulation must control, it being the actual
contract, expressly and plainly provided for in
the policy (Art. 1370, Civil Code; Young v.
Midland Textile Ins. Co., 30 Phil. 617; Ty v.
First Nat. Surety & Assur. Co., Inc., L-16136-
45, 29 April 1961).
2. ID.; ID.; ID.; ONEROUS INSURANCE
CONTRACT DOES NOT JUSTIFY
ABROGATION OF EXPRESS TERMS. The fact
that the insurance contract is onerous does not
in itself justify the abrogation of its express
terms which the insured accepted or adhered
to and which is the law between the
contracting parties.
DECISION
Plaintiff-appellee Misamis Lumber Corporation,
under its former name, Lanao Timber Mills,
Inc., insured its Ford Falcon motor car for the
amount of P14,000 with the defendant-
appellant, Capital Insurance & Surety
Company, Inc. The pertinent provisions of the
policy provided, as follows:
"1. The Company will subject to the Limits of
Liability indemnify the Insured against loss or
damage to the Motor Vehicle and its
accessories and spare parts whilst thereon.
"2. (a) by accidental collision or overturing or
collision or overturning consequent when
mechanical breakdown or consequent upon
wear and tear.
x x x
"3. At its option the Company may pay in cash
the amount of the loss or damage or may
repair, reinstate or replace the Motor Vehicle or
any part thereof or its accessories or spare
parts. The liability of the Company shall not
exceed the value of the parts lost or damaged
and the reasonable cost of fitting such parts or
the value of the Motor Vehicle at the time of
the loss or damage whichever is the less. The
Insureds estimate of value stated in the
schedule shall be the maximum amount
payable by the Company in respect of any
claim for loss or damage.
x x x was filed late.
"4. The insured may authorize the repair of the
Motor Vehicle necessitated by damage for
which the Company may be liable under this
policy provided that:
(a) the estimated cost of such repair does not
exceed the Authorized Repair Limit.
(b) a detailed estimate of the cost is forwarded
to the Company without delay."
and providing also that the authorized repair
limit is P150.00.
At around eleven oclock in the evening of 25
November 1961, and while the above-
mentioned insurance policy was in force, the
insured car, while traveling along Aurora
Boulevard in front of the Pepsi Cola plant in
Quezon City, passed over a water hole which
the driver did not see because an oncoming car
did not dim its light. The crankcase and
flywheel housing of the car broke when it hit a
hollow block Lying alongside the water hole. At
the instance of the plaintiff-appellee, the car
was towed and repaired by Morosi Motors at its
shop at 1906 Taft Avenue Extension at a total
cost of P302.27.
On 29 November 1961, when the repairs on
the car had already been made, the plaintiff-
appellee made a report of the accident to the
defendant-appellant Capital Insurance &
Surety Company.
Since the defendant-appellant refused to pay
for the total cost of towage and repairs, suit
was filed in the municipal court originally.
The case before Us is now a direct appeal on a
point of law from the judgment of the Court of
First Instance of Manila finding for the plaintiff
and against the defendant-insurer in its Civil
Case No. 51757. Per our resolution on 13
February 1964, it was resolved to proceed with
the case without the appellees brief, which
The defendant-appellant admits liability in the
amount of P150, but not for any excess
thereof.
The lower court did not exonerate the said
appellant for the excess because, according to
it, the companys absolution would render the
insurance contract one-sided and that the said
insurer had not shown that the cost of repairs
in the sum of P302.27 is unreasonable,
excessive or padded, nor had it shown that it
could have undertaken the repairs itself at less
expense.
The above reasoning is beside the point,
because the insurance policy stipulated in
paragraph 4 that if the insured authorizes the
repair, the liability of the insurer, per its sub-
paragraph (a), is limited to P150.00. The literal
meaning of this stipulation must control, it
being the actual contract, expressly and plainly
provided for in the policy (Art. 1370, Civil
Code, Young v. Midland Textile Ins. Co., 30
Phil, 617; Ty v. First Nat. Surety & Assur. Co.,
Inc., L-16138-45, 29 April 1961).
The lower courts recourse to legal
hermeneutics is not called for because
paragraph 4 of the policy is clear and specific
and leaves no room for interpretation. The
interpretation given is even unjustified because
it opposes what was specifically stipulated.
Thus, it will be observed that the policy drew
out not only the limits of the insurers liability
but also the mechanics that the insured had to
follow to be entitled to full indemnity of
repairs. The option to undertake the repairs is
accorded to the insurance company per
paragraph 2. The said company was deprived
of the option because the insured took it upon
itself to have the repairs made, and only
notified the insurer when the repairs were
done. As a consequence, paragraph 4, which
limits the companys liability to P150.00,
applies.
The insurance contract may be rather onerous
("one-sided", as the lower court put it), but
that in itself does not justify the abrogation of
its express terms, terms which the insured
accepted or adhered to and which is the law
between the contracting parties.
Finally, to require the insurer to prove that the
cost of the repairs ordered by the insured is
unreasonable, as the appealed decision does,
when the insurer was not given an opportunity
to inspect and assess the damage before the
repairs were made, strikes us as contrary to
elementary justice and equity.
For the foregoing reasons, the appealed
decision is hereby modified by ordering the
defendant-appellant Capital Insurance &
Surety Company, Inc. to pay not more than
P150.00 to the plaintiff-appellee Misamis
Lumber Corporation. Each party shall bear its
own costs and attorneys fees.
G.R. No. 76399 January 22, 1993
RAFAEL (REX) VERENDIA v. COURT OF
APPEALS and FIDELITY & SURETY CO. OF
THE PHILIPPINES
G.R. No. 75605. January 22, 1993.
FIDELITY & SURETY CO. OF THE
PHILIPPINES, INC. v. RAFAEL VERENDIA
and THE COURT OF APPEALS

3. CIVIL LAW; INSURANCE CONTRACT; LAW
BETWEEN THE PARTIES; GENERALLY, SHOULD
BE CONSTRUED IN FAVOR OF THE INSURED.
Basically a contract of indemnity, an
insurance contract is the law between the
parties (Pacific Banking Corporation v. Court of
Appeals 168 SCRA 1 [1988]). Its terms and
conditions constitute the measure of the
insurers liability and compliance therewith is a
condition precedent to the insureds right to
recovery from the insurer (Oriental Assurance
Corporation v. Court of Appeals, 200 SCRA 459
[1991], citing Perla Compania de Sequros, Inc.
v. Court of Appeals, 185 SCRA 741 [1991]). As
it is also a contract of adhesion, an insurance
contract should be liberally construed in favor
of the insured and strictly against the insurer
company which usually prepares it (Western
Guaranty Corporation v. Court of Appeals, 187
SCRA 652 [1980]).
4. ID.; ID.; BENEFITS THEREUNDER SHALL BE
FORFEITED IF ANY FALSE DECLARATIONS BE
MADE IN SUPPORT OF THE CLAIM; CASE AT
BAR. Considering that Verendia used a false
lease contract to support his claim under Fire
Insurance Policy No. F-18876, the terms of the
policy should be strictly construed against the
insured. Verendia failed to live by the terms of
the policy, specifically Section 13 thereof which
is expressed in terms that are clear and
unambiguous, that all benefits under the policy
shall be forfeited "if the claim be in any respect
fraudulent, or if any false declaration be made
or used in support thereof, or if any fraudulent
means or devises are used by the Insured or
anyone acting in his behalf to obtain any
benefit under the policy." Verendia, having
presented a false declaration to support his
claim for benefits in the form of a fraudulent
lease contract, he forfeited all benefits therein
by virtue of Section 13 of the policy in the
absence of proof that Fidelity waived such
provision (Pacific Banking Corporation v. Court
of Appeals, supra). Worse yet, by presenting a
false lease contract, Verendia reprehensibly
disregarded the principle that insurance
contracts are uberrimae fidae and demand the
most abundant good faith (Velasco v. Apostol,
173 SCRA 228 [1989]).
5. ID.; ID.; SUBROGATION RECEIPTS, NOT AN
INDICATION OF PRESENCE OF MUTUAL
AGREEMENT TO SETTLE CLAIM OF INSURED.
There is no reason to conclude that by
submitting the subrogation receipt as evidence
in court, Fidelity bound itself to a "mutual
agreement" to settle Verendias claims in
consideration of the amount of P142,685.77.
While the said receipt appears to have been a
filled-up form of Fidelity, no representative of
Fidelity had signed it. It might be that there
had been efforts to settle Verendias claims,
but surely, the subrogation receipt by itself
does not prove that a settlement had been
arrived at and enforced. Thus, to interpret
Fidelitys presentation of the subrogation
receipt in evidence as indicative of its
accession to its "terms" is not only wanting in
rational basis but would be substituting the will
of the Court for that of the parties.
DECISION
The two consolidated cases involved herein
stemmed from the issuance by Fidelity and
Surety Insurance Company of the Philippines
(Fidelity for short) of its Fire Insurance Policy
No. F-18876 effective between June 23, 1980
and June 23, 1981 covering Rafael (Rex)
Verendias residential building located at Tulip
Drive, Beverly Hills, Antipolo, Rizal in the
amount of P385,000.00. Designated as
beneficiary was the Monte de Piedad & Savings
Bank. Verendia also insured the same building
with two other companies, namely, The
Country Bankers Insurance for P56,000.00
under Policy No. PDB-80-1913 expiring on May
12, 1981, and The Development Insurance for
P400,000.00 under Policy No. F-48867 expiring
on June 30, 1981.
While the three fire insurance policies were in
force, the insured property was completely
destroyed by fire on the early morning of
December 28, 1980. Fidelity was accordingly
informed of the loss and despite demands,
refused payment under its policy, thus
prompting Verendia to file a complaint with the
then Court of First Instance of Quezon City,
praying for payment of P385,000.00, legal
interest thereon, plus attorneys fees and
litigation expenses. The complaint was later
amended to include Monte de Piedad as an
"unwilling defendant" (p. 16, Record).
Answering the complaint, Fidelity, among other
things, averred that the policy was avoided by
reason of over-insurance, that Verendia
maliciously represented that the building at the
time of the fire was leased under a contract
executed on June 25, 1980 to a certain
Roberto Garcia, when actually it was a Marcelo
Garcia who was the lessee.
On May 24, 1983, the trial court rendered a
decision, per Judge Rodolfo A. Ortiz, ruling in
favor of Fidelity. In sustaining the defenses set
up by Fidelity, the trial court ruled that
Paragraph 3 of the policy was also violated by
Verendia in that the insured failed to inform
Fidelity of his other insurance coverages with
Country Bankers Insurance and Development
Insurance.
Verendia appealed to the then Intermediate
Appellate Court and in a decision promulgated
on March 31, 1986, (CA-G.R. No. CV No.
02895, Coquia, Zosa, Bartolome, and Ejercito
(P), JJ.,), the appellate court reversed for the
following reasons: (a) there was no
misrepresentation concerning the lease for the
contract was signed by Marcelo Garcia in the
name of Roberto Garcia; and (b) Paragraph 3
of the policy contract requiring Verendia to
give notice to Fidelity of other contracts of
insurance was waived by Fidelity as shown by
its conduct in attempting to settle the claim of
Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate courts
decision on April 4, 1986, but instead of
directly filing a motion for reconsideration
within 15 days therefrom, Fidelity filed on April
21, 1986, a motion for extension of 3 days
within which to file a motion for
reconsideration. The motion for extension was
not filed on April 19, 1986 which was the 15th
day after receipt of the decision because said
15th day was a Saturday and of course, the
following day was a Sunday (p. 14, Rollo of
G.R. No. 75605). The motion for extension was
granted by the appellate court on April 30,
1986 (p. 15, ibid.), but Fidelity had in the
meantime filed its motion for reconsideration
on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the
record Fidelitys motion for reconsideration on
the ground that the motion for extension was
filed out of time because the 15th day from
receipt of the decision which fell on a Saturday
was ignored by Fidelity, for indeed, so
Verendia contended, the Intermediate
Appellate Court has personnel receiving
pleadings even on Saturdays.
The motion to expunge was denied on June 17,
1986 (p. 27, ibid.) and after a motion for
reconsideration was similarly brushed aside on
July 22, 1986 (p. 30, ibid.), the petition herein
docketed as G.R. No. 75605 was initiated.
Subsequently, or more specifically on October
21, 1986, the appellate court denied Fidelitys
motion for reconsideration and account
thereof. Fidelity filed on March 31, 1986, the
petition for review on certiorari now docketed
as G.R. No. 76399. The two petitions, inter-
related as they are, were consolidated (p. 54,
Rollo of G.R. No. 76399) and thereafter given
due course.
Before we can even begin to look into the
merits of the main case which is the petition
for review on certiorari, we must first
determine whether the decision of the
appellate court may still be reviewed, or
whether the same is beyond further judicial
scrutiny. Stated otherwise before anything
else, inquiry must be made into the issue of
whether Fidelity could have legally asked for
an extension of the 15-day reglementary
period for appealing or for moving for
reconsideration.
As early as 1944, this Court through Justice
Ozaeta already pronounced the doctrine that
the pendency of a motion for extension of time
to perfect an appeal does not suspend the
running of the period sought to be extended
(Garcia v. Buenaventura 74 Phil. 611 [1944]).
To the same effect were the rulings in Gibbs v.
CFI of Manila (80 Phil. 160 [1948]), Bello v.
Fernando (4 SCRA 138 [1962]), and Joe v.
King (20 SCRA 1120 [1967]).
The above cases notwithstanding and because
the Rules of Court do not expressly prohibit the
filing of a motion for extension of time to file a
motion for reconsideration in regard to a final
order or judgment, magistrates, including
those in the Court of Appeals, held sharply
divided opinions on whether the period for
appealing which also includes the period for
moving to reconsider may be extended. The
matter was not definitely settled until this
Court issued its Resolution in Habaluyas
Enterprises, Inc. v. Japson (142 SCRA 208
[1986]), declaring that beginning one month
from the promulgation of the resolution on May
30, 1986
". . . the rule shall be strictly enforced that no
motion for extension of time to file a motion
for new trial or reconsideration shall be filed . .
." (at p. 212.)
In the instant case, the motion for extension
was filed and granted before June 30, 1986,
although, of course, Verendias motion to
expunge the motion for reconsideration was
not finally disposed until July 22, 1986, or after
the dictum in Habaluyas had taken effect.
Seemingly, therefore, the filing of the motion
for extension came before its formal
proscription under Habaluyas, for which reason
we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity
raises therein are: (a) whether or not the
contract of lease submitted by Verendia to
support his claim on the fire insurance policy
constitutes a false declaration which would
forfeit his benefits under Section 13 of the
policy and (b) whether or not, in submitting
the subrogation receipt in evidence, Fidelity
had in effect agreed to settle Verendias claim
in the amount stated in said receipt. 1
Verging on the factual, the issue of the
veracity or falsity of the lease contract could
have been better resolved by the appellate
court for, in a petition for review
on certiorari under Rule 45, the jurisdiction of
this Court is limited to the review of errors of
law. The appellate courts findings of fact are.
therefore. conclusive upon this Court except in
the following cases: (1) when the conclusion is
a finding grounded entirely on speculation,
surmises or conjectures; (2) when the
inference made is manifestly absurd, mistaken,
or impossible; (3) when there is grave abuse
of discretion in the appreciation of facts; (4)
when the judgment is premised on a
misapprehension of facts; (5) when the
findings of fact are conflicting; and (6) when
the Court of Appeals in making its findings
went beyond the issues of the case and the
same are contrary to the admissions of both
appellant and appellee (Ronquillo v. Court of
Appeals, 195 SCRA 433 [1991]). In view of the
conflicting findings of the trial court and the
appellate court on important issues in these
consolidated cases and it appearing that the
appellate court judgment is based on a
misapprehension of facts, this Court shall
review the evidence on record.
The contract of lease upon which Verendia
relies to support his claim for insurance
benefits, was entered into between him and
one Robert Garcia, married to Helen Cawinian,
on June 25, 1980 (Exh. "1"), a couple of days
after the effectivity of the insurance policy.
When the rented residential building was razed
to the ground on December 28, 1980, it
appears that Robert Garcia (or Roberto Garcia)
was still within the premises. However,
according to the investigation report prepared
by Pat. Eleuterio M. Buenviaje of the Antipolo
police, the building appeared to have "no
occupant" and that Mr. Roberto Garcia was
"renting on the otherside (sic) portion of said
compound" (Exh. "E"). These pieces of
evidence belie Verendias uncorroborated
testimony that Marcelo Garcia whom he
considered as the real lessee, was occupying
the building when it was burned (TSN, July 27,
1982, p. 10).
Robert Garcia disappeared after the fire. It was
only on October 9, 1981 that an adjuster was
able to locate him. Robert Garcia then
executed an affidavit before the National
Intelligence and Security Authority (NISA) to
the effect that he was not the lessee of
Verendias house and that his signature on the
contract of lease was a complete forgery. Thus,
on the strength of these facts, the adjuster
submitted a report dated December 4, 1981
recommending the denial of Verendias claim
(Exh. "2").
Ironically, during the trial, Verendia admitted
that it was not Robert Garcia who signed the
lease contract. According to Verendia, it was
signed by Marcelo Garcia cousin of Robert, who
had been paying the rentals all the while.
Verendia, however, failed to explain why
Marcelo had to sign his cousins name when he
in fact was paying for the rent and why he
(Verendia) himself, the lessor, allowed such a
ruse. Fidelitys conclusions on these proven
facts appear, therefore, to have sufficient
bases: Verendia concocted the lease contract
to deflect responsibility for the fire towards an
alleged "lessee", inflated the value of the
property by the alleged monthly rental of
P6,500) when in fact, the Provincial Assessor
of Rizal had assessed the propertys fair
market value to be only P40,300.00, insured
the same property with two other insurance
companies for a total coverage of around
P900,000, and created a dead-end for the
adjuster by the disappearance of Robert
Garcia.
Basically a contract of indemnity, an insurance
contract is the law between the parties (Pacific
Banking Corporation v. Court of Appeals 168
SCRA 1 [1988]). Its terms and conditions
constitute the measure of the insurers liability
and compliance therewith is a condition
precedent to the insureds right to recovery
from the insurer (Oriental Assurance
Corporation v. Court of Appeals, 200 SCRA 459
[1991], citing Perla Compania de Sequros, Inc.
v. Court of Appeals, 185 SCRA 741 [1991]). As
it is also a contract of adhesion, an insurance
contract should be liberally construed in favor
of the insured and strictly against the insurer
company which usually prepares it (Western
Guaranty Corporation v. Court of Appeals, 187
SCRA 652 [1980]).
Considering, however, the foregoing discussion
pointing to the fact that Verendia used a false
lease contract to support his claim under Fire
Insurance Policy No. F-18876, the terms of the
policy should be strictly construed against the
insured. Verendia failed to live by the terms of
the policy, specifically Section 13 thereof which
is expressed in terms that are clear and
unambiguous, that all benefits under the policy
shall be forfeited "if the claim be in any respect
fraudulent, or if any false declaration be made
or used in support thereof, or if any fraudulent
means or devises are used by the Insured or
anyone acting in his behalf to obtain any
benefit under the policy." Verendia, having
presented a false declaration to support his
claim for benefits in the form of a fraudulent
lease contract, he forfeited all benefits therein
by virtue of Section 13 of the policy in the
absence of proof that Fidelity waived such
provision (Pacific Banking Corporation v. Court
of Appeals, supra). Worse yet, by presenting a
false lease contract, Verendia reprehensibly
disregarded the principle that insurance
contracts are uberrimae fidae and demand the
most abundant good faith (Velasco v. Apostol,
173 SCRA 228 [1989]).
There is also no reason to conclude that by
submitting the subrogation receipt as evidence
in court, Fidelity bound itself to a "mutual
agreement" to settle Verendias claims in
consideration of the amount of P142,685.77.
While the said receipt appears to have been a
filled-up form of Fidelity, no representative of
Fidelity had signed it. It is even incomplete as
the blank spaces for a witness and his address
are not filled up. More significantly, the same
receipt states that Verendia had received the
aforesaid amount. However, that Verendia had
not received the amount stated therein, is
proven by the fact that Verendia himself filed
the complaint for the full amount of
P385,000.00 stated in the policy. It might be
that there had been efforts to settle Verendias
claims, but surely, the subrogation receipt by
itself does not prove that a settlement had
been arrived at and enforced. Thus, to
interpret Fidelitys presentation of the
subrogation receipt in evidence as indicative of
its accession to its "terms" is not only wanting
in rational basis but would be substituting the
will of the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is
DISMISSED. The petition in G.R. No. 76399 is
GRANTED and the decision of the then
Intermediate Appellate Court under review is
REVERSED and SET ASIDE and that of the trial
court is hereby REINSTATED and UPHELD.
SO ORDERED.
G.R. NO. 156167 : May 16, 2005
GULF RESORTS, INC. v. PHILIPPINE
CHARTER INSURANCE CORPORATION
DECISION
Before the Court is the Petition
for Certiorariunder Rule 45 of the Revised
Rules of Court by petitioner GULF RESORTS,
INC., against respondent PHILIPPINE CHARTER
INSURANCE CORPORATION. Petitioner assails
the appellate court decision1 which dismissed
its two appeals and affirmed the judgment of
the trial court.
For review are the warring interpretations of
petitioner and respondent on the scope of the (Exhs. "G" also "G-1") and in said policy the the policy wording and rates in said policy be
insurance company's liability for earthquake
earthquake endorsement clause as indicated in copied in the policy to be issued by defendant;
damage to petitioner's properties. Petitioner
avers that, pursuant to its earthquake shock Exhibits "C-1", "D-1", Exhibits "E" and "F-1" that defendant issued Policy No. 31944 to
endorsement rider, Insurance Policy No. 31944
covers all damages to the properties within its was deleted and the entry under plaintiff covering the period of March 14, 1990
resort caused by earthquake. Respondent
Endorsements/Warranties at the time of issue to March 14, 1991 for P10,700,600.00 for a
contends that the rider limits its liability for
loss to the two swimming pools of petitioner. read that plaintiff renewed its policy with AHAC total premium of P45,159.92 (Exh. "I"); that in

The facts as established by the court a quo, (AIU) for the period of March 14, 1989 to the computation of the premium, defendant's
and affirmed by the appellate court are as
follows: March 14, 1990 under Policy No. 206- Policy No. 31944 (Exh. "I"), which is the policy

4568061-9 (Exh. "H") which carried the entry in question, contained on the right-hand upper
[P]laintiff is the owner of the Plaza Resort under "Endorsement/Warranties at Time of portion of page 7 thereof, the following:
situated at Agoo, La Union and had its Issue", which read "Endorsement to Include Rate-
properties in said resort insured originally with Earthquake Shock (Exh. "6-B-1") in the Various

the American Home Assurance Company Premiu ' P37,420.60 F/L

amount of P10,700.00 and paid P42,658.14 m
(AHAC-AIU). In the first four insurance policies (Exhs. "6-A" and "6-B") as premium thereof, ' 2,061.52 ' Typhoon
issued by AHAC-AIU from 1984-85; 1985-86; computed as follows: ' 1,030.76 ' EC

1986-1987; and 1987-88 (Exhs. "C", "D", "E" ' 393.00 ' ES
Item - P7,691,000.00 - on the Clubhouse only
@ .392%; Doc. 3,068.10
and "F"; also Exhs. "1", "2", "3" and "4" Stamps
- 1,500,000.00 - on the furniture, etc. contained in the
respectively), the risk of loss from earthquake building above- mentioned@ .490%; F.S.T. 776.89
shock was extended only to plaintiff's two - 393,000.00 - on the two swimming pools, only Prem. 409.05
(against the peril of earthquake shock
Tax only)
swimming pools, thus, "earthquake shock @ 0.100%
TOTAL 45,159.92;
- 116,600.00 other buildings include as follows:
endt." (Item 5 only) (Exhs. "C-1"; "D-1," and
a) Tilter House - P19,800.00 - 0.551%
"E" and two (2) swimming pools only (Exhs. b) Power House - P41,000.00 -that the above break-down of premiums shows
0.551%
"C-1"; 'D-1", "E" and "F-1"). "Item 5" in those c) House Shed - P55,000.00 -that
0.540%
plaintiff paid only P393.00 as premium
P100,000.00 - for furniture, fixtures, lines air-con and
policies referred to the two (2) swimming pools operating equipment against earthquake shock (ES); that in all the
only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that six insurance policies (Exhs. "C", "D", "E", "F",
subsequently AHAC(AIU) issued in plaintiff's that plaintiff agreed to insure with defendant "G" and "H"), the premium against the peril of
favor Policy No. 206-4182383-0 covering the the properties covered by AHAC (AIU) Policy earthquake shock is the same, that is P393.00
period March 14, 1988 to March 14, 1989 No. 206-4568061-9 (Exh. "H") provided that (Exhs. "C" and "1-B"; "2-B" and "3-B-1" and

"3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-
1"; "6-C-1"; issued by AHAC (Exhs. "C", "D",
"E", "F", "G" and "H") and in Policy No. 31944
issued by defendant, the shock endorsement
provide(sic):
In consideration of the payment by the insured
to the company of the sum included additional
premium the Company agrees,
notwithstanding what is stated in the printed
conditions of this policy due to the contrary,
that this insurance covers loss or damage to
shock to any of the property insured by this
Policy occasioned by or through or in
consequence of earthquake (Exhs. "1-D", "2-
D", "3-A", "4-B", "5-A", "6-D" and "7-C");
that in Exhibit "7-C" the word "included" above
the underlined portion was deleted; that on
July 16, 1990 an earthquake struck Central
Luzon and Northern Luzon and plaintiff's
properties covered by Policy No. 31944 issued
by defendant, including the two swimming
pools in its Agoo Playa Resort were damaged.2
After the earthquake, petitioner advised
respondent that it would be making a claim
under its Insurance Policy No. 31944 for
damages on its properties. Respondent
instructed petitioner to file a formal claim, then
assigned the investigation of the claim to an
independent claims adjuster, Bayne Adjusters
and Surveyors, Inc.3 On July 30, 1990,
respondent, through its adjuster, requested
petitioner to submit various documents in
support of its claim. On August 7, 1990, Bayne 5.) Costs.11
Adjusters and Surveyors, Inc., through its
Respondent filed its Answer with Special and
Vice-President A.R. de Leon,4rendered a
preliminary report5 finding extensive damage Affirmative Defenses with Compulsory
caused by the earthquake to the clubhouse Counterclaims.12
and to the two swimming pools. Mr. de Leon
stated that "except for the swimming pools, all On February 21, 1994, the lower court after
trial ruled in favor of the respondent, viz:
affected items have no coverage for
earthquake shocks."6 On August 11, 1990,
petitioner filed its formal demand7 for
settlement of the damage to all its properties The above schedule clearly shows that plaintiff
in the Agoo Playa Resort. On August 23, 1990,
paid only a premium of P393.00 against the
respondent denied petitioner's claim on the
ground that its insurance policy only afforded peril of earthquake shock, the same premium
earthquake shock coverage to the two
swimming pools of the resort.8 Petitioner and it paid against earthquake shock only on the
respondent failed to arrive at a
two swimming pools in all the policies issued
settlement.9 Thus, on January 24, 1991,
petitioner filed a complaint10 with the regional by AHAC(AIU) (Exhibits "C", "D", "E", "F" and
trial court of Pasig praying for the payment of
the following: "G"). From this fact the Court must
consequently agree with the position of
1.) The sum of P5,427,779.00, representing
defendant that the endorsement rider (Exhibit
losses sustained by the insured properties,
"7-C") means that only the two swimming
with interest thereon, as computed under par.
pools were insured against earthquake shock.
29 of the policy (Annex "B") until fully paid;
Plaintiff correctly points out that a policy of
2.) The sum of P428,842.00 per month,
insurance is a contract of adhesion hence,
representing continuing losses sustained by
where the language used in an insurance
plaintiff on account of defendant's refusal to
contract or application is such as to create
pay the claims;
ambiguity the same should be resolved against
the party responsible therefor, i.e., the
3.) The sum of P500,000.00, by way of
insurance company which prepared the
exemplary damages;
contract. To the mind of [the] Court, the
4.) The sum of P500,000.00 by way of language used in the policy in litigation is clear
attorney's fees and expenses of litigation; and unambiguous hence there is no need for
interpretation or construction but only
application of the provisions therein.
From the above observations the Court finds
that only the two (2) swimming pools had
earthquake shock coverage and were heavily
damaged by the earthquake which struck on
July 16, 1990. Defendant having admitted that
the damage to the swimming pools was
appraised by defendant's adjuster
at P386,000.00, defendant must, by virtue of
the contract of insurance, pay plaintiff said
amount.
Because it is the finding of the Court as stated
in the immediately preceding paragraph that
defendant is liable only for the damage caused
to the two (2) swimming pools and that
defendant has made known to plaintiff its
willingness and readiness to settle said liability,
there is no basis for the grant of the other
damages prayed for by plaintiff. As to the
counterclaims of defendant, the Court does not
agree that the action filed by plaintiff is
baseless and highly speculative since such
action is a lawful exercise of the plaintiff's right
to come to Court in the honest belief that their
Complaint is meritorious. The prayer,
therefore, of defendant for damages is likewise
denied.
WHEREFORE, premises considered, defendant
is ordered to pay plaintiffs the sum of THREE
HUNDRED EIGHTY SIX THOUSAND PESOS
(P386,000.00) representing damage to the two
(2) swimming pools, with interest at 6% per
annum from the date of the filing of the
Complaint until defendant's obligation to
plaintiff is fully paid.
No pronouncement as to costs.13
Petitioner's Motion for Reconsideration was
denied. Thus, petitioner filed an appeal with
the Court of Appeals based on the following
assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT
PLAINTIFF-APPELLANT CAN ONLY RECOVER
FOR THE DAMAGE TO ITS TWO SWIMMING
POOLS UNDER ITS FIRE POLICY NO. 31944,
CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE
ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT
TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING
PLAINTIFF-APPELLANT'S RIGHT TO RECOVER
UNDER DEFENDANT-APPELLEE'S POLICY (NO.
31944; EXH "I") BY LIMITING ITSELF TO A
CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES
SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE
EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING
THAT PLAINTIFF-APPELLANT IS ENTITLED TO
THE DAMAGES CLAIMED, WITH INTEREST
COMPUTED AT 24% PER ANNUM ON CLAIMS
ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial
appeal, assailing the lower court's failure to
award it attorney's fees and damages on its
compulsory counterclaim.
After review, the appellate court affirmed the
decision of the trial court and ruled, thus:
However, after carefully perusing the
documentary evidence of both parties, We are
not convinced that the last two (2) insurance
contracts (Exhs. "G" and "H"), which the
plaintiff-appellant had with AHAC (AIU) and
upon which the subject insurance contract with
Philippine Charter Insurance Corporation is
said to have been based and copied (Exh. "I"),
covered an extended earthquake shock
insurance on all the insured properties.
xxx

We also find that the Court a quo was correct
in not granting the plaintiff-appellant's prayer
for the imposition of interest - 24% on the
insurance claim and 6% on loss of income
allegedly amounting to P4,280,000.00. Since
the defendant-appellant has expressed its
willingness to pay the damage caused on the
two (2) swimming pools, as the Court a quo
and this Court correctly found it to be liable
only, it then cannot be said that it was in
default and therefore liable for interest.
Coming to the defendant-appellant's prayer for
an attorney's fees, long-standing is the rule
that the award thereof is subject to the sound
discretion of the court. Thus, if such discretion
is well-exercised, it will not be disturbed on
appeal (Castro et al. v. CA, et al., G.R. No.
115838, July 18, 2002). Moreover, being the
award thereof an exception rather than a rule,
it is necessary for the court to make findings of
facts and law that would bring the case within
the exception and justify the grant of such
award (Country Bankers Insurance Corp. v.
Lianga Bay and Community Multi-Purpose
Coop., Inc., G.R. No. 136914, January 25,
2002). Therefore, holding that the plaintiff-
appellant's action is not baseless and highly
speculative, We find that the Court a quo did
not err in granting the same.
WHEREFORE, in view of all the foregoing, both
appeals are hereby DISMISSED and judgment
of the Trial Court hereby AFFIRMED in toto. No
costs.15
Petitioner filed the present petition raising the
following issues:16
A. WHETHER THE COURT OF APPEALS
CORRECTLY HELD THAT UNDER
RESPONDENT'S INSURANCE POLICY NO.
31944, ONLY THE TWO (2) SWIMMING POOLS,
RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE
RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS
CORRECTLY DENIED PETITIONER'S PRAYER
FOR DAMAGES WITH INTEREST THEREON AT
THE RATE CLAIMED, ATTORNEY'S FEES AND
EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policy's earthquake shock
endorsement clearly covers all of the
properties insured and not only the swimming
pools. It used the words "any property insured
by this policy," and it should be interpreted as
all inclusive.
Second, the unqualified and unrestricted
nature of the earthquake shock endorsement is
confirmed in the body of the insurance policy
itself, which states that it is "[s]ubject to:
Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt.,
Extended Coverage Endt., FEA Warranty &
Annual Payment Agreement On Long Term
Policies."17
Third, that the qualification referring to the
two swimming pools had already been deleted
in the earthquake shock endorsement.
Fourth, it is unbelievable for respondent to
claim that it only made an inadvertent
omission when it deleted the said qualification.
Fifth, that the earthquake shock endorsement
rider should be given precedence over the
wording of the insurance policy, because the
rider is the more deliberate expression of the
agreement of the contracting parties.
Sixth, that in their previous insurance policies,
limits were placed on the
endorsements/warranties enumerated at the
time of issue.
Seventh, any ambiguity in the earthquake
shock endorsement should be resolved in favor
of petitioner and against respondent. It was
respondent which caused the ambiguity when
it made the policy in issue.
Eighth, the qualification of the endorsement
limiting the earthquake shock endorsement
should be interpreted as a caveat on the
standard fire insurance policy, such as to
remove the two swimming pools from the
coverage for the risk of fire. It should not be
used to limit the respondent's liability for
earthquake shock to the two swimming pools
only.
Ninth, there is no basis for the appellate court
to hold that the additional premium was not
paid under the extended coverage. The
premium for the earthquake shock coverage
was already included in the premium paid for
the policy.
Tenth, the parties' contemporaneous and
subsequent acts show that they intended to
extend earthquake shock coverage to all
insured properties. When it secured an
insurance policy from respondent, petitioner
told respondent that it wanted an exact replica
of its latest insurance policy from American
Home Assurance Company (AHAC-AIU), which
covered all the resort's properties for
earthquake shock damage and respondent
agreed. After the July 16, 1990 earthquake,
respondent assured petitioner that it was
covered for earthquake shock. Respondent's
insurance adjuster, Bayne Adjusters and
Surveyors, Inc., likewise requested petitioner
to submit the necessary documents for its
building claims and other repair costs. Thus,
under the doctrine of equitable estoppel, it
cannot deny that the insurance policy it issued
to petitioner covered all of the properties
within the resort.
Eleventh, that it is proper for it to avail of a
Petition for Review by certiorari under Rule 45
of the Revised Rules of Court as its remedy,
and there is no need for calibration of the
evidence in order to establish the facts upon
which this petition is based.
On the other hand, respondent made the
following counter arguments:18
First, none of the previous policies issued by
AHAC-AIU from 1983 to 1990 explicitly
extended coverage against earthquake shock
to petitioner's insured properties other than on
the two swimming pools. Petitioner admitted
that from 1984 to 1988, only the two
swimming pools were insured against
earthquake shock. From 1988 until 1990, the
provisions in its policy were practically identical
to its earlier policies, and there was no
increase in the premium paid. AHAC-AIU, in a
letter19 by its representative Manuel C.
Quijano, categorically stated that its previous
policy, from which respondent's policy was
copied, covered only earthquake shock for the
two swimming pools.
Second, petitioner's payment of additional
premium in the amount of P393.00 shows that
the policy only covered earthquake shock
damage on the two swimming pools. The
amount was the same amount paid by
petitioner for earthquake shock coverage on
the two swimming pools from 1990-1991. No
additional premium was paid to warrant
coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to
the limitation of the earthquake shock
endorsement to the two swimming pools in the
policy schedule did not expand the earthquake
shock coverage to all of petitioner's properties.
As per its agreement with petitioner,
respondent copied its policy from the AHAC-
AIU policy provided by petitioner. Although the
first five policies contained the said
qualification in their rider's title, in the last two
policies, this qualification in the title was
deleted. AHAC-AIU, through Mr. J. Baranda III,
stated that such deletion was a mere
inadvertence. This inadvertence did not make
the policy incomplete, nor did it broaden the
scope of the endorsement whose descriptive
title was merely enumerated. Any ambiguity in
the policy can be easily resolved by looking at
the other provisions, specially the enumeration
of the items insured, where only the two
swimming pools were noted as covered for
earthquake shock damage.
Fourth, in its Complaint, petitioner alleged
that in its policies from 1984 through 1988,
the phrase "Item 5 - P393,000.00 - on the two
swimming pools only (against the peril of
earthquake shock only)" meant that only the
swimming pools were insured for earthquake
damage. The same phrase is used in toto in
the policies from 1989 to 1990, the only
difference being the designation of the two
swimming pools as "Item 3."
Fifth, in order for the earthquake shock
endorsement to be effective, premiums must
be paid for all the properties covered. In all of
its seven insurance policies, petitioner only
paid P393.00 as premium for coverage of the
swimming pools against earthquake shock. No
other premium was paid for earthquake shock
coverage on the other properties. In addition,
the use of the qualifier "ANY" instead of "ALL"
to describe the property covered was done
deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of
its requirement that all of its properties must
be included in the earthquake shock coverage.
Petitioner's own evidence shows that it only
required respondent to follow the exact
provisions of its previous policy from AHAC-
AIU. Respondent complied with this
requirement. Respondent's only deviation from
the agreement was when it modified the
provisions regarding the replacement cost
endorsement. With regard to the issue under
litigation, the riders of the old policy and the
policy in issue are identical.
Seventh, respondent did not do any act or
give any assurance to petitioner as would
estop it from maintaining that only the two
swimming pools were covered for earthquake
shock. The adjuster's letter notifying petitioner
to present certain documents for its building
claims and repair costs was given to petitioner
before the adjuster knew the full coverage of
its policy.
Petitioner anchors its claims on AHAC-AIU's
inadvertent deletion of the phrase "Item 5
Only" after the descriptive name or title of the
Earthquake Shock Endorsement. However, the
words of the policy reflect the parties' clear
intention to limit earthquake shock coverage to
the two swimming pools.
Before petitioner accepted the policy, it had
the opportunity to read its conditions. It did
not object to any deficiency nor did it institute
any action to reform the policy. The policy
binds the petitioner.
Eighth, there is no basis for petitioner to claim
damages, attorney's fees and litigation
expenses. Since respondent was willing and
able to pay for the damage caused on the two
swimming pools, it cannot be considered to be
in default, and therefore, it is not liable for
interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items
are important in the resolution of the case at
bar.
First, in the designation of location of risk,
only the two swimming pools were specified as
included, viz:
ITEM 3 - 393,000.00 - On the two (2)
swimming pools only (against the peril of
earthquake shock only)20
Second, under the breakdown for premium
payments,21 it was stated that:
PREMIUM RECAPITULATION
ITEM AMOUNT RATES PREMIUM
NOS.
xx
x In consideration of the payment by the Insured
3 393,000.00 0.100%- 393.0022]
E/S
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or
damage occasioned by or through or in
consequence, directly or indirectly of any of
the following occurrences, namely: - -
(a) Earthquake, volcanic eruption or other
convulsion of nature.23
Fourth, the rider attached to the policy, titled
"Extended Coverage Endorsement (To Include
the Perils of Explosion, Aircraft, Vehicle and
Smoke)," stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING
ESTABLISHED AGGREGATE SUMS INSURED IN
EXCESS OF FIVE MILLION PESOS, IN
CONSIDERATION OF A DISCOUNT OF 5% OR 7
- % OF THE NET PREMIUM x x x POLICY
HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x
AND TO PAY THE PREMIUM.
Earthquake Endorsement
to the Company of the sum of P. . . . . . . . . . .
. . . . . . additional premium the Company
agrees, notwithstanding what is stated in the
printed conditions of this Policy to the contrary,
that this insurance covers loss or damage
(including loss or damage by fire) to any of the
property insured by this Policy occasioned by
or through or in consequence of Earthquake.
Provided always that all the conditions of this
Policy shall apply (except in so far as they may
be hereby expressly varied) and that any
reference therein to loss or damage by fire
should be deemed to apply also to loss or
damage occasioned by or through or in
consequence of Earthquake.24
Petitioner contends that pursuant to this rider,
no qualifications were placed on the scope of
the earthquake shock coverage. Thus, the
policy extended earthquake shock coverage to
all of the insured properties.
It is basic that all the provisions of the
insurance policy should be examined and
interpreted in consonance with each
other.25 All its parts are reflective of the true
intent of the parties. The policy cannot be
construed piecemeal. Certain stipulations
cannot be segregated and then made to
control; neither do particular words or phrases
necessarily determine its character. Petitioner
cannot focus on the earthquake shock
endorsement to the exclusion of the other
provisions. All the provisions and riders, taken
and interpreted together, indubitably show the
intention of the parties to extend earthquake
shock coverage to the two swimming pools
only.
A careful examination of the premium
recapitulation will show that it is the clear
intent of the parties to extend earthquake
shock coverage only to the two swimming
pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an
agreement whereby one undertakes for a
consideration to indemnify another against
loss, damage or liability arising from an
unknown or contingent event. Thus, an
insurance contract exists where the following
elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the
happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general
scheme to distribute actual losses among a
large group of persons bearing a similar risk;
and
5. In consideration of the insurer's
promise, the insured pays a
premium.26 (Emphasis ours)
An insurance premium is the consideration
paid an insurer for undertaking to indemnify
the insured against a specified peril.27 In fire,
casualty, and marine insurance, the premium
payable becomes a debt as soon as the risk
attaches.28 In the subject policy, no premium
payments were made with regard to
earthquake shock coverage, except on the two
swimming pools. There is no mention of any
premium payable for the other resort
properties with regard to earthquake shock.
This is consistent with the history of
petitioner's previous insurance policies from
AHAC-AIU. As borne out by petitioner's
witnesses:
CROSS EXAMINATION OF LEOPOLDO Q. Did you also do this through your insurance
MANTOHAC TSN, November 25, 1991 agency?
pp. 12-13
A. If you are referring to Forte Insurance
Q. Now Mr. Mantohac, will it be correct to state Agency, yes.
also that insofar as your insurance policy
Q. Is Forte Insurance Agency a department or
during the period from March 4, 1984 to March
division of your company?
4, 1985 the coverage on earthquake shock was
limited to the two swimming pools only?
A. No, sir. They are our insurance agency.
A. Yes, sir. It is limited to the two swimming
Q. And they are independent of your company
pools, specifically shown in the warranty, there
insofar as operations are concerned?
is a provision here that it was only for item 5.
A. Yes, sir, they are separate entity.
Q. More specifically Item 5 states the amount
of P393,000.00 corresponding to the two Q. But insofar as the procurement of the
swimming pools only? insurance policy is concerned they are of
course subject to your instruction, is that not
A. Yes, sir.
correct?
CROSS EXAMINATION OF LEOPOLDO
A. Yes, sir. The final action is still with us
MANTOHAC TSN, November 25, 1991
although they can recommend what insurance
to take.
pp. 23-26
Q. In the procurement of the insurance police
Q. For the period from March 14, 1988 up to
(sic) from March 14, 1988 to March 14, 1989,
March 14, 1989, did you personally arrange for
did you give written instruction to Forte
the procurement of this policy?
Insurance Agency advising it that the
A. Yes, sir. earthquake shock coverage must extend to all
properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written
instruction, although we made an oral
instruction to that effect of extending the
coverage on (sic) the other properties of the
company.
Q. And that instruction, according to you, was
very important because in April 1987 there was
an earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your
properties against similar tremors in the
[future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you
did you bother to check the provisions with
respect to your instructions that all properties
must be covered again by earthquake shock
endorsement?
A. Are you referring to the insurance policy
issued by American Home Assurance Company
marked Exhibit "G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the marked by counsel for defendant as Exhibit[s]
warranty on the earthquake shock 1-6 inclusive. Did you have occasion to review
endorsement has no more limitation referring of (sic) these six (6) policies issued by your
to the two swimming pools only, I was company [in favor] of Agoo Playa Resort?
contented already that the previous limitation
WITNESS:
pertaining to the two swimming pools was
Yes[,] I remember having gone over these
already removed.
policies at one point of time, sir.
Petitioner also cited and relies on the
attachment of the phrase "Subject to: Other
Insurance Clause, Typhoon Endorsement, Q. Now, wach (sic) of these six (6) policies
Earthquake Shock Endorsement, Extended
marked in evidence as Exhibits C to H
Coverage Endorsement, FEA Warranty &
Annual Payment Agreement on Long Term respectively carries an earthquake shock
Policies"29 to the insurance policy as proof of
the intent of the parties to extend the coverage endorsement[?] My question to you is, on the
for earthquake shock. However, this phrase is
merely an enumeration of the descriptive titles basis on (sic) the wordings indicated in
of the riders, clauses, warranties or Exhibits C to H respectively what was the
endorsements to which the policy is subject, as
required under Section 50, paragraph 2 of the extent of the coverage [against] the peril of
Insurance Code.
earthquake shock as provided for in each of
We also hold that no significance can be placed
the six (6) policies?
on the deletion of the qualification limiting the
coverage to the two swimming pools. The
earthquake shock endorsement cannot stand xxx
alone. As explained by the testimony of Juan
Baranda III, underwriter for AHAC-AIU:
WITNESS:
DIRECT EXAMINATION OF JUAN BARANDA The extent of the coverage is only up to the
III30 two (2) swimming pools, sir.
TSN, August 11, 1992
Q. Is that for each of the six (6) policies
pp. 9-12
namely: Exhibits C, D, E, F, G and H?
Atty. Mejia:
A. Yes, sir.
We respectfully manifest that the same
exhibits C to H inclusive have been previously
ATTY. MEJIA:
What is your basis for stating that the
coverage against earthquake shock as
provided for in each of the six (6) policies
extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the
enumeration "Earthquake Shock Endorsement,
in the Clauses and Warranties: Item 5 only
(Earthquake Shock Endorsement)," sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock
endorsement on stand alone basis. For
swimming pools we do cover earthquake
shock. For building we covered it for full
earthquake coverage which includes
earthquake shock'
COURT:
As far as earthquake shock endorsement you
do not have a specific coverage for other
things other than swimming pool? You are
covering building? They are covered by a
general insurance?
WITNESS:
Earthquake shock coverage could not stand
alone. If we are covering building or another
we can issue earthquake shock solely but that
the moment I see this, the thing that comes to
my mind is either insuring a swimming pool,
foundations, they are normally affected by
earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiff's witness, Mr. Mantohac testified
and he alleged that only Exhibits C, D, E and F
inclusive [remained] its coverage against
earthquake shock to two (2) swimming pools
only but that Exhibits G and H respectively
entend the coverage against earthquake shock
to all the properties indicated in the respective
schedules attached to said policies, what can
you say about that testimony of plaintiff's
witness?
WITNESS:
As I have mentioned earlier, earthquake shock
cannot stand alone without the other half of it.
I assure you that this one covers the two
swimming pools with respect to earthquake
shock endorsement. Based on it, if we are
going to look at the premium there has been
no change with respect to the rates. Everytime
(sic) there is a renewal if the intention of the
insurer was to include the earthquake shock, I
think there is a substantial increase in the
premium. We are not only going to consider
the two (2) swimming pools of the other as
stated in the policy. As I see, there is no
increase in the amount of the premium. I must
say that the coverage was not broaden (sic) to
include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the
amount of the coverage. If you are going to do
some computation based on the rates you will
arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure]
swimming pools for fire insurance?
WITNESS:
No, we don't, sir.
Q. That is why the phrase "earthquake shock
to the two (2) swimming pools only" was
placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these
exhibits, Exhibits G and H which you have
pointed to during your direct-examination, the
phrase "Item no. 5 only" meaning to (sic) the
two (2) swimming pools was deleted from the
policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach
any significance to the deletion of the
qualifying phrase for the policies?
WITNESS:
My answer to that would be, the deletion of
that particular phrase is inadvertent. Being a
company underwriter, we do not cover. . it was
inadvertent because of the previous policies
that we have issued with no specific
attachments, premium rates and so on. It was
inadvertent, sir.
The Court also rejects petitioner's contention
that respondent's contemporaneous and
subsequent acts to the issuance of the
insurance policy falsely gave the petitioner
assurance that the coverage of the earthquake
shock endorsement included all its properties
in the resort. Respondent only insured the
properties as intended by the petitioner.
Petitioner's own witness testified to this
agreement, viz:
CROSS EXAMINATION OF LEOPOLDO
MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer
of yours Mr. Witness, what exactly did you tell
Atty. Omlas (sic) to copy from Exhibit "H" for
purposes of procuring the policy from
Philippine Charter Insurance Corporation?
A. I told him that the insurance that they will
have to get will have the same provisions as
this American Home Insurance Policy No. 206-
4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same
except that of the premium rates?
A. Yes, sir. He assured me that with regards to
the insurance premium rates that they will be
charging will be limited to this one. I (sic) can
even be lesser.
CROSS EXAMINATION OF LEOPOLDO
MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness,
that you made a comparison of the provisions
and scope of coverage of Exhibits "I" and "H"
sometime in the third week of March, 1990 or
thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any
discrepancy or difference between the policy
wordings as well as scope of coverage of
Exhibits "I" and "H" respectively?
A. No, sir, I did not discover any difference
inasmuch (sic) as I was assured already that
the policy wordings and rates were copied from

the insurance policy I sent them but it was
only when this case erupted that we
discovered some discrepancies.
Q. With respect to the items declared for
insurance coverage did you notice any
discrepancy at any time between those
indicated in Exhibit "I" and those indicated in
Exhibit "H" respectively?
A. With regard to the wordings I did not notice
any difference because it was exactly the
same P393,000.00 on the two (2) swimming
pools only against the peril of earthquake
shock which I understood before that this
provision will have to be placed here because
this particular provision under the peril of
earthquake shock only is requested because
this is an insurance policy and therefore cannot
be insured against fire, so this has to be
placed.
The verbal assurances allegedly given by
respondent's representative Atty. Umlas were
not proved. Atty. Umlas categorically denied
having given such assurances.
Finally, petitioner puts much stress on the
letter of respondent's independent claims
adjuster, Bayne Adjusters and Surveyors, Inc.
But as testified to by the representative of
Bayne Adjusters and Surveyors, Inc.,
respondent never meant to lead petitioner to
believe that the endorsement for earthquake
shock covered properties other than the two
swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON
(Bayne Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to
your discussion regarding the extent of
coverage of the policy issued by Philippine
Charter Insurance Corporation?
A. I remember that when I returned to the
office after the inspection, I got a photocopy of
the insurance coverage policy and it was
indicated under Item 3 specifically that the
coverage is only for earthquake shock. Then, I
remember I had a talk with Atty. Umlas (sic),
and I relayed to him what I had found out in
the policy and he confirmed to me indeed only
Item 3 which were the two swimming pools
have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon
your basis, if any, for stating that except for
the swimming pools all affected items have no
coverage for earthquake shock?
xxx
A. I based my statement on my findings,
because upon my examination of the policy I
found out that under Item 3 it was specific on
the wordings that on the two swimming pools
only, then enclosed in parenthesis (against the
peril[s] of earthquake shock only), and
secondly, when I examined the summary of
premium payment only Item 3 which refers to
the swimming pools have a computation for
premium payment for earthquake shock and all
the other items have no computation for
payment of premiums.
In sum, there is no ambiguity in the terms of
the contract and its riders. Petitioner cannot
rely on the general rule that insurance
contracts are contracts of adhesion which
should be liberally construed in favor of the
insured and strictly against the insurer
company which usually prepares it.31 A
contract of adhesion is one wherein a party,
usually a corporation, prepares the stipulations
in the contract, while the other party merely
affixes his signature or his "adhesion" thereto.
Through the years, the courts have held that in
these type of contracts, the parties do not
bargain on equal footing, the weaker party's
participation being reduced to the alternative
to take it or leave it. Thus, these contracts are
viewed as traps for the weaker party whom the
courts of justice must protect.32 Consequently,
any ambiguity therein is resolved against the
insurer, or construed liberally in favor of the
insured.33
The case law will show that this Court will only
rule out blind adherence to terms where facts
and circumstances will show that they are
basically one-sided.34 Thus, we have called on
lower courts to remain careful in scrutinizing
the factual circumstances behind each case to
determine the efficacy of the claims of
contending parties. In Development Bank of
the Philippines v. National Merchandising
Corporation, et al.,35 the parties, who were
acute businessmen of experience, were
presumed to have assented to the assailed
documents with full knowledge.
We cannot apply the general rule on contracts
of adhesion to the case at bar. Petitioner
cannot claim it did not know the provisions of
the policy. From the inception of the policy,
petitioner had required the respondent to
copy verbatim the provisions and terms of its
latest insurance policy from AHAC-AIU. The
testimony of Mr. Leopoldo Mantohac, a direct
participant in securing the insurance policy of
petitioner, is reflective of petitioner's
knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO
MANTOHAC36
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what
kind of policy you would want for those
facilities in Agoo Playa?
A. Yes, sir. I told him that I will agree to that
renewal of this policy under Philippine Charter
Insurance Corporation as long as it will follow
the same or exact provisions of the previous
insurance policy we had with American Home
Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure
that the provisions which you wanted in the
American Home Insurance policy are to be
incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine
Charter Insurance Corporation I specifically
told him that the policy and wordings shall be
copied from the AIU Policy No. 206-4568061-
9.
Respondent, in compliance with the condition
set by the petitioner, copied AIU Policy No.
206-4568061-9 in drafting its Insurance Policy
No. 31944. It is true that there was variance in
some terms, specifically in the replacement
cost endorsement, but the principal provisions
of the policy remained essentially similar to
AHAC-AIU's policy. Consequently, we cannot
apply the "fine print" or "contract of adhesion"
rule in this case as the parties' intent to limit
the coverage of the policy to the two
swimming pools only is not ambiguous.37
IN VIEW WHEREOF, the judgment of the
Court of Appeals is affirmed. The Petition
for Certiorari is dismissed. No costs.
SO ORDERED.
G.R. No. 125678 March 18, 2002
PHILAMCARE HEALTH SYSTEMS, INC. v.
COURT OF APPEALS and JULITA TRINOS
Ernani Trinos, deceased husband of respondent
Julita Trinos, applied for a health care coverage
with petitioner Philamcare Health Systems,
Inc. In the standard application form, he
answered no to the following question:
Have you or any of your family members ever
consulted or been treated for high blood
pressure, heart trouble, diabetes, cancer, liver
disease, asthma or peptic ulcer? (If Yes, give
details). 1
The application was approved for a period of
one year from March 1, 1988 to March 1,
1989. Accordingly, he was issued Health Care
Agreement No. P010194. Under the
agreement, respondents husband was entitled
to avail of hospitalization benefits, whether
ordinary or emergency, listed therein. He was
also entitled to avail of "out-patient benefits"
such as annual physical examinations,
preventive health care and other out-patient
services.
Upon the termination of the agreement, the
same was extended for another year from
March 1, 1989 to March 1, 1990, then from
March 1, 1990 to June 1, 1990. The amount of
coverage was increased to a maximum sum of
P75,000.00 per disability. 2
During the period of his coverage, Ernani
suffered a heart attack and was confined at the
Manila Medical Center (MMC) for one month
beginning March 9, 1990. While her husband
was in the hospital, respondent tried to claim
the benefits under the health care agreement.
However, petitioner denied her claim saying
that the Health Care Agreement was void.
According to petitioner, there was a
concealment regarding Ernanis medical
history. Doctors at the MMC allegedly
discovered at the time of Ernanis confinement
that he was hypertensive, diabetic and
asthmatic, contrary to his answer in the
application form. Thus, respondent paid the
hospitalization expenses herself, amounting to
about P76,000.00.
After her husband was discharged from the
MMC, he was attended by a physical therapist
at home. Later, he was admitted at the
Chinese General Hospital. Due to financial
difficulties, however, respondent brought her
husband home again. In the morning of April
13, 1990, Ernani had fever and was feeling
very weak. Respondent was constrained to
bring him back to the Chinese General Hospital
where he died on the same day.
On July 24, 1990, respondent instituted with
the Regional Trial Court of Manila, Branch 44,
an action for damages against petitioner and
its president, Dr. Benito Reverente, which was
docketed as Civil Case No. 90 53795. She
asked for reimbursement of her expenses plus
moral damages and attorneys fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court
renders judgment in favor of the plaintiff Julita
Trinos, ordering:
1. Defendants to pay and reimburse the
medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus
interest, until the amount is fully paid to
plaintiff who paid the same;
2. Defendants to pay the reduced amount of
moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of
P10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of
P20,000.00, plus costs of suit.
SO ORDERED 3
On appeal, the Court of Appeals affirmed the
decision of the trial court but deleted all
awards for damages and absolved petitioner
Reverente. 4 Petitioners motion for
reconsideration was denied. 5 Hence,
petitioner brought the instant petition for
review, raising the primary argument that a
health care agreement is not an insurance
contract; hence the "incontestability clause"
under the Insurance Code 6 does not apply.
Petitioner argues that the agreement grants
"living benefits," such as medical check-ups
and hospitalization which a member may
immediately enjoy so long as he is alive upon
effectivity of the agreement until its expiration
one-year thereafter. Petitioner also points out
that only medical and hospitalization benefits
are given under the agreement without any
indemnification, unlike in an insurance contract
where the insured is indemnified for his loss.
Moreover, since Health Care Agreements are
only for a period of one year, as compared to
insurance contracts which last longer, 7
petitioner argues that the incontestability
clause does not apply, as the same requires an
effectivity period of at least two years.
Petitioner further argues that it is not an
insurance company, which is governed by the
Insurance Commission, but a Health
Maintenance Organization under the authority
of the Department of Health.
Section 2 (1) of the Insurance Code defines a
contract of insurance as an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event. An insurance contract exists where the
following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the
happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general
scheme to distribute actual losses among a
large group of persons bearing a similar risk;
and
5. In consideration of the insurers promise,
the insured pays a premium. 8
Section 3 of the Insurance Code states that
any contingent or unknown event, whether
past or future, which may damnify a person
having an insurable interest against him, may
be insured against. Every person has an
insurable interest in the life and health of
himself. Section 10 provides:
Every person has an insurable interest in the
life and health:
(1) of himself, of his spouse and of his
children;
(2) of any person on whom he depends wholly
or in part for education or support, or in whom
he has a pecuniary interest;
(3) of any person under a legal obligation to
him for the payment of money, respecting
property or service, of which death or illness
might delay or prevent the performance; and
(4) of any person upon whose life any estate
or interest vested in him depends.
In the case at bar, the insurable interest of
respondents husband in obtaining the health
care agreement was his own health. The health
care agreement was in the nature of non-life
insurance, which is primarily a contract of
indemnity. 9 Once the member incurs hospital,
medical or any other expense arising from
sickness, injury or other stipulated contingent,
the health care provider must pay for the same
to the extent agreed upon under the contract.
Petitioner argues that respondents husband
concealed a material fact in his application. It
appears that in the application for health
coverage, petitioners required respondents
husband to sign an express authorization for
any person, organization or entity that has any
record or knowledge of his health to furnish
any and all information relative to any
hospitalization, consultation, treatment or any
other medical advice or examination. 10
Specifically, the Health Care Agreement signed
by respondents husband states:
We hereby declare and agree that all
statement and answers contained herein and in
any addendum annexed to this application are
full, complete and true and bind all parties in
interest under the Agreement herein applied
for, that there shall be no contract of health
care coverage unless and until an Agreement is
issued on this application and the full
Membership Fee according to the mode of
payment applied for is actually paid during the
lifetime and good health of proposed Members;
that no information acquired by any
Representative of PhilamCare shall be binding
upon PhilamCare unless set out in writing in
the application; that any physician is, by these
presents, expressly authorized to disclose or
give testimony at anytime relative to any
information acquired by him in his professional
capacity upon any question affecting the
eligibility for health care coverage of the
Proposed Members and that the acceptance of
any Agreement issued on this application shall
be a ratification of any correction in or addition
to this application as stated in the space for
Home Office Endorsement. 11 (Emphasis ours)
In addition to the above condition, petitioner
additionally required the applicant for
authorization to inquire about the applicants
medical history, thus:
I hereby authorize any person, organization, or
entity that has any record or knowledge of my
health and/or that of ________ to give to the
PhilamCare Health Systems, Inc. any and all
information relative to any hospitalization.
consultation. treatment or any other medical
advice or examination. This authorization is in
connection with the application for health care
coverage only. A photographic copy of this
authorization shall be as valid as the original.
12 (Emphasis ours)
Petitioner cannot rely on the stipulation
regarding "Invalidation of agreement" which
reads:
Failure to disclose or misrepresentation of any
material information by the member in the
application or medical examination, whether
intentional or unintentional, shall automatically
invalidate the Agreement from the very
beginning and liability of Philamcare shall be
limited to return of all Membership Fees paid.
An undisclosed or misrepresented information
is deemed material if its revelation would have
resulted in the declination of the applicant by
Philamcare or the assessment of a higher
Membership Fee for the benefit or benefits
applied for. 13
The answer assailed by petitioner was in
response to the question relating to the
medical history of the applicant. This largely
depends on opinion rather than fact, especially
coming from respondents husband who was
not a medical doctor. Where matters of opinion
or judgment are called for, answers made in
good faith and without intent to deceive will
not avoid a policy even though they are
untrue. 14 Thus,
(A)lthough false, a representation of the
expectation, intention, belief, opinion, or
judgment of the insured will not avoid the
policy if there is no actual fraud in inducing the
acceptance of the risk, or its acceptance at a
lower rate of premium, and this is likewise the
rule although the statement is material to the
risk, if the statement is obviously of the
foregoing character, since in such case the
insurer is not justified in relying upon such
statement, but is obligated to make further
inquiry. There is a clear distinction between
such a case and one in which the insured is
fraudulently and intentionally states to be true,
as a matter of expectation or belief, that which
he then knows, to be actually untrue, or the
impossibility of which is shown by the facts
within his knowledge, since in such case the
intent to deceive the insurer is obvious and
amounts to actual fraud. 15 (Emphasis ours)
The fraudulent intent on the part of the insured
must be established to warrant rescission of
the insurance contract. 16 Concealment as a
defense for the health care provider or insurer
to avoid liability is an affirmative defense and
the duty to establish such defense by
satisfactory and convincing evidence rests
upon the provider or insurer. In any case, with
or without the authority to investigate,
petitioner is liable for claims made under the
contract. Having assumed a responsibility
under the agreement, petitioner is bound to
answer the same to the extent agreed upon. In
the end, the liability of the health care provider
attaches once the member is hospitalized for
the disease or injury covered by the agreement
or whenever he avails of the covered benefits
which he has prepaid.
Under Section 27 of the Insurance Code, "a
concealment entitles the injured party to
rescind a contract of insurance." The right to
rescind should be exercised previous to the
commencement of an action on the contract.
17 In this case, no rescission was made.
Besides, the cancellation of health care
agreements as in insurance policies require the
concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence
after effective date of the policy of one or more
of the grounds mentioned;
3. Must be in writing, mailed or delivered to
the insured at the address shown in the policy;
4. Must state the grounds relied upon provided
in Section 64 of the Insurance Code and upon
request of insured, to furnish facts on which
cancellation is based. 18
None of the above pre-conditions was fulfilled
in this case. When the terms of insurance
contract contain limitations on liability, courts
should construe them in such a way as to
preclude the insurer from non-compliance with
his obligation. 19 Being a contract of adhesion,
the terms of an insurance contract are to be
construed strictly against the party which
prepared the contract the insurer. 20 By
reason of the exclusive control of the insurance
company over the terms and phraseology of
the insurance contract, ambiguity must be
strictly interpreted against the insurer and
liberally in favor of the insured, especially to
avoid forfeiture. 21 This is equally applicable to
Health Care Agreements. The phraseology
used in medical or hospital service contracts,
such as the one at bar, must be liberally
construed in favor of the subscriber, and if
doubtful or reasonably susceptible of two
interpretations the construction conferring
coverage is to be adopted, and exclusionary
clauses of doubtful import should be strictly
construed against the provider. 22
Anent the incontestability of the membership
of respondents husband, we quote with
approval the following findings of the trial
court:
(U)nder the title Claim procedures of expenses,
the defendant Philamcare Health Systems Inc.
had twelve months from the date of issuance
of the Agreement within which to contest the
membership of the patient if he had previous
ailment of asthma, and six months from the
issuance of the agreement if the patient was
sick of diabetes or hypertension. The periods
having expired, the defense of concealment or
misrepresentation no longer lie. 23
Finally, petitioner alleges that respondent was
not the legal wife of the deceased member
considering that at the time of their marriage,
the deceased was previously married to
another woman who was still alive. The health
care agreement is in the nature of a contract of
indemnity. Hence, payment should be made to
the party who incurred the expenses. It is not
controverted that respondent paid all the
hospital and medical expenses. She is
therefore entitled to reimbursement. The
records adequately prove the expenses
incurred by respondent for the deceaseds
hospitalization, medication and the
professional fees of the attending physicians.
24
WHEREFORE, in view of the foregoing, the
petition is DENIED. The assailed decision of the
Court of Appeals dated December 14, 1995 is
AFFIRMED.
SO ORDERED.
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAIA DE SEGUROS v.
CHRISTERN, HUENEFELD & CO., INC.
3. INSURANCE; TERMINATION OF POLICY OF
PUBLIC ENEMY. As the Philippine Insurance
Law (Act No. 2427, as amended), in its section
8, provides that "anyone except a public
enemy may be insured," an insurance policy
ceases to be allowable as soon as an insured
becomes a public enemy.
4. ID.; ID.; RETURN OF PREMIUMS UPON
TERMINATION OF POLICY BY REASON OF WAR.
Where an insurance policy ceases to be
effective by reason of war, which has made the
insured an enemy, the premiums paid for the
period covered by the policy from the date war
is declared, should be returned.
DECISION
On October 1, 1941, the respondent
corporation, Christern, Huenefeld & Co., Inc.,
after payment of corresponding premium,
obtained from the petitioner, Filipinas Cia. de
Seguros, fire policy No. 29333 in the sum of
P100,000, covering merchandise contained in a
building located at No. 711 Roman Street,
Binondo, Manila. On February 27, 1942, or
during the Japanese military occupation, the
building and insured merchandise were
burned. In due time the respondent submitted
to the petitioner its claim under the policy. The
salvaged goods were sold at public auction
and, after deducting their value, the total loss
suffered by the respondent was fixed at
P92,650. The petitioner refused to pay the
claim on the ground that the policy in favor of
the respondent had ceased to be in force on
the date the United States declared war
against Germany, the respondent corporation
(though organized under and by virtue of the
laws of the Philippines) being controlled by
German subjects and the petitioner being a
company under American jurisdiction when
said policy was issued on October 1, 1941. The
petitioner, however, in pursuance of the order
of the Director of the Bureau of Financing,
Philippine Executive Commission, dated April 9,
1943, paid to the respondent the sum of
P92,650 on April 19, 1943.
The present action was filed on August 6,
1946, in the Court of First Instance of Manila
for the purpose of recovering from the
respondent the sum of P92,650 above
mentioned. The theory of the petitioner is that
the insured merchandise were burned after the
policy issued in 1941 in favor of the
respondent corporation had ceased to be
effective because of the outbreak of the war
between the United States and Germany on
December 10, 1941, and that the payment
made by the petitioner to the respondent
corporation during the Japanese military
occupation was under pressure. After trial, the
Court of First Instance of Manila dismissed the
action without pronouncement as to costs.
Upon appeal to the Court of Appeals, the
judgment of the Court of First Instance of
Manila was affirmed, with costs. The case is
now before us on appeal by certiorari from the
decision of the Court of Appeals.
The Court of Appeals overruled the contention
of the petitioner that the respondent
corporation became an enemy when the United
States declared war against Germany, relying
on English and American cases which held that
a corporation is a citizen of the country or
state by and under the laws of which it was
created or organized. It rejected the theory
that the nationality of a private corporation is
determined by the character or citizenship of
its controlling stockholders.
There is no question that majority of the
stockholders of the respondent corporation
were German subjects. This being so, we have
to rule that said respondent became an enemy
corporation upon the outbreak of the war
between the United States and Germany. The
English and American cases relied upon by the
Court of Appeals have lost their force in view of
the latest decision of the Supreme Court of the
United States in Clark v. Uebersee Finanz
Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-
153, in which the control test has been
adopted. In "Enemy Corporations" by Martin
Domke, a paper presented to the Second
International Conference of the Legal
Profession held at The Hague (Netherlands) in
August, 1948, the following enlightening
passages appear:jgc:chanrobles.com.ph
"Since World War I, the determination of
enemy nationality of corporations has been
discussed in many countries, belligerent and
neutral. A corporation was subject to enemy
legislation when it was controlled by enemies,
namely managed under the influence of
individuals or corporations themselves
considered as enemies. It was the English
courts which first in the Daimler case applied
this new concept of "piercing the corporate
veil, which was adopted by the Peace Treaties
of 1919 and the Mixed Arbitral Tribunals
established after the First World War.
"The United States of America did not adopt
the control test during the First World War.
Courts refused to recognize the concept
whereby American-registered corporations
could be considered as enemies and thus
subject to domestic legislation and
administrative measures regarding enemy
property.
"World War II revived the problem again. It
was known that German and other enemy
interests were cloaked by domestic corporation
structure. It was not only by legal ownership of
shares that a material influence could be
exercised on the management of the
corporation but also by long-term loans and
other factual situations. For that reason,
legislation on enemy property enacted in
various countries during World War II adopted
by statutory provisions the control test and
determined, to various degrees, the incidents
of control. Court decisions were rendered on
the basis of such newly enacted statutory
provisions in determining enemy character of
domestic corporation.
"The United States did not, in the amendments
of the Trading with the Enemy Act during the
last war, include as did other legislations, the
application of the control test and again, as in
World War I, courts refused to apply this
concept whereby the enemy character of an
American or neutral-registered corporation is
determined by the enemy nationality of the
controlling stockholders.
"Measures of blocking foreign funds, the so
called freezing regulations, and other
administrative practice in the treatment of
foreign-owned property in the United States
allowed to a large degree the determination of
enemy interests in domestic corporations and
thus the application of the control test. Court
decisions sanctioned such administrative
practice enacted under the First War Powers
Act of 1941, and more recently, on December
8, 1947, the Supreme Court of the United
States definitely approved of the control
theory. In Clark v. Uebersee Finanz
Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by German
interests, the Court said: The property of all
foreign interest was placed within the reach of
the vesting power (of the Alien Property
Custodian) not to appropriate friendly or
neutral assets but to reach enemy interests
which masqueraded under those innocent
fronts. . . . The power of seizure and vesting
was extended to all property of any foreign
country or national so that no innocent
appearing device could become a Trojan
horse."
It becomes unnecessary, therefore, to dwell at
length on the authorities cited in support of the
appealed decision. However, we may add that,
in Haw Pia v. China Banking Corporation, * 45
Off. Gaz., (Supp. 9) 229, we already held that
the China Banking Corporation came within the
meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized
countries not only because it was incorporated
under the laws of an enemy country but
because it was controlled by enemies.
The Philippine Insurance Law (Act No. 2427, as
amended), in section 8, provides that "anyone
except a public enemy may be insured." It
stands to reason that an insurance policy
ceases to be allowable as soon as an insured
becomes a public enemy.
"Effect of war, generally. All intercourse
between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by
the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the
enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of
voluntary submission to it; or of receiving its
protection; also, all acts concerning the
transmission of money or goods; and all
contracts relating thereto are thereby nullified.
It further prohibits insurance upon trade with
or by the enemy, and upon the life or lives of
aliens engaged in service with the enemy; this
for the reason that the subjects of one country
cannot be permitted to lend their assistance to
protect by insurance the commerce or property
of belligerent, alien subjects, or to do anything
detrimental to their countrys interest. The
purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy
its enemys property and repay in insurances
the value of what has been so destroyed, or
that it should in such manner increase the
resources of the enemy, or render it aid, and
the commencement of war determines, for like
reasons, all trading intercourse with the
enemy, which prior thereto may have been
lawful. All individuals, therefore, who compose
the belligerent powers, exist, as to each other,
in a state of utter exclusion, and are public
enemies." (6 Couch, Cyc. of Ins. Law, pp.
5352-5353.)
"In the case of an ordinary fire policy, which
grants insurance only from year to year, or for
some other specified term it is plain that when
the parties become alien enemies, the
contractual tie is broken and the contractual
rights of the parties, so far as not vested, lost."
(Vance, the Law on Insurance, Sec. 44, p.
112.)
The respondent having become an enemy
corporation on December 10, 1941, the
insurance policy issued in its favor on October
1, 1941, by the petitioner (a Philippine
corporation) had ceased to be valid and
enforceable, and since the insured goods were
burned after December 10, 1941, and during
the war, the respondent was not entitled to
any indemnity under said policy from the
petitioner. However, elementary rules of
justice (in the absence of specific provision in
the Insurance Law) require that the premium
paid by the respondent for the period covered
by its policy from December 11, 1941, should
be returned by the petitioner.
The Court of Appeals, in deciding the case,
stated that the main issue hinges on the
question of whether the policy in question
became null and void upon the declaration of
war between the United States and Germany
on December 10, 1941, and its judgment in
favor of the respondent corporation was
predicated on its conclusion that the policy did
not cease to be in force. The Court of Appeals
necessarily assumed that, even if the payment
by the petitioner to the respondent was
involuntary, its action is not tenable in view of
the ruling on the validity of the policy. As a
matter of fact, the Court of Appeals held that
"any intimidation resorted to by the appellee
was not unjust but the exercise of its lawful
right to claim for and receive the payment of
the insurance policy," and that the ruling of the
Bureau of Financing to the effect that "the
appellee was entitled to payment from the
appellant, was well founded." Factually, there
can be no doubt that the Director of the
Bureau of Financing, in ordering the petitioner
to pay the claim of the respondent, merely
obeyed the instructions of the Japanese
Military Administration, as may be seen from
the following: "In view of the findings and
conclusion of this office contained in its
decision on Administrative Case dated
February 9, 1943 copy of which was sent to
your office and the concurrence therein of the
Financial Department of the Japanese Military
Administration, and following the instructions
of said authority, you are hereby ordered to
pay the claim of Messrs. Christern, Huenefeld
& Co., Inc. The payment of said claim,
however, should be made by means of crossed
check." (Italics supplied.) .
It results that the petitioner is entitled to
recover what was paid to the respondent under
the circumstances of this case. However, the
petitioner will be entitled to recover only the
equivalent, in actual Philippine currency, of
P92,650 paid on April 19, 1943, in accordance
with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby
reversed and the respondent corporation is
ordered to pay to the petitioner the sum of
P77,208.39, Philippine currency, less the
amount of the premium, in Philippine currency,
that should be returned by the petitioner for
the unexpired term of the policy in question,
beginning December 11, 1941. Without costs.
So ordered.
G.R. No. 113899 October 13, 1999
GREAT PACIFIC LIFE ASSURANCE CORP. v.
COURT OF APPEALS AND MEDARDA V.
LEUTERIO
DECISION
This petition for review, under Rule 45 of the
Rules of Court, assails the Decision 1 dated
May 17, 1993, of the Court of Appeals and its
Resolution 2 dated January 4, 1994 in CA-G.R.
CV No. 18341. The appellate court affirmed in
toto the judgment of the Misamis Oriental
Regional Trial Court, Branch 18, in an
insurance claim filed by private respondent
against Great Pacific Life Assurance Co. The
dispositive portion of the trial courts decision
reads:
"WHEREFORE, judgment is rendered adjudging
the defendant GREAT PACIFIC LIFE
ASSURANCE CORPORATION as insurer under
its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay
to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr.
Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for
damages, attorneys fees and litigation
expenses in the complaint and counterclaim,
with costs against the defendant and
dismissing the complaint in respect to the
plaintiffs, other than the widow-beneficiary, for
lack of cause of action." 3
The facts, as found by the Court of Appeals,
are as follows:
A contract of group life insurance was executed
between petitioner Great Pacific Life Assurance
Corporation (hereinafter Grepalife) and
Development Bank of the Philippines
(hereinafter DBP). Grepalife agreed to insure
the lives of eligible housing loan mortgagors of
DBP.
On November 11, 1983, Dr. Wilfredo Leuterio,
a physician and a housing debtor of DBP
applied for membership in the group life
insurance plan. In an application form, Dr.
Leuterio answered questions concerning his
health condition as follows:
"7. Have you ever had, or consulted, a
physician for a heart condition, high blood
pressure, cancer, diabetes, lung, kidney or
stomach disorder or any other physical
impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge,
in good health?
Answer: [ x ] Yes [ ] No." 4
On November 15, 1983, Grepalife issued
Certificate No. B-18558, as insurance coverage
of Dr. Leuterio, to the extent of his DBP
mortgage indebtedness amounting to eighty-
six thousand, two hundred (P86,200.00)
pesos.
On August 6, 1984, Dr. Leuterio died due to
"massive cerebral hemorrhage." Consequently,
DBP submitted a death claim to Grepalife.
Grepalife denied the claim alleging that Dr.
Leuterio was not physically healthy when he
applied for an insurance coverage on
November 15, 1983. Grepalife insisted that Dr.
Leuterio did not disclose he had been suffering
from hypertension, which caused his death.
Allegedly, such non-disclosure constituted
concealment that justified the denial of the
claim.
On October 20, 1986, the widow of the late Dr.
Leuterio, respondent Medarda V. Leuterio, filed
a complaint with the Regional Trial Court of
Misamis Oriental, Branch 18, against Grepalife
for "Specific Performance with Damages." 5
During the trial, Dr. Hernando Mejia, who
issued the death certificate, was called to
testify. Dr. Mejias findings, based partly from
the information given by the respondent
widow, stated that Dr. Leuterio complained of
headaches presumably due to high blood
pressure. The inference was not conclusive
because Dr. Leuterio was not autopsied, hence,
other causes were not ruled out.
On February 22, 1988, the trial court rendered
a decision in favor of respondent widow and
against Grepalife. On May 17, 1993, the Court
of Appeals sustained the trial courts decision.
Hence, the present petition. Petitioners
interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING
DEFENDANT-APPELLANT LIABLE TO THE
DEVELOPMENT BANK OF THE PHILIPPINES
(DBP) WHICH IS NOT A PARTY TO THE CASE
FOR PAYMENT OF THE PROCEEDS OF A
MORTGAGE REDEMPTION INSURANCE ON THE
LIFE OF PLAINTIFFS HUSBAND WILFREDO
LEUTERIO ONE OF ITS LOAN BORROWERS,
INSTEAD OF DISMISSING THE CASE AGAINST
DEFENDANT-APPELLANT [Petitioner Grepalife]
FOR LACK OF CAUSE OF ACTION.
2. THE LOWER COURT ERRED IN NOT
DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR
NATURE OF THE ACTION AND OVER THE
PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING
DEFENDANT-APPELLANT TO PAY TO DBP THE
AMOUNT OF P86,200.00 IN THE ABSENCE OF
ANY EVIDENCE TO SHOW HOW MUCH WAS
THE ACTUAL AMOUNT PAYABLE TO DBP IN
ACCORDANCE WITH ITS GROUP INSURANCE
CONTRACT WITH DEFENDANT-APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING
THAT THERE WAS NO CONCEALMENT OF
MATERIAL INFORMATION ON THE PART OF
WILFREDO LEUTERIO IN HIS APPLICATION
FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-
APPELLANT OF THE INSURANCE CLAIM
ARISING FROM THE DEATH OF WILFREDO
LEUTERIO." 6
Synthesized below are the assigned errors for
our resolution:
1. Whether the Court of Appeals erred in
holding petitioner liable to DBP as beneficiary
in a group life insurance contract from a
complaint filed by the widow of the
decedent/mortgagor?
2. Whether the Court of Appeals erred in not
finding that Dr. Leuterio concealed that he had
hypertension, which would vitiate the
insurance contract?
3. Whether the Court of Appeals erred in
holding Grepalife liable in the amount of eighty
six thousand, two hundred (P86,200.00) pesos
without proof of the actual outstanding
mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was
instituted by the widow of Dr. Leuterio, not the
real party in interest, hence the trial court
acquired no jurisdiction over the case. It
argues that when the Court of Appeals
affirmed the trial courts judgment, Grepalife
was held liable to pay the proceeds of
insurance contract in favor of DBP, the
indispensable party who was not joined in the
suit.
To resolve the issue, we must consider the
insurable interest in mortgaged properties and
the parties to this type of contract. The
rationale of a group insurance policy of
mortgagors, otherwise known as the
"mortgage redemption insurance," is a device
for the protection of both the mortgagee and
the mortgagor. On the part of the mortgagee,
it has to enter into such form of contract so
that in the event of the unexpected demise of
the mortgagor during the subsistence of the
mortgage contract, the proceeds from such
insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of
the mortgagor from paying the obligation. 7 In
a similar vein, ample protection is given to the
mortgagor under such a concept so that in the
event of death; the mortgage obligation will be
extinguished by the application of the
insurance proceeds to the mortgage
indebtedness. 8 Consequently, where the
mortgagor pays the insurance premium under
the group insurance policy, making the loss
payable to the mortgagee, the insurance is on
the mortgagors interest, and the mortgagor
continues to be a party to the contract. In this
type of policy insurance, the mortgagee is
simply an appointee of the insurance fund,
such loss-payable clause does not make the
mortgagee a party to the contract. 9
Section 8 of the Insurance Code provides:
"Unless the policy provides, where a mortgagor
of property effects insurance in his own name
providing that the loss shall be payable to the
mortgagee, or assigns a policy of insurance to
a mortgagee, the insurance is deemed to be
upon the interest of the mortgagor, who does
not cease to be a party to the original contract,
and any act of his, prior to the loss, which
would otherwise avoid the insurance, will have
the same effect, although the property is in the
hands of the mortgagee, but any act which,
under the contract of insurance, is to be
performed by the mortgagor, may be
performed by the mortgagee therein named,
with the same effect as if it had been
performed by the mortgagor."
The insured private respondent did not cede to
the mortgagee all his rights or interests in the
insurance, the policy stating that: "In the
event of the debtors death before his
indebtedness with the Creditor [DBP] shall
have been fully paid, an amount to pay the
outstanding indebtedness shall first be paid to
the creditor and the balance of sum assured, if
there is any, shall then be paid to the
beneficiary/ies designated by the debtor." 10
When DBP submitted the insurance claim
against petitioner, the latter denied payment
thereof, interposing the defense of
concealment committed by the insured.
Thereafter, DBP collected the debt from the
mortgagor and took the necessary action of
foreclosure on the residential lot of
private Respondent. 11 In Gonzales La O v.
Yek Tong Lin Fire & Marine Ins. Co. 12 we
held:
"Insured, being the person with whom the
contract was made, is primarily the proper
person to bring suit thereon. . . . Subject to
some exceptions, insured may thus sue,
although the policy is taken wholly or in part
for the benefit of another person named or
unnamed, and although it is expressly made
payable to another as his interest may appear
or otherwise. . . . Although a policy issued to a
mortgagor is taken out for the benefit of the
mortgagee and is made payable to him, yet
the mortgagor may sue thereon in his own
name, especially where the mortgagees
interest is less than the full amount
recoverable under the policy, . . . .
And in volume 33, page 82, of the same work,
we read the following:
Insured may be regarded as the real party in
interest, although he has assigned the policy
for the purpose of collection, or has assigned
as collateral security any judgment he may
obtain." 13
And since a policy of insurance upon life or
health may pass by transfer, will or succession
to any person, whether he has an insurable
interest or not, and such person may recover it
whatever the insured might have recovered,
14 the widow of the decedent Dr. Leuterio may
file the suit against the insurer, Grepalife.
The second assigned error refers to an alleged
concealment that the petitioner interposed as
its defense to annul the insurance contract.
Petitioner contends that Dr. Leuterio failed to
disclose that he had hypertension, which might
have caused his death. Concealment exists
where the assured had knowledge of a fact
material to the risk, and honesty, good faith,
and fair dealing requires that he should
communicate it to the assured, but he
designedly and intentionally withholds the
same. 15
Petitioner merely relied on the testimony of the
attending physician, Dr. Hernando Mejia, as
supported by the information given by the
widow of the decedent. Grepalife asserts that
Dr. Mejias technical diagnosis of the cause of
death of Dr. Leuterio was a duly documented
hospital record, and that the widows
declaration that her husband had "possible
hypertension several years ago" should not be
considered as hearsay, but as part of res
gestae.
On the contrary the medical findings were not
conclusive because Dr. Mejia did not conduct
an autopsy on the body of the decedent. As
the attending physician, Dr. Mejia stated that
he had no knowledge of Dr. Leuterios any
previous hospital confinement. 16 Dr.
Leuterios death certificate stated that
hypertension was only "the possible cause of
death." The private respondents statement, as
to the medical history of her husband, was due
to her unreliable recollection of events. Hence,
the statement of the physician was properly
considered by the trial court as hearsay.
The question of whether there was
concealment was aptly answered by the
appellate court, thus:
"The insured, Dr. Leuterio, had answered in his
insurance application that he was in good
health and that he had not consulted a doctor
or any of the enumerated ailments, including
hypertension; when he died the attending
physician had certified in the death certificate
that the former died of cerebral hemorrhage,
probably secondary to hypertension. From this
report, the appellant insurance company
refused to pay the insurance claim. Appellant
alleged that the insured had concealed the fact
that he had hypertension.
Contrary to appellants allegations, there was
no sufficient proof that the insured had
suffered from hypertension. Aside from the
statement of the insureds widow who was not
even sure if the medicines taken by Dr.
Leuterio were for hypertension, the appellant
had not proven nor produced any witness who
could attest to Dr. Leuterios medical history. .
.
x x x
Appellant insurance company had failed to
establish that there was concealment made by
the insured, hence, it cannot refuse payment
of the claim." 17
The fraudulent intent on the part of the insured
must be established to entitle the insurer to
rescind the contract. 18 Misrepresentation as a
defense of the insurer to avoid liability is an
affirmative defense and the duty to establish
such defense by satisfactory and convincing
evidence rests upon the insurer. 19 In the case
at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is
therefore liable to pay the proceeds of the
insurance.
And that brings us to the last point in the
review of the case at bar. Petitioner claims that
there was no evidence as to the amount of Dr.
Leuterios outstanding indebtedness to DBP at
the time of the mortgagors death. Hence, for
private respondents failure to establish the
same, the action for specific performance
should be dismissed. Petitioners claim is
without merit. A life insurance policy is a
valued policy. 20 Unless the interest of a
person insured is susceptible of exact
pecuniary measurement, the measure of
indemnity under a policy of insurance upon life
or health is the sum fixed in the policy. 21 The
mortgagor paid the premium according to the
coverage of his insurance, which states that:
"The policy states that upon receipt of due
proof of the Debtors death during the terms of
this insurance, a death benefit in the amount
of P86,200.00 shall be paid.
In the event of the debtors death before his
indebtedness with the creditor shall have been
fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the Creditor
and the balance of the Sum Assured, if there is
any shall then be paid to the beneficiary/ies
designated by the debtor." 22 (Emphasis
omitted)
However, we noted that the Court of Appeals
decision was promulgated on May 17, 1993. In
private respondents memorandum, she states
that DBP foreclosed in 1995 their residential
lot, in satisfaction of mortgagors outstanding
loan. Considering this supervening event, the
insurance proceeds shall inure to the benefit of
the heirs of the deceased person or his
beneficiaries. Equity dictates that DBP should
not unjustly enrich itself at the expense of
another (Nemo cum alterius detrimenio
protest). Hence, it cannot collect the insurance
proceeds, after it already foreclosed on the
mortgage. The proceeds now rightly belong to
Dr. Leuterios heirs represented by his widow,
herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED.
The Decision and Resolution of the Court of
Appeals in CA-G.R. CV 18341 is AFFIRMED with
MODIFICATION that the petitioner is ORDERED
to pay the insurance proceeds amounting to
Eighty-six thousand, two hundred
(P86,200.00) pesos to the heirs of the insured,
Dr. Wilfredo Leuterio (deceased), upon
presentation of proof of prior settlement of
mortgagors indebtedness to Development
Bank of the Philippines. Costs against
petitioner.
SO ORDERED.
G.R. No. 14300. January 19, 1920
SAN MIGUEL BREWERY, ETC v. LAW
UNION AND ROCK INSURANCE CO. (LTD.)
ET AL., Defendants-Appellees. HENRY
HARDING, Defendant-Appellant.
SYLLABUS
1. INSURANCE; INSURABLE INTEREST;
EXTENT OF RECOVERY BY MORTGAGEE. A
brewery company, as mortgagee of real
property, procured a policy of insurance to be
written thereon payable to itself, in case of
loss. The insurer was notified that the brewery
was merely a mortgagee, but no information
was asked or given as to the personality of the
owner. Held: That the brewery company had
an insurable interest but could recover on the
policy only to the extent of the credit secured
by the mortgage.
2. ID.; SALE OF INSURED PROPERTY;
SUSPENSION OF INSURANCE. A purchaser
of insured property who does not take the
precaution to obtain a transfer of the policy of
insurance cannot, in case of loss, recover upon
such contract, as the transfer of the property
has the effect of suspending the insurance until
the purchaser becomes owner of the policy as
well as of the property insured.
3. ID.; MISTAKE OF PARTIES IN EXPRESSION
OF INTENTION; REFORMATION. If during
the negotiations leading up to the writing of a
policy of insurance the contracting parties
agree that the insurance shall be so written as
to protect not only the interest of the applicant
for the policy, as mortgagee, but also the
residuary interest of the owner, and the policy
is, by inadvertence, ignorance, or mistake, so
written as to protect only the interest of the
applicant, the court has the power to reform
the contract and give effect to it in the sense in
which the parties intended to be bound.
4. ID.; ID.; ID.; CERTAINTY OF PROOF
REQUIRED. In order to justify the
reformation of a contract of insurance on the
ground of failure of the contract to express the
intention of the contracting parties, the proof
must be of the most satisfactory character,
and it must be made clearly to appear that the
minds of the contracting parties did actually
meet in agreement and that there was some
mutual mistake in the expression of their
purpose.
DECISION
This action was begun on October 8, 1917, in
the Court of First Instance of the city of Manila
by the plaintiff, the San Miguel Brewery, for
the purpose of recovering upon two policies of
insurance underwritten respectively by the Law
Union and Rock Insurance Company (Ltd.) ,
and the "Filipinas" Compaia de Seguros, for
the sum of P7,500 each, insuring certain
property which has been destroyed by fire. The
plaintiff, the San Miguel Brewery, is named as
the party assured in the two policies referred
to, but it is alleged in the complaint that said
company was in reality interested in the
property which was the subject of insurance in
the character of a mortgage creditor only, and
that the owner of said property upon the date
the policies were issued was one D. P. Dunn
who was later succeeded as owner by one
Henry Harding. Accordingly said Harding was
made a defendant, as a person interested in
the subject of the litigation.
The prayer of the complaint is that judgment
be entered in favor of the plaintiff against the
two companies named for the sum of P15,000,
with interest and costs, and further that upon
satisfaction of the balance of P4,505.30 due to
the plaintiff upon the mortgage debt, and upon
the cancellation of the mortgage, the plaintiff
be absolved from liability to the defendants or
any of them. The peculiar form of the latter
part of the prayer is evidently due to the
design of the plaintiff to lay a foundation for
Harding to recover the difference between the
plaintiffs credit and the amount for which the
property was insured. Accordingly, as was to
be expected, Harding answered, admitting the
material allegations of the complaint and
claiming for himself the right to recover the
difference between the plaintiffs mortgage
credit and the face value of the policies. The
two insurance companies also answered,
admitting in effect their liability to the San
Miguel Brewery to the extent of its mortgage
credit, but denying liability to Harding on the
ground that under the contracts of insurance
the liability of the insurance companies was
limited to the insurable interest of the plaintiff
therein. Soon after the action was begun the
insurance companies effected a settlement
with the San Miguel Brewery by paying the full
amount of the credit claimed by it, with the
result that the litigation as between the
original plaintiff and the two insurance
companies came to an end, leaving the action
to be prosecuted to final judgment by the
defendant Harding with respect to the balance
claimed to be due to him upon the policies.
Upon hearing the evidence the trial judge came
to the conclusion that Harding had no right of
action whatever against the companies and
absolved them from liability without special
finding as to costs. From this decision the said
Henry Harding has appealed.
The two insurance companies who are named
as defendants do not dispute their liability to
the San Miguel Brewery, to the extent already
stated, and the only question here under
discussion is that of the liability of the
insurance companies to Harding. It is therefore
necessary to take account of such facts only as
bear upon this aspect of the case.
In this connection it appears that on January
12, 1916, D. P. Dunn, then the owner of the
property to which the insurance relates,
mortgaged the same to the San Miguel
Brewery to secure a debt of P10.000. In the
contract of mortgage Dunn agreed to keep the
property insured at his expense to the full
amount of its value in companies to be
selected by the Brewery Company and
authorized the latter in case of loss to receive
the proceeds of the insurance and to retain
such part as might be necessary to cover the
mortgage debt. At the same time, in order
more conveniently to accomplish the end in
view, Dunn authorized and requested the
Brewery Company to effect said insurance
itself. Accordingly on the same date Antonio
Brias, general manager of the Brewery, made
a verbal application to the Law Union and Rock
Insurance Company for insurance to the extent
of P15,000 upon said property. In reply to a
question of the companys agent as to whether
the Brewery was the owner of the property, he
stated that the company was interested only
as a mortgagee. No information was asked as
to who was the owner of the property, and no
information upon this point was given.
It seems that the insurance company to whom
this application was directed did not want to
carry more than one-half the risk. It therefore
issued its own policy for P7,500 and procured a
policy in a like amount to be issued by the
"Filipinas" Compaia de Seguros. Both policies
were issued in the name of the San Miguel
Brewery as the assured, and contained no
reference to any other interest in the property.
Both policies contain the usual clause requiring
assignments to be approved and noted on the
policy. The premiums were paid by the
Brewery and charged to Dunn. A year later the
policies were renewed, without change, the
renewal premiums being paid by the Brewery,
supposedly for the account of the owner. In
the month of March of the year 1917 Dunn
sold the insured property to the defendant
Henry Harding, but no assignment of the
insurance, or of the insurance policies, was at
any time made to him.
We agree with the trial court that no cause of
action in Henry Harding against the insurance
companies is shown. He is not a party to the
contracts of insurance and cannot directly
maintain an action thereon. (Uy Tam and Uy
Yet v. Leonard, 30 Phil. Rep., 471.) His claim is
merely of an equitable and subsidiary nature
and must be made effective, if at all, through
the San Miguel Brewery in whose name the
contracts are written. Now the Brewery, as
mortgagee of the insured property,
undoubtedly had an insurable interest therein;
but it could not, in any event, recover upon
these policies an amount in excess of its
mortgage credit. In this connection it will be
remembered that Antonio Brias, upon making
application for the insurance, informed the
company with which the insurance was placed
that the Brewery was interested only as a
mortgagee. It would, therefore, be impossible
for the Brewery to recover anything beyond
the amount secured by its mortgage on the
insured property.
This conclusion is not only deducible from the
principles governing the operation and effect of
insurance contracts in general but the point is
clearly covered by the express provisions of
sections 16 and 50 of the Insurance Act (Act
No. 2427). In the first of the sections cited, it
is declared that "the measure of an insurable
interest in property is the extent to which the
insured might be damnified by loss or injury
thereof" (sec. 16); while in the other it is
stated that "the insurance shall be applied
exclusively to the proper interest of the person
in whose name it is made unless otherwise
specified in the policy" (sec. 50).
These provisions would have been fatal to any
attempt at recovery even by D. P. Dunn, if the
ownership of the property had continued in
him up to the time of the loss; and as regards
Hardings an additional insuperable obstacle is
found in the fact that the ownership of the
property had been changed, prior to the loss,
without any corresponding change having been
effected in the policy of insurance. In section
19 of the Insurance Act we find it stated that
"a change of interest in any part of a thing
insured unaccompanied by a corresponding
change of interest in the insurance, suspends
the insurance to an equivalent extent, until the
interest in the thing and the interest in the
insurance are vested in the same person."
Again in section 55 it is declared that "the
mere transfer of a thing insured does not
transfer the policy, but suspends it until the
same person becomes the owner of both the
policy and the thing insured."
Undoubtedly these policies of insurance might
have been so framed as to have been "payable
to the San Miguel Brewery, mortgagee, as its
interest may appear, remainder to
whomsoever, during the continuance of the
risk, may become the owner of the interest
insured." (Sec. 54, Act No. 2427.) Such a
clause would have proved an intention to
insure the entire interest in the property, not
merely the insurable interest of the San Miguel
Brewery, and would have shown exactly to
whom the money, in case of loss, should be
paid. But the policies are not so written.
It is easy to collect from the facts stated in the
decision of the trial judge, no less than from
the testimony of Brias, the manager of the San
Miguel Brewery, that, as the insurance was
written up, the obligation of the insurance
companies was different from that
contemplated by Dunn, at whose request the
insurance was written, and Brias. In the
contract of mortgage Dunn had agreed, at his
own expense, to insure the mortgaged
property for its full value and to indorse the
policies in such manner as to authorize the
Brewery Company to receive the proceeds in
case of loss and to retain such part thereof as
might be necessary to satisfy the remainder
then due upon the mortgage debt. Instead,
however, of effecting the insurance himself
Dunn authorized and requested the Brewery
Company to procure insurance on the property
in the amount of P15,000 at Dunns expense.
The Brewery Company undertook to carry this
mandate into effect, and it of course became
its duty to procure insurance of the character
contemplated, that is, to have the policies so
written as to protect not only the insurable
interest of the Brewery, but also the owner.
Brias seems to have supposed that the policies
as written had this effect, but in this he was
mistaken. It was certainly a hardship on the
owner to be required to pay the premiums
upon P15,000 of insurance when he was
receiving no benefit whatever except in
protection to the extent of his indebtedness to
the Brewery. The blame for the situation thus
created rests, however, with the Brewery
rather than with the insurance companies, and
there is nothing in the record to indicate that
the insurance companies were requested to
write insurance upon the insurable interest of
the owner or intended to make themselves
liable to that extent.
If during the negotiations which resulted in the
writing of this insurance, it had been agreed
between the contracting parties that the
insurance should be so written as to protect
not only the interest of the mortgagee but also
the residuary interest of the owner, and the
policies had been, by inadvertence, ignorance,
or mistake written in the form in which they
were issued, a court would have the power to
reform the contracts and give effect to them in
the sense in which the parties intended to be
bound. But in order to justify this, it must be
made clearly to appear that the minds of the
contracting parties did actually meet in
agreement and that they labored under some
mutual error or mistake in respect to the
expression of their purpose. Thus, in Bailey v.
American Central Insurance Co. (13 Fed.,
250), it appeared that a mortgagee desiring to
insure his own insurable interest only, correctly
stated his interest, and asked that the same be
insured. The insurance company agreed to
accept the risk, but the policy was issued in
the name of the owner, because of the
mistaken belief of the companys agent that
the law required it to be so drawn. It was held
that a court of equity had the power, at the
suit of the mortgagee, to reform the
instrument and give judgment in his favor for
the loss thereunder, although it had been
agreed by both parties that the policy should
be written exactly as it was. Said the court: "If
the applicant correctly states his interest and
distinctly asks for an insurance thereon, and
the agent of the insurer agrees to comply with
his request, and assumes to decide upon the
form of the policy to be written for that
purpose, and by mistake of law adopts the
wrong form, a court of equity will reform the
instrument so as to make it insurance upon the
interest named." (See also Fink v. Queens
Insurance Co., 24 Fed., 318; Esch v. Home
Insurance Co., 78 Iowa, 334; 16 Am. St. Rep.,
443; Woodbury Savings etc., Co., v. Charter
Oack Insurance Co., 31 Conn., 517; Balen v.
Hanover Fire Insurance Co., 67 Mich., 179.)
Similarly, in cases where the mortgagee is by
mistake described as owner, the court may
grant reformation and permit a recovery by the
mortgagee in his character as such. (Dalton v.
Milwaukee etc. Insurance Co., 126 Iowa, 377;
Spare v. Home Mutual Insurance Co., 17 Fed.,
568.) In Thompson v. Phenix Insurance Co.
(136 U. S., 287, 34 L. ed., 408), it appeared
that one Kearney made application to an
insurance company for insurance on certain
property in his hands as receiver and it was
understood between him and the companys
agent that, in case of loss, the proceeds of the
policy should accrue to him and his successors
as receiver and to others whom it might
concern. However, the policy, as issued, was
so worded as to be payable only to him as
receiver. In an action brought on the policy by
a successor of Kearney, it was alleged that the
making of the contract in this form was due to
inadvertence, accident, and mistake upon the
part of both Kearney and the company.
Said the court:
"If by inadvertence, accident, or mistake the
terms of the contract were not fully set forth in
the policy, the plaintiff is entitled to have it
reformed."
In another case the same court said:
"We have before us a contract from which, by
mistake, material stipulations have been
omitted, whereby the true intent and meaning
of the parties are not fully or accurately
expressed. There was a definite concluded
agreement as to insurance, which, in point of
time, preceded the preparation and delivery of
the policy, and this is demonstrated by legal
and exact evidence, which removes all doubt
as to the sense and undertaking of the parties.
In the agreement there has been a mutual
mistake, caused chiefly by that contracting
party who now seeks to limit the insurance to
an interest in the property less than that
agreed to be insured. The written agreement
did not effect that which the parties intended.
That a court of equity can afford relief in such
a case, is, we think, well settled by the
authorities." (Smell v. Atlantic, etc., Ins. Co.,
98 U. S., 85, 89; 25 L. ed., 52.)
But to justify the reformation of a contract, the
proof must be of the most satisfactory
character, and it must clearly appear that the
contract failed to express the real agreement
between the parties. (Philippine Sugar Estates
Development Company v. Government of the
Philippine Islands, 62 L. ed., 1177, reversing
Government of Philippine Islands v. Philippine
Sugar Estates Development Co., 30
In the case now before us the proof is entirely
insufficient to authorize the application of the
doctrine stated in the foregoing cases, for it is
by no means clear from the testimony of Brias
and none other was offered that the
parties intended for the policy to cover the risk
of the owner in addition to that of the
mortgagee. It results that the defendant
Harding is not entitied to relief in any aspect of
the case.
The judgment is therefore affirmed, with costs
against the appellant. So ordered.
G.R. No. L-15184 May 31, 1963
SAURA IMPORT & EXPORT CO., INC., vs.
PHILIPPINE INTERNATIONAL SURETY
CO., INC., and PHILIPPINE NATIONAL
BANK
Instant case was certified by the Court of
Appeals to Us, it appearing that the issues
involved are purely of law.
On December 26, 1952, the Saura Import &
Export Co Inc., mortgaged to the Phil. National
Bank, a parcel of land covered by T.C.T. No.
40445 of the Registry of Deeds of Davao,
issued in its name, to secure the payment of
promissory note of P27,000.00 (Exhs. P, B-2).
On April 30, 1953, the mortgage was amended
to guarantee an increased amount, bringing
the total mortgaged debt to P37,000.00 (Exhs.
P-2, B-3). The provisions of the mortgaged
contact, pertinent to the resolution of the
present case, provide as follows -
2. . . . he shall insure the mortgaged property
at all times against fire and earthquake for an
amount and with such company satisfactory to
the Mortgagee, indorsing to the latter the
corresponding policies; he shall keep the
mortgaged property in good condition, making
repairs and protecting walls that may be
necessary; . . .
xxx xxx xxx
Erected on the land mortgaged, was a building
of strong materials owned by the mortgagor
Saura Import & Export Co., Inc., which had
always been covered by insurance, many years
prior to the mortgage contract. Pursuant to the
requirement, Saura insured the building and its
contents with the Philippine International
Surety, an insurance firm acceptable to
mortgagee Bank, for P29,000.00 against fire
for the period of one year from October 2,
1954. As required therefor, the insurance
policy was endorsed to the mortgagee PNB, in
a Memo which states -
Loss if any, payable to the Philippine National
Bank as their interest may appear, subject to
the terms, conditions and warranties of this
policy (Exh. A).
The policy was delivered to the mortgagee
Bank by Saura. On October 15, 1954, barely
thirteen (13) days after the issuance of the fire
insurance policy (October 2, 1954), the insurer
cancelled the same, effective as of the date of
issue (Exh. A-2). Notice of the cancellation was
given to appellee bank in writing, sent by
Registered Mail and personally addressed to
Fortunato Domingo, Branch Manager of the
appellee Bank's Davao Branch, and was
received by the Bank on November 8, 1954.
On April 6, 1955, the building and its contents,
worth P40,685.69 were burned. On April 11,
1955, Saura filed a claim with the Insurer and
mortgagee Bank. Upon the presentation of
notice of loss with the PNB, Saura learned for
the first time that the policy had previously
been cancelled on October 2, 1954, by the
insurer, when Saura's folder in the Bank's filed
was opened and the notice of cancellation
(original and duplicate) sent by the Insurer to
the Bank, was found. Upon refusal of the
Insurer Philippine International Surety to pay
the amount of the insurance, Civil Case No.
26847 was filed with the Manila CFI against the
Insurer, and the PNB was later included as
party defendant, after it had refused to
prosecute the case jointly with Saura Import &
Export Co., Inc.
At the trial, it was established that neither the
Insurer nor the mortgagee Bank informed the
plaintiff Saura of the cancellation of the policy.
On April 30, 1957, the court a quo rendered
the following judgment -
. . . IN VIEW WHEREOF, complaint dismissed;
costs against the plaintiff; but as there is no
proof on the counterclaim of the Philippines
International Surety, the same is also
dismissed.
Wherefore, the parties respectfully pray that
the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without
prejudice to the parties adducing other
evidence to prove their case not covered by
this stipulation of facts.
A motion to reconsider the above judgment,
seasonably presented on May 14, 1957, was
subsequently denied. The decision rendered
and the resolution denying the motion for
reconsideration constitute the subject of the
instant appeal by plaintiff Saura on the three
alleged errors, which converge on the
correctness of the ruling, wholly dismissing the
complaint absolving both the insurance
company and the bank from liability.
In the determination of liabilities of the parties
herein, let us look into the general principles of
insurance, in matters of cancellations of policy
by the insurer. Fire insurance policies and
other contracts of insurance upon property, in
addition to the common provision for
cancellation of the policy upon request of the
insured, generally provide for cancellation by
the insurer by notice to the insured for a
prescribed period, which is usually 5 days, and
the return of the unearned portion of the
premium paid by the insured, such provision
for cancellation upon notice being authorized
by statutes in some jurisdiction, either
specifically or as a provision of an adopted
standard form of policy. The purpose of
provisions or stipulations for notice to the
insured, is to prevent the cancellation of the
policy, without allowing the insured ample
opportunity to negotiate for other insurance in
its stead. The form and sufficiency of a notice
of cancellation is determined by policy
provisions. In order to form the basis for the
cancellation of a policy, notice to the insured n
not be in any particular form, in the absence of
a statute or policy provision prescribing such
form, and it is sufficient, so long as it positively
and unequivocally indicates to the insured, that
it is the intention of the company that the
policy shall cease to be binding. Where the
policy contains no provisions that a certain
number of days notice shall be given, a
reasonable notice and opportunity to obtain
other insurance must be given. Actual personal
notice to the insured is essential to a
cancellation under a provision for cancellation
by notice. The actual receipt by the insured of
a notice of cancellation is universally
recognized as a condition precedent to a
cancellation of the policy by the insurer, and
consequently a letter containing notice of
cancellation which is mailed by the insurer but
not received by the insured, is ineffective as
cancellation (29 Am. Jur. pp. 732-741).
The policy in question (Exh. A), does not
provide for the notice, its form or period. The
Insurance Law, Act No. 2427, does not likewise
provide for such notice. This being the case, it
devolves upon the Court to apply the generally
accepted principles of insurance, regarding
cancellation of the insurance policy by the
insurer. From what has been heretofore stated,
actual notice of cancellation in a clear and
unequivocal manner, preferably in writing, in
view of the importance of an insurance
contract, should be given by the insurer to the
insured, so that the latter might be given an
opportunity to obtain other insurance for his
own protection. The notice should be personal
to the insured and not to and/or through any
unauthorized person by the policy. In the case
at bar, the defendant insurance company,
must have realized the paramount importance
of sending a notice of cancellation, when it
sent the notice of cancellation of the policy to
the defendant bank (as mortgagee), but not to
the insured with which it (insurance company)
had direct dealing. It was the primary duty of
the defendant-appellee insurance company to
notify the insured, but it did not. It should be
stated that the house and its contents were
burned on April 6, 1955, at the time when the
policy was enforced (October 2, 1954 to
October 2, 1955); and that under the facts, as
found by the trial court, to which We are
bound, it is evident that both the insurance
company and the appellee bank failed,
wittingly or unwittingly, to notify the insured
appellant Saura of the cancellation made.
Of course, the defendant insurance company
contends that it gave notice to the defendant-
appellee bank as mortgagee of the property,
and that was already a substantial compliance
with its duty to notify the insured of the
cancellation of the policy. But notice to the
bank, as far appellant herein is concerned, is
not effective notice.
If a mortgage or lien exists against the
property insured, and the policy contains a
clause stating that loss, if any, shall be payable
to such mortgagee or the holder of such lien as
interest may appear, notice of cancellation to
the mortgagee or lienholder alone is ineffective
as a cancellation of the policy to the owner of
the property. (Connecticut Ins. Co. v.
Caumisar, 218 Ky. 378, 391 SW 776, cited in
29 Am. Jur. p. 743).
Upon authority of the above case, therefore,
the liability of the insurance company becomes
a fact.
It may be argued that in the appeal brief of
appellant, no error has been assigned against
the insurance company and no prayer is found
therein asking that it be made liable. It must
be noted, however, that the case was
dismissed the lower court and the main object
of the appeal is to secure a reversal of the said
judgment. This Court is clothed with ample
authority to review matters, even if they are
not assigned as errors in the appeal, if it finds
that their consideration is necessary in arriving
at a just decision of the case. Thus it was held:
While an assignment of error which is required
by law or rule of court has been held essential
to appellate review, only those assigned will be
considered, there are a number of cases which
appear to accord to the appellate court a broad
discretionary power to waive the lack of proper
assignment of errors and consider errors not
assigned. And an unassigned error closely
related to an error properly assigned, or upon
which the determination of the question raised
by the error properly assigned is dependent,
will be considered by the appellate court
notwithstanding the failure to assign it as
error. (Hernandez v. Andal, 78 Phil. 198-199).
Although assigned errors apparently appear to
be directed against the appellee bank alone,
they in essence, seek a reversal of the decision
on dismissal, entered by the lower court, which
in the main has for its purpose the finding of
liability on the policy. In the course of our
examination of the records of the case, the
decision and the errors assigned, We found
that liability attached principally the insurance
company, for its failure to give notice of the
cancellation of the policy to herein appellant
itself.
Because of the conclusions reached, We find it
unnecessary to discuss the errors assigned
against appellee bank.
WHEREFORE, the decision appealed from is
hereby reversed, and another is entered,
condemning the defendant-appellee Philippine
International Surety Co., Inc., to pay Saura
Import & Export Co., Inc., appellant herein,
the sum of P29,000.00, the amount involved in
Policy No. 429, subject-matter of the instant insurance company, plus the sum allegedly
case. Without costs. paid to defendant as interest on the alleged
indebtedness.
On December 19, 1952, defendant filed her
answer setting up as special defense that the
G.R. No. L-7667 November 28, 1955
transaction entered into between the plaintiff
and defendant is one of sale with option to
CHERIE PALILEO v. BEATRIZ COSIO,
repurchase but that the period for repurchase
had expired without plaintiff having returned
the price agreed upon as a result of which the
SYLLABUS
ownership of the property had become
consolidated in the defendant. Defendant also
set up certain counterclaims which involve a
total amount of P4,900.
2. INSURANCE; WHERE MORTGAGED
PROPERTY WAS INSURED BY MORTGAGEE IN
On April 7, 1953, the case was set for trial on
HIS OWN NAME; EFFECT OF. Where a
the merits, but because of several
mortgagee, indecently of the mortgagor,
postponements asked by the parties, the same
insures the mortgaged property in his own
has to be set anew for trial on January 12,
name and for his own interest, he is entitled to
1954. On this date, neither the defendant nor
the insurance proceeds in case of loss, but in
her counsel appeared, even if the latter had
such case , he is not allowed to retain his claim
been notified of the postponement almost a
against the mortgagor, but is passed by
month earlier, and so the court received the
subrogation to the insurer to the extent of the
evidence of the plaintiff. On January 18, 1954,
money paid. (Vance on Insurance, 2d ed., p.
the court, having in view the evidence
654.)
presented, rendered judgment granting the
relief prayed for in the complaint.
DECISION
On February 2, 1954, the original counsel for
the defendant was substituted and the new
counsel immediately moved that the judgment
Plaintiff filed a complaint against defendant in
be set aside on the ground that, due to
the Court of First Instance of Manila praying
mistake or excusable negligence, defendant
that (1) the transaction entered into between
was unable to present her evidence and the
them on December 18, 1951 be declared as
decision was contrary to law, and this motion
one of loan, and the document executed
having been denied, defendant took the
covering the transaction as one of equitable
present appeal.
mortgage to secure the payment of said loan;
(2) the defendant be ordered to credit to the
The important issue to be determined in this
plaintiff with the necessary amount from the
appeal is whether the lower court committed a
sum received by the defendant from the
grave abuse of discretion in not reopening the
Associated Insurance & Surety Co., Inc. and to
case to give defendant an opportunity to
apply the same to the payment of plaintiffs
present her evidence considering that the
obligation thus considering it as fully paid; and
failure of her original counsel to appear was
(3) the defendant be ordered to pay to plaintiff
due to mistake or excusable negligence which
the difference between the alleged
ordinary prudence could not have guarded
indebtedness of plaintiff and the sum received
against.
by defendant from the aforementioned
The original counsel of defendant was Atty.
Leon Ma. Guerrero. As early as February 11,
1953, said counsel showed interest in the early
disposal of this case by moving the court to
have it set for trial. The first date set was April
7, 1953, but no hearing was had on that date
because plaintiff had moved to postpone it.
The case was next set for hearing on April 28,
1953, but on motion again of plaintiff, the
hearing was transferred to November 6, 1953.
Then, upon petition of defendant, the trial had
to be moved to December 15, 1953, and
because Atty. Guerrero could not appear on
said date because of a case he had in Cebu
City, the hearing was postponed to January 18,
1954.
And on January 4, 1954, or nineteen days after
receiving the notice of hearing, Atty. Guerrero
was appointed Undersecretary of Foreign
Affairs. It is now contended that the
appointment was so sudden and unexpected
that Atty. Guerrero, after taking his oath, was
unable to wind up his private cases or make
any preparation at all. It is averred that "The
days that followed his appointment were very
busy days for defendants former counsel.
There was an immediate need for clearing the
backlog of official business, including the
reorganization of the Department of Foreign
Affairs and our Foreign Service, and more
importantly, he had to assist the Secretary of
Foreign Affairs in negotiations of national
importance like the Japanese reparations, and
the revision of the trade agreement with the
United States, that, Atty. Guerrero had to work
as much as fourteen hours daily . . . Because
of all these unavoidable confusion that followed
in the wake of Atty. Guerreros sudden and
unexpected appointment, the trial of this case
scheduled for January 18, 1954 escaped his
memory, and consequently, Atty. Guerrero and
the defendant were unable to appear when the
case was called for trial." These reasons, it
is intimated, constitute excusable negligence
which ordinary prudence could not have
guarded against and should have been
considered by the trial court as sufficient
justification to grant the petition of defendant
for a rehearing.
It is a well-settled rule that the granting of a
motion to set aside a judgment or order on the
ground of mistake or excusable negligence is
addressed to the sound discretion of the court
(See Coombs v. Santos, 24 Phil., 446; Daipan
v. Sigabu, 25 Phil., 184). And an order issued
in the exercise of such discretion is ordinarily
not to be disturbed unless it is shown that the
court has gravely abused such discretion. (See
Tell v. Tell, 48 Phil., 70; Macke v. Camps, 5
Phil., 185; Calvo v. De Gutierrez, 4 Phil., 203;
Manzanares v. Moreta, 38 Phil., 821; Salva v.
Palacio and Leuterio, 90 Phil., 731.) In denying
the motion for reopening the trial court said:
"After going over the same arguments, this
Court is of the opinion, and so holds that the
decision of this Court of January 18, 1954
should not be disturbed." Considering the
stature, ability and experience of counsel Leon
Ma. Guerrero, and the fact that he was given
almost one month notice before the date set
for trial, we are persuaded to conclude that the
trial court did not abuse its discretion in
refusing to reconsider its decision.
Coming now to the merits of the case, we note
that the lower court made the following
findings: On December 18, 1951, plaintiff
obtained from defendant a loan in the sum of
P12,000 subject to the following conditions:
(a) that plaintiff shall pay to defendant an
interest in the amount of P250 a month; (b)
that defendant shall deduct from the loan
certain obligations of plaintiff to third persons
amounting to P4,550, plus the sum of P250 as
interest for the first month; and (c) that after
making the above deductions, defendant shall
deliver to plaintiff only the balance of the loan
of P12,000.
Pursuant to their agreement, plaintiff paid to
defendant as interest on the loan a total of
P2,250.00 corresponding to nine months from
December 18, 1951, on the basis of P250.00 a
month, which is more than the maximum
interest authorized by law. To secure the
payment of the aforesaid loan, defendant
required plaintiff to sign a document known as
"Conditional Sale of Residential Building",
purporting to convey to defendant, with right
to repurchase, a two-story building of strong
materials belonging to plaintiff. This document
did not express the true intention of the parties
which was merely to place said property as
security for the payment of the loan.
After the execution of the aforesaid document,
defendant insured the building against fire with
the Associated Insurance & Surety Co., Inc. for
the sum of P15,000, the insurance policy
having been issued in the name of defendant.
The building was partly destroyed by fire and,
after proper demand, defendant collected from
the insurance company an indemnity of
P13,107.00 Plaintiff demanded from defendant
that she be credited with the necessary
amount to pay her obligation out of the
insurance proceeds but defendant refused to
do so. And on the strength of these facts, the
court rendered decision the dispositive part of
which reads as follows:
"Wherefore, judgment is hereby rendered
declaring the transaction had between plaintiff
and defendant, as shown in Exhibit A, an
equitable mortgage to secure the payment of
the sum of P12,000 loaned by the defendant to
plaintiff; ordering the defendant to credit the
sum of P13,107 received by the defendant
from the Associated Insurance & Surety Co.,
Inc. to the payment of plaintiffs obligation in
the sum of P12,000.00 as stated in the
complaint, thus considering the agreement of
December 18, 1951 between the herein
plaintiff and defendant completely paid and
leaving still a balance in the sum of P1,107
from the insurance collected by defendant;
that as plaintiff had paid to the defendant the
sum of P2,250.00 for nine months as interest
on the sum of P12,000 loaned to plaintiff and
the legal interest allowed by law in this
transaction does not exceed 12 per cent per
annum, or the sum of P1,440 for one year, so
the herein plaintiff and overpaid the sum of
P810 to the defendant, which this Court hereby
likewise orders the said defendant to refund to
herein plaintiff, plus the balance of P1,107
representing the difference of the sum loan of
P12,000 and the collected insurance of
P13,107 from the insurance company above
mentioned to which the herein plaintiff is
entitled to receive, and to pay the costs."
The question that now arises is: Is the trial
court justified in considering the obligation of
plaintiff fully compensated by the insurance
amount and in ordering defendant to refund to
plaintiff the sum of P1,107 representing the
difference of the loan of P12,000 and the sum
of P13,107 collected by said defendant from
the insurance company notwithstanding the
fact that it was not proven that the insurance
was taken for the benefit of the mortgagor?
It is our opinion that on this score the court is
in error for its ruling runs counter to the rule
governing an insurance taken by a mortgagee
independently of the mortgagor. The rule is
that "where a mortgagee, independently of the
mortgagor, insures the mortgaged property in
his own name and for his own interest, he is
entitled to the insurance proceeds in case of
loss, but in such case, he is not allowed to
retain his claim against the mortgagor, but is
passed by subrogation to the insurer to the
extent of the money paid." (Vance on
Insurance, 2d ed., p. 654) Or, stated in
another way, "the mortgagee may insure his
interest in the property independently of the
mortgagor. In that event, upon the destruction
of the property the insurance money paid to
the mortgagee will not inure to the benefit of
the mortgagor, and the amount due under the
mortgage debt remains unchanged. The
mortgagee, however, is not allowed to retain
his claim against the mortgagor, but it passes
by subrogation to the insurer, to the extent of
the insurance money paid." (Vance on
Insurance, 3rd ed., pp. 772-773) This is the
same rule upheld by this Court in a case that
arose in this jurisdiction. In the case
mentioned, an insurance contract was taken
out by the mortgagee upon his own interest, it
being stipulated that the proceeds would be
paid to him only and when the case came up
for decision, this Court held that the
mortgagee, in case of loss, may only recover
upon the policy to the extent of his credit at
the time of the loss. It was declared that the
mortgaged had no right of action against the
mortgagee on the policy. (San Miguel Brewery
v. Law Union, 40 Phil., 674.)
It is true that there are authorities which hold
that "if a mortgagee procures insurance on his
separate interest at his own expense and for
his own benefit, without any agreement with
the mortgagor with respect thereto, the
mortgagor has no interest in the policy, and is
not entitled to have the insurance proceeds
applied in reduction of the mortgage debt" (19
R. C. L., p. 405), and that, furthermore, the
mortgagee "has still a right to recover his
whole debt of the mortgagor." (King v. State
Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co.
v. Boyden, 9 Allen, 123; See also Loomis v.
Eagle Life & Health Ins. Co., 6 Gray, 396;
Washington Mills Emery Mfg. Co. v. Weymouth
& B. Mut. F. Ins. Co., 135 Mass. 506; Foster v.
Equitable Mut. F. Ins. Co., 2 Gray 216.) But
these authorities merely represent the minority
view (See case note, 3 Lawyers Report
Annotated, new series, p. 79). "The general
rule and the weight of authority is, that the
insurer is thereupon subrogated to the rights
of the mortgagee under the mortgage. This is
put upon the analogy of the situation of the
insurer to that of a surety." (Jones on
Mortgages, Vol. I, pp. 671-672.)
Considering the foregoing rules, it would
appear that the lower court erred in declaring
that the proceeds of the insurance taken out
by the defendant on the property mortgaged
inured to the benefit of the plaintiff and in
ordering said defendant to deliver to the
plaintiff the difference between her
indebtedness and the amount of insurance
received by the defendant, for, in the light of
the majority rule we have above enunciated,
the correct solution should be that the
proceeds of the insurance should be delivered
to the defendant but that her claim against the
plaintiff should be considered assigned to the
insurance company who is deemed subrogated
to the rights of the defendant to the extent of
the money paid as indemnity.
Consistent with the foregoing pronouncement,
we therefore modify the judgment of the lower
court as follows: (1) the transaction had
between the plaintiff and defendant as shown
in Exhibit A is merely an equitable mortgage
intended to secure the payment of the loan of
P12,000; (2) that the proceeds of the
insurance amounting to P13,107.00 was
properly collected by defendant who is not
required to account for it to the plaintiff; (3)
that the collection of said insurance proceeds
shall not be deemed to have compensated the
obligation of the plaintiff to the defendant, but
bars the latter from claiming its payment from
the former; and (4) defendant shall pay to the
plaintiff the sum of P810.00 representing the
overpayment made by plaintiff by way of
interest on the loan. No pronouncement as to
costs.
G.R. NO. 168115 :June 8, 2007
VICENTE ONG LIM SING, JR. v. FEB
LEASING & FINANCE CORPORATION
This is a Petition for Review
on Certiorari assailing the Decision1 dated
March 15, 2005 and the Resolution2 dated May
23, 2005 of the Court of Appeals (CA) in CA-
G.R. CV No. 77498.
The facts are as follows:
On March 9, 1995, FEB Leasing and Finance
Corporation (FEB) entered into a lease3 of
equipment and motor vehicles with JVL Food
Products (JVL). On the same date, Vicente Ong
Lim Sing, Jr. (Lim) executed an Individual
Guaranty Agreement4 with FEB to guarantee
the prompt and faithful performance of the
terms and conditions of the aforesaid lease
agreement. Corresponding Lease Schedules
with Delivery and Acceptance Certificates5 over
the equipment and motor vehicles formed part
of the agreement. Under the contract, JVL was
obliged to pay FEB an aggregate gross monthly
rental of One Hundred Seventy Thousand Four
Hundred Ninety-Four Pesos (P170,494.00).
JVL defaulted in the payment of the monthly
rentals. As of July 31, 2000, the amount in
arrears, including penalty charges and
insurance premiums, amounted to Three
Million Four Hundred Fourteen Thousand Four
Hundred Sixty-Eight and 75/100 Pesos
(P3,414,468.75). On August 23, 2000, FEB
sent a letter to JVL demanding payment of the
said amount. However, JVL failed to pay.6
On December 6, 2000, FEB filed a
Complaint7 with the Regional Trial Court of
Manila, docketed as Civil Case No. 00-99451,
for sum of money, damages, and replevin
against JVL, Lim, and John Doe.
In the Amended Answer,8 JVL and Lim
admitted the existence of the lease agreement
but asserted that it is in reality a sale of
equipment on installment basis, with FEB
acting as the financier. JVL and Lim claimed
that this intention was apparent from the fact
that they were made to believe that when full
payment was effected, a Deed of Sale will be
executed by FEB as vendor in favor of JVL and
Lim as vendees.9 FEB purportedly assured
them that documenting the transaction as a
lease agreement is just an industry practice
and that the proper documentation would be
effected as soon as full payment for every item
was made. They also contended that the lease
agreement is a contract of adhesion and
should, therefore, be construed against the
party who prepared it, i.e., FEB.
In upholding JVL and Lim's stance, the trial
court stressed the contradictory terms it found
in the lease agreement. The pertinent portions
of the Decision dated November 22, 2002
read:
A profound scrutiny of the provisions of the
contract which is a contract of adhesion at
once exposed the use of several contradictory
terms. To name a few, in Section 9 of the said
contract - disclaiming warranty, it is stated
that the lessor is not the manufacturer nor the
latter's agent and therefore does not guarantee
any feature or aspect of the object of the
contract as to its merchantability.
Merchantability is a term applied in a contract
of sale of goods where conditions and
warranties are made to apply. Article 1547 of
the Civil Code provides that unless a contrary
intention appears an implied warranty on the
part of the seller that he has the right to sell
and to pass ownership of the object is
furnished by law together with an implied
warranty that the thing shall be free from
hidden faults or defects or any charge or
encumbrance not known to the buyer.
In an adhesion contract which is drafted and
printed in advance and parties are not given a
real arms' length opportunity to transact, the
Courts treat this kind of contract strictly
against their architects for the reason that the
party entering into this kind of contract has no
choice but to accept the terms and conditions
found therein even if he is not in accord
therewith and for that matter may not have
understood all the terms and stipulations
prescribed thereat. Contracts of this character
are prepared unilaterally by the stronger party
with the best legal talents at its disposal. It is
upon that thought that the Courts are called
upon to analyze closely said contracts so that
the weaker party could be fully protected.
Another instance is when the alleged lessee
was required to insure the thing against loss,
damage or destruction.
In property insurance against loss or other
accidental causes, the assured must have an
insurable interest, 32 Corpus Juris 1059.
xxx
It has also been held that the test of insurable
interest in property is whether the assured has
a right, title or interest therein that he will be
benefited by its preservation and continued
existence or suffer a direct pecuniary loss from
its destruction or injury by the peril insured
against. If the defendants were to be regarded
as only a lessee, logically the lessor who
asserts ownership will be the one directly
benefited or injured and therefore the lessee is
not supposed to be the assured as he has no
insurable interest.
There is also an observation from the records
that the actual value of each object of the
contract would be the result after computing
the monthly rentals by multiplying the said
rentals by the number of months specified
when the rentals ought to be paid.
Still another observation is the existence in the
records of a Deed of Absolute Sale by and
between the same parties, plaintiff and
defendants which was an exhibit of the
defendant where the plaintiff sold to the same
defendants one unit 1995 Mitsubishi L-200
STRADA DC PICK UP and in said Deed, The
Court noticed that the same terms as in the
alleged lease were used in respect to warranty,
as well as liability in case of loss and other
conditions. This action of the plaintiff
unequivocally exhibited their real intention to
execute the corresponding Deed after the
defendants have paid in full and as heretofore
discussed and for the sake of emphasis the
obscurity in the written contract cannot favor
the party who caused the obscurity.
Based on substantive Rules on Interpretation,
if the terms are clear and leave no doubt upon
the intention of the contracting parties, the
literal meaning of its stipulations shall control.
If the words appear to be contrary to the
evident intention of the parties, their
contemporaneous and subsequent acts shall be
principally considered. If the doubts are cast
upon the principal object of the contract in
such a way that it cannot be known what may
have been the intention or will of the parties,
the contract shall be null and void.10
Thus, the court concluded with the following
disposition:
In this case, which is held by this Court as a
sale on installment there is no chattel
mortgage on the thing sold, but it appears
amongst the Complaint's prayer, that the
plaintiff elected to exact fulfillment of the
obligation.
For the vehicles returned, the plaintiff can only
recover the unpaid balance of the price
because of the previous payments made by the
defendants for the reasonable use of the units,
specially so, as it appears, these returned
vehicles were sold at auction and that the
plaintiff can apply the proceeds to the balance.
However, with respect to the unreturned units
and machineries still in the possession of the
defendants, it is this Court's view and so hold
that the defendants are liable therefore and
accordingly are ordered jointly and severally to
pay the price thereof to the plaintiff together
with attorney's fee and the costs of suit in the
sum of Php25,000.00.
SO ORDERED.11
On December 27, 2002, FEB filed its Notice of
Appeal.12 Accordingly, on January 17, 2003,
the court issued an Order13 elevating the entire
records of the case to the CA. FEB averred that
the trial court erred:
A. When it ruled that the agreement between
the Parties-Litigants is one of sale of personal
properties on installment and not of lease;
B. When it ruled that the applicable law on the
case is Article 1484 (of the Civil Code) and not
R.A. No. 8556;
C. When it ruled that the Plaintiff-Appellant can
no longer recover the unpaid balance of the
price because of the previous payments made
by the defendants for the reasonable use of
the units;
D. When it failed to make a ruling or judgment
on the Joint and Solidary Liability of Vicente
Ong Lim, Jr. to the Plaintiff-Appellant.14
On March 15, 2005, the CA issued its
Decision15 declaring the transaction between
the parties as a financial lease agreement
under Republic Act (R.A.) No.
8556.16 The fallo of the assailed Decision
reads:
WHEREFORE, the instant appeal
is GRANTED and the assailed Decision dated
22 November 2002 rendered by the Regional
Trial Court of Manila, Branch 49 in Civil Case
No. 00-99451 is REVERSED and SET ASIDE,
and a new judgment is
hereby ENTERED ordering appellees JVL Food
Products and Vicente Ong Lim, Jr. to solidarily
pay appellant FEB Leasing and Finance
Corporation the amount of Three Million Four
Hundred Fourteen Thousand Four
Hundred Sixty Eight Pesos and 75/100
(Php3,414,468.75), with interest at the rate
of twelve percent (12%) per annum starting
from the date of judicial demand on 06
December 2000, until full payment thereof.
Costs against appellees.
SO ORDERED.17
Lim filed the instant Petition for Review
on Certiorari under Rule 45
contending that:
I The Honorable Court of Appeals failed to take
The Honorable Court of Appeals erred when it
failed to consider that the undated complaint
was filed by Saturnino J. Galang, Jr., without
any authority from respondent's Board of
Directors and/or Secretary's Certificate.
II
The Honorable Court of Appeals erred when it
failed to strictly apply Section 7, Rule 18 of the
1997 Rules of Civil Procedure and now Item 1,
A(8) of A.M. No. 03-1-09 SC (June 8, 2004).
III
The Honorable Court of Appeals erred in not
dismissing the appeal for failure of the
respondent to file on time its appellant's brief
and to separately rule on the petitioner's
motion to dismiss.
IV
The Honorable Court of Appeals erred in
finding that the contract between the parties is
one of a financial lease and not of a contract of
sale.
V
The Honorable Court of Appeals ERRED IN
ruling that the payments paid by the petitioner
to the respondent are "rentals" and not
installments paid for the purchase price of the
subject motor vehicles, heavy machines and
equipment.
VI
The Honorable Court of Appeals erred in ruling
that the previous contract of sale involving the
pick-up vehicle is of no consequence.
VII
into consideration that the contract of lease, a
contract of adhesion, concealed the true
intention of the parties, which is a contract of
sale.
VIII
The Honorable Court of Appeals erred in ruling
that the petitioner is a lessee with insurable
interest over the subject personal properties.
IX
The Honorable Court of Appeals erred in
construing the intentions of the Court a quo in
its usage of the term merchantability.18
We affirm the ruling of the appellate court.
First, Lim can no longer question Galang's
authority as FEB's authorized representative in
filing the suit against Lim. Galang was the
representative of FEB in the proceedings
before the trial court up to the appellate court.
Petitioner never placed in issue the validity of
Galang's representation before the trial and
appellate courts. Issues raised for the first time
on appeal are barred by estoppel. Arguments
not raised in the original proceedings cannot
be considered on review; otherwise, it would
violate basic principles of fair play.19
Second, there is no legal basis for Lim to
question the authority of the CA to go beyond
the matters agreed upon during the pre-trial
conference, or in not dismissing the appeal for
failure of FEB to file its brief on time, or in not
ruling separately on the petitioner's motion to
dismiss.
Courts have the prerogative to relax
procedural rules of even the most mandatory
character, mindful of the duty to reconcile both
the need to speedily put an end to litigation
and the parties' right to due process. In
numerous cases, this Court has allowed liberal
construction of the rules when to do so would
serve the demands of substantial justice and
equity.20 In Aguam v. Court of Appeals, the
Court explained:
The court has the discretion to dismiss or not
to dismiss an appellant's appeal. It is a power
conferred on the court, not a duty. The
"discretion must be a sound one, to be
exercised in accordance with the tenets of
justice and fair play, having in mind the
circumstances obtaining in each case."
Technicalities, however, must be avoided. The
law abhors technicalities that impede the cause
of justice. The court's primary duty is to render
or dispense justice. "A litigation is not a game
of technicalities." "Lawsuits unlike duels are
not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to
justice and becomes its great hindrance and
chief enemy, deserves scant consideration
from courts." Litigations must be decided on
their merits and not on technicality. Every
party litigant must be afforded the amplest
opportunity for the proper and just
determination of his cause, free from the
unacceptable plea of technicalities. Thus,
dismissal of appeals purely on technical
grounds is frowned upon where the policy of
the court is to encourage hearings of appeals
on their merits and the rules of procedure
ought not to be applied in a very rigid,
technical sense; rules of procedure are used
only to help secure, not override substantial
justice. It is a far better and more prudent
course of action for the court to excuse a
technical lapse and afford the parties a review
of the case on appeal to attain the ends of
justice rather than dispose of the case on
technicality and cause a grave injustice to the
parties, giving a false impression of speedy
disposal of cases while actually resulting in
more delay, if not a miscarriage of justice.21
Third, while we affirm that the subject lease
agreement is a contract of adhesion, such a
contract is not void per se. It is as binding as
any ordinary contract. A party who enters into
an adhesion contract is free to reject the
stipulations entirely.22 If the terms thereof are
accepted without objection, then the contract
serves as the law between the parties.
In Section 23 of the lease contract, it was
expressly stated that:
SECTION 23. ENTIRE AGREEMENT;
SEVERABILITY CLAUSE
23.1. The LESSOR and the LESSEE agree this
instrument constitute the entire agreement
between them, and that no representations
have been made other than as set forth herein.
This Agreement shall not be amended or
altered in any manner, unless such
amendment be made in writing and signed by
the parties hereto.
Petitioner's claim that the real intention of the
parties was a contract of sale of personal
property on installment basis is more likely a
mere afterthought in order to defeat the rights
of the respondent.
The Lease Contract with corresponding Lease
Schedules with Delivery and Acceptance
Certificates is, in point of fact, a financial lease
within the purview of R.A. No. 8556. Section
3(d) thereof defines "financial leasing" as:
[A] mode of extending credit through a non-
cancelable lease contract under which the
lessor purchases or acquires, at the instance of
the lessee, machinery, equipment, motor
vehicles, appliances, business and office
machines, and other movable or immovable
property in consideration of the periodic
payment by the lessee of a fixed amount of
money sufficient to amortize at least seventy
(70%) of the purchase price or acquisition
cost, including any incidental expenses and a
margin of profit over an obligatory period of
not less than two (2) years during which the
lessee has the right to hold and use the leased
property with the right to expense the lease
rentals paid to the lessor and bears the cost of
repairs, maintenance, insurance and
preservation thereof, but with no obligation or
option on his part to purchase the leased
property from the owner-lessor at the end of
the lease contract.
FEB leased the subject equipment and motor
vehicles to JVL in consideration of a monthly
periodic payment of P170,494.00. The periodic
payment by petitioner is sufficient to amortize
at least 70% of the purchase price or
acquisition cost of the said movables in
accordance with the Lease Schedules with
Delivery and Acceptance Certificates. "The
basic purpose of a financial leasing transaction
is to enable the prospective buyer of
equipment, who is unable to pay for such
equipment in cash in one lump sum, to lease
such equipment in the meantime for his use, at
a fixed rental sufficient to amortize at least
70% of the acquisition cost (including the
expenses and a margin of profit for the
financial lessor) with the expectation that at
the end of the lease period the buyer/financial
lessee will be able to pay any remaining
balance of the purchase price."23
The allegation of petitioner that the rent for
the use of each movable constitutes the value
of the vehicle or equipment leased is of no
moment. The law on financial lease does not
prohibit such a circumstance and this alone
does not make the transaction between the
parties a sale of personal property on
installment. In fact, the value of the lease,
usually constituting the value or amount of the
property involved, is a benefit allowed by law
to the lessor for the use of the property by the
lessee for the duration of the lease. It is
recognized that the value of these movables
depreciates through wear and tear upon use by
the lessee. In Beltran v. PAIC Finance
Corporation,24 we stated that:
Generally speaking, a financing company is not
a buyer or seller of goods; it is not a trading
company. Neither is it an ordinary leasing
company; it does not make its profit by buying
equipment and repeatedly leasing out such
equipment to different users thereof. But a
financial lease must be preceded by a purchase
and sale contract covering the equipment
which becomes the subject matter of the
financial lease. The financial lessor takes the
role of the buyer of the equipment leased. And
so the formal or documentary tie between the
seller and the real buyer of the equipment, i.e.,
the financial lessee, is apparently severed. In
economic reality, however, that relationship
remains. The sale of the equipment by the
supplier thereof to the financial lessor and the
latter's legal ownership thereof are intended to
secure the repayment over time of the
purchase price of the equipment, plus financing
charges, through the payment of lease rentals;
that legal title is the upfront security held by
the financial lessor, a security probably
superior in some instances to a chattel
mortgagee's lien.25
Fourth, the validity of Lease No. 27:95:20
between FEB and JVL should be upheld. JVL
entered into the lease contract with full
knowledge of its terms and conditions. The
contract was in force for more than four years.
Since its inception on March 9, 1995, JVL and
Lim never questioned its provisions. They only
attacked the validity of the contract after they
were judicially made to answer for their default
in the payment of the agreed rentals.
It is settled that the parties are free to agree
to such stipulations, clauses, terms, and
conditions as they may want to include in a
contract. As long as such agreements are not
contrary to law, morals, good customs, public
policy, or public order, they shall have the
force of law between the parties.26Contracting
parties may stipulate on terms and conditions
as they may see fit and these have the force of
law between them.27
The stipulation in Section 1428 of the lease
contract, that the equipment shall be insured
at the cost and expense of the lessee against
loss, damage, or destruction from fire, theft,
accident, or other insurable risk for the full
term of the lease, is a binding and valid
stipulation. Petitioner, as a lessee, has an
insurable interest in the equipment and motor
vehicles leased. Section 17 of the Insurance
Code provides that the measure of an
insurable interest in property is the extent to
which the insured might be damnified by loss
or injury thereof. It cannot be denied that JVL
will be directly damnified in case of loss,
damage, or destruction of any of the properties
leased.
Likewise, the stipulation in Section 9.1 of the
lease contract that the lessor does not warrant
the merchantability of the equipment is a valid
stipulation. Section 9.1 of the lease contract is
stated as:
9.1 IT IS UNDERSTOOD BETWEEN THE
PARTIES THAT THE LESSOR IS NOT THE
MANUFACTURER OR SUPPLIER OF THE
EQUIPMENT NOR THE AGENT OF THE
MANUFACTURER OR SUPPLIER THEREOF. THE
LESSEE HEREBY ACKNOWLEDGES THAT IT
HAS SELECTED THE EQUIPMENT AND THE
SUPPLIER THEREOF AND THAT THERE ARE NO
WARRANTIES, CONDITIONS, TERMS,
REPRESENTATION OR INDUCEMENTS,
EXPRESS OR IMPLIED, STATUTORY OR
OTHERWISE, MADE BY OR ON BEHALF OF THE
LESSOR AS TO ANY FEATURE OR ASPECT OF
THE EQUIPMENT OR ANY PART THEREOF, OR
AS TO ITS FITNESS, SUITABILITY, CAPACITY,
CONDITION OR MERCHANTABILITY, NOR AS
TO WHETHER THE EQUIPMENT WILL MEET THE
REQUIREMENTS OF ANY LAW, RULE,
SPECIFICATIONS OR CONTRACT WHICH
PROVIDE FOR SPECIFIC MACHINERY OR
APPARATUS OR SPECIAL METHODS.29
In the financial lease agreement, FEB did not
assume responsibility as to the quality,
merchantability, or capacity of the equipment.
This stipulation provides that, in case of defect
of any kind that will be found by the lessee in
any of the equipment, recourse should be
made to the manufacturer. "The financial
lessor, being a financing company, i.e., an
extender of credit rather than an ordinary
equipment rental company, does not extend a
warranty of the fitness of the equipment for
any particular use. Thus, the financial lessee
was precisely in a position to enforce such
warranty directly against the supplier of the
equipment and not against the financial lessor.
We find nothing contra legem or contrary to
public policy in such a contractual
arrangement."30

Fifth, petitioner further proffers the view that

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

We join the CA in rejecting this view because

to allow the transaction involving the pick-up
to be read into the terms of the lease
agreement would expand the coverage of the
agreement, in violation of Article 1372 of the
New Civil Code.31 The lease contract subject of
the complaint speaks only of a lease. Any
agreement between the parties after the lease
contract has ended is a different transaction
altogether and should not be included as part
of the lease. Furthermore, it is a cardinal rule
in the interpretation of contracts that if the
terms of a contract are clear and leave no
doubt as to the intention of the contracting
parties, the literal meaning of its stipulations
shall control. No amount of extrinsic aid is
necessary in order to determine the parties'
intent.32

WHEREFORE, in the light of all the foregoing,

the petition is DENIED. The Decision of the CA
in CA-G.R. CV No. 77498 dated March 15,
2005 and Resolution dated May 23, 2005 are
AFFIRMED. Costs against petitioner.

SO ORDERED.