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G.R. No. 124520 August 18, 1997 Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners, vs. COURT OF APPEALS and CKS DEVELOPMENT CORPORATION, respondents.

the United Insurance Co., Inc. (hereinafter United) without the written consent of private respondent CKS. 4. On the day that the lease contract was to expire, fire broke out inside the leased premises. 5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it wrote the insurer (United) a demand letter asking that the proceeds of the insurance contract (between the Cha spouses and United) be paid directly to CKS, based on its lease contract with the Cha spouses. 6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United. 7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision * ordering therein defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary damages, P20,000.00 as attorney's fees and costs of suit. 8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision ** dated 11 January 1996, affirming the trial court decision, deleting however the awards for exemplary damages and attorney's fees. A motion for reconsideration by United was denied on 29 March 1996. In the present petition, the following errors are assigned by petitioners to the Court of Appeals: I THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION IN THE CONTRACT OF LEASE

PADILLA, J.: This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of respondent Court of Appeals. The undisputed facts of the case are as follows: 1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with private respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988. 2. One of the stipulations of the one (1) year lease contract states: 18. . . . The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects placed at any stall or store or space in the leased premises without first obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then the policy is deemed assigned and transferred to the LESSOR for its own benefit; . . . 1 3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by fire the merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with

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

assigned or transferred to the lessor (CKS) if said policy is obtained without the prior written consent of the latter. It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be contrary to law, morals, good customs, public order or public policy. 3 Sec. 18 of the Insurance Code provides: Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of some person having an insurable interest in the property insured. A non-life insurance policy such as the fire insurance policy taken by petitionerspouses over their merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist at the time the insurance takes effect and at the time the loss occurs. 4 The basis of such requirement of insurable interest in property insured is based on sound public policy: to prevent a person from taking out an insurance policy on property upon which he has no insurable interest and collecting the proceeds of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager which is void under Section 25 of the Insurance Code, which provides: Sec. 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person insured has or has not any interest in the property insured, or that the policy shall be received as proof of such interest, and every policy executed by way of gaming or wagering, is void. In the present case, it cannot be denied that CKS has no insurable interest in the goods and merchandise inside the leased

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premises under the provisions of Section 17 of the Insurance Code which provide: Sec. 17. The measure of an insurable interest in property is the extent to which the insured might be damnified by loss of injury thereof. Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a beneficiary of the fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest over said merchandise remains with the insured, the Cha spouses. The automatic assignment of the policy to CKS under the provision of the lease contract previously quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a person (CKS) who has no insurable interest in the property insured. The liability of the Cha spouses to CKS for violating their lease contract in that the Cha spouses obtained a fire insurance policy over their own merchandise, without the consent of CKS, is a separate and distinct issue which we do not resolve in this case. WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and Stella Uy-Cha. SO ORDERED. G.R. No. 137172 April 4, 2001

MASAGANA TELAMART, INC., respondent. RESOLUTION DAVIDE, JR., C.J.: In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision 1 of the Court of Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum of P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondent's properties; (b) declaring the replacementrenewal policies effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties covered by the renewalreplacement policies. The modification consisted in the (1) deletion of the trial court's declaration that three of the policies were in force from August 1991 to August 1992; and (2) reduction of the award of the attorney's fees from 25% to 10% of the total amount due the Respondent. The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals in its assailed decision as follows: Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits "A" to "E", Record, pp. 158175) on its properties [in Pasay City and Manila] . . . . All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiffs properties located at 24102432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On

UCPB GENERAL INSURANCE CO., INC., petitioner, vs.

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July 13, 1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's Checks in the total amount of P225,753.45 as renewal premium payments for which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On July 14, 1992, Masagana made its formal demand for indemnification for the burned insured properties. On the same day, defendant returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record, p. 192) that it was rejecting Masagana's claim on the following grounds: "a) Said policies expired last May 22, 1992 and were not renewed for another term; b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and c) The properties covered by the said policies were burned in a fire that took place last June 13, 1992, or before tender of premium payment." (Record, p. 5) Hence Masagana filed this case. The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the premiums on 13 July 1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as provided under Policy Condition No. 26, which states: 26. Renewal Clause. Unless the company at least forty five days in advance of the end of the policy

period mails or delivers to the assured at the address shown in the policy notice of its intention not to renew the policy or to condition its renewal upon reduction of limits or elimination of coverages, the assured shall be entitled to renew the policy upon payment of the premium due on the effective date of renewal. Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the renewal of the policies. Such a practice had existed up to the time the claims were filed. Thus: Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than 60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on

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May 7, 1990 but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's sister company) dated December 10, 1988 but premium therefor was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance Policy No. HO/F29362 was issued on June 15, 1989 but premium was paid only on February 13, 1990 under O.R. No. 39233 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was issued on November 22, 1988 but premium therefor was collected only on March 15, 1989 under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to December 15, 1989 (Exhs. "FF" and "FF-1"). Moreover, according to the Court of Appeals the following circumstances

constitute preponderant proof that no timely notice of non-renewal was made by Petitioner: (1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar Reinsurance Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not earlier than said date, or within 45 days from the expiry dates of the policies as provided under Policy Condition No. 26; (2) Defendant insurer unconditionally accepted, and issued an official receipt for, the premium payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban Adjusters and Valuers to investigate plaintiff's claim as shown by the letter dated July 17, 1992 (Exhibit "11", Record, p. 254). In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies issued by petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 . . . had been extended or renewed by an implied credit arrangement though actual payment of premium was tendered on a later date and after the occurrence of the (fire) risk insured against." We resolved this issue in the negative in view of Section 77 of the Insurance Code and our decisions in Valenzuela v. Court of Appeals; 2 South Sea Surety and Insurance Co., Inc. v. Court of Appeals; 3 and Tibay v. Court of Appeals. 4 Accordingly, we reversed and set aside the decision of the Court of Appeals.

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Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we had made in the decision our own findings of facts, which are not in accord with those of the trial court and the Court of Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22 May 1992, or before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by operation of law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were paid within the 60- to 90-day credit term. Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension of credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take judicial notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit terms in premium payment has been the prevalent practice in the insurance industry. Most insurance companies, including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but is merely designed for the protection of the parties to an insurance contract. The Code itself, in Section 78, authorizes the validity of a policy notwithstanding non-payment of premiums. Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77 Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term was perfectly alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and habitually accepting payments 60 to 90 days from the effective dates of the policies, it has implicitly

agreed to modify the tenor of the insurance policy and in effect waived the provision therein that it would pay only for the loss or damage in case the same occurred after payment of the premium. Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the trial court and the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal and sent by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise ignored the fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the Insurance Code readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of the premium due on the effective date of renewal should first be made. Respondent's argument that Section 77 is not a prohibitive provision finds no authoritative support. Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and the pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts, as found by the trial court and the Court of Appeals, are indeed duly established: 1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually renewed. 2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on the renewed policies. 3. There was no valid notice of nonrenewal of the policies in question, as there is no proof at all that the notice sent by ordinary mail was

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received by Respondent, and the copy thereof allegedly sent to Zuellig was ever transmitted to Respondent. 4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by Respondent within the 60- to 90-day credit term and were duly accepted and received by Petitioner's cashier. The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for the payment of premiums. Section 77 of the Insurance Code of 1978 provides: SECTION 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December 1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540, approved on 21 June 1963, which read: SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the peril insured against, unless there is clear agreement to grant the insured

credit extension of the premium due. No policy issued by an insurance company is valid and binding unless and until the premium thereof has been paid. (Italic supplied) It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement to extend the period to pay the premium. But are there exceptions to Section 77? The answer is in the affirmative. The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life policy whenever the grace period provision applies. The second is that covered by Section 78 of the Insurance Code, which provides: SECTION 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until premium is actually paid. A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of Appeals, 5 wherein we ruled that Section 77 may not apply if the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of loss. We said therein, thus: We hold that the subject policies are valid even if the premiums were paid on installments. The records clearly show that the petitioners and private respondent intended subject insurance policies to be binding and effective notwithstanding the staggered payment of the premiums. The initial insurance contract entered

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into in 1982 was renewed in 1983, then in 1984. In those three years, the insurer accepted all the installment payments. Such acceptance of payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to continue collecting and accepting the premiums, although paid on installments, and later deny liability on the lame excuse that the premiums were not prepaid in full. Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its Resolution denying the motion for reconsideration of its decision: While the import of Section 77 is that prepayment of premiums is strictly required as a condition to the validity of the contract, We are not prepared to rule that the request to make installment payments duly approved by the insurer would prevent the entire contract of insurance from going into effect despite payment and acceptance of the initial premium or first installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the condition of prepayment by making an acknowledgment in the insurance policy of receipt of premium as conclusive evidence of payment so far as to make the policy binding despite the fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is valid even if premiums are not paid, but does not expressly prohibit an agreement granting credit extension, and such an agreement is not contrary to

morals, good customs, public order or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to allow insured to pay premiums in installments not so prescribed. At the very least, both parties should be deemed in estoppel to question the arrangement they have voluntarily accepted. By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the premium. This simply means that if the insurer has granted the insured a credit term for the payment of the premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even though the premium is paid after the loss but within the credit term. Moreover, there is nothing in Section 77 which prohibits the parties in an insurance contract to provide a credit term within which to pay the premiums. That agreement is not against the law, morals, good customs, public order or public policy. The agreement binds the parties. Article 1306 of the Civil Code provides: ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from taking refuge under said Section,

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since Respondent relied in good faith on such practice. Estoppel then is the fifth exception to Section 77. WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new one is hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a reversible error was committed by the Court of Appeals in its challenged decision, which is hereby AFFIRMED in toto. No pronouncement as to cost. SO ORDERED. G.R. No. L-31845 April 30, 1979 GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner, vs. HONORABLE COURT OF APPEALS, respondents. G.R. No. L-31878 April 30, 1979 LAPULAPU D. MONDRAGON, petitioner, vs. HON. COURT OF APPEALS and NGO HING, respondents. Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner Company. Voltaire Garcia for petitioner Mondragon. Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both cases seek similar relief, through these petitions for certiorari by way of appeal, from the amended decision of respondent Court of Appeals which affirmed in toto the decision of the Court of First Instance of Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and severally to pay plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the sum of P1,077.75, without interest. It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life of his one-year old daughter Helen Go. Said respondent supplied the essential data which petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon finally type-wrote the data on the application form which was signed by private respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as his commission for being a duly authorized agebt of Pacific Life. Upon the payment of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to private respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the application form his strong recommendation for the approval of the insurance application. Then on April 30, 1957, Mondragon received a letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The letter stated that the said life insurance application for 20-year endowment plan is not available

DE CASTRO, J.: The two above-entitled cases were ordered consolidated by the Resolution of this Court

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for minors below seven years old, but Pacific Life can consider the same under the Juvenile Triple Action Plan, and advised that if the offer is acceptable, the Juvenile Non-Medical Declaration be sent to the company. The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the approval of the 20-year endowment insurance plan to children, pointing out that since 1954 the customers, especially the Chinese, were asking for such coverage (Exhibit 4-M). It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of bronchopneumonia. Thereupon, private respondent sought the payment of the proceeds of the insurance, but having failed in his effort, he filed the action for the recovery of the same before the Court of First Instance of Cebu, which rendered the adverse decision as earlier refered to against both petitioners. The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a temporary contract of the life insurance in question; and (2) whether private respondent Ngo Hing concealed the state of health and physical condition of Helen Go, which rendered void the aforesaid Exhibit E. 1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT. These conditions state that: A. If the Company or its agent, shan have received the premium deposit ... and the insurance application, ON or

PRIOR to the date of medical examination ... said insurance shan be in force and in effect from the date of such medical examination, for such period as is covered by the deposit ..., PROVIDED the company shall be satisfied that on said date the applicant was insurable on standard rates under its rule for the amount of insurance and the kind of policy requested in the application. D. If the Company does not accept the application on standard rate for the amount of insurance and/or the kind of policy requested in the application but issue, or offers to issue a policy for a different plan and/or amount ..., the insurance shall not be in force and in effect until the applicant shall have accepted the policy as issued or offered by the Company and shall have paid the full premium thereof. If the applicant does not accept the policy, the deposit shall be refunded. E. If the applicant shall not have been insurable under Condition A above, and the Company declines to approve the application the insurance applied for shall not have been in force at any time and the sum paid be returned to the applicant upon the surrender of this receipt. (Emphasis Ours). The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be merely a provisional or temporary insurance

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contract and only upon compliance of the following conditions: (1) that the company shall be satisfied that the applicant was insurable on standard rates; (2) that if the company does not accept the application and offers to issue a policy for a different plan, the insurance contract shall not be binding until the applicant accepts the policy offered; otherwise, the deposit shall be reftmded; and (3) that if the applicant is not ble according to the standard rates, and the company disapproves the application, the insurance applied for shall not be in force at any time, and the premium paid shall be returned to the applicant. Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an acknowledgment, on behalf of the company, that the latter's branch office had received from the applicant the insurance premium and had accepted the application subject for processing by the insurance company; and that the latter will either approve or reject the same on the basis of whether or not the applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved the insurance application of respondent Ngo Hing, the binding deposit receipt in question had never become in force at any time. Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure outright. As held by this Court, where an agreement is made between the applicant and the agent, no liability shall attach until the principal approves the risk and a receipt is given by the agent. The acceptance is merely conditional and is subordinated to the act of the company in approving or rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life

Assurance Company of Canada, 41 Phil. 264). It bears repeating that through the intracompany communication of April 30, 1957 (Exhibit 3-M), Pacific Life disapproved the insurance application in question on the ground that it is not offering the twentyyear endowment insurance policy to children less than seven years of age. What it offered instead is another plan known as the Juvenile Triple Action, which private respondent failed to accept. In the absence of a meeting of the minds between petitioner Pacific Life and private respondent Ngo Hing over the 20-year endowment life insurance in the amount of P50,000.00 in favor of the latter's one-year old daughter, and with the non-compliance of the abovequoted conditions stated in the disputed binding deposit receipt, there could have been no insurance contract duly perfected between thenl Accordingly, the deposit paid by private respondent shall have to be refunded by Pacific Life. As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other contracts, must be assented to by both parties either in person or by their agents ... The contract, to be binding from the date of the application, must have been a completed contract, one that leaves nothing to be dione, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless the minds of the parties have met in agreement." We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate to him the rejection of the insurance application would not have any adverse effect on the allegedly perfected temporary contract (Respondent's Brief, pp. 13-14). In this first place, there was no contract

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perfected between the parties who had no meeting of their minds. Private respondet, being an authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware that said company does not offer the life insurance applied for. When he filed the insurance application in dispute, private respondent was, therefore, only taking the chance that Pacific Life will approve the recommendation of Mondragon for the acceptance and approval of the application in question along with his proposal that the insurance company starts to offer the 20-year endowment insurance plan for children less than seven years. Nonetheless, the record discloses that Pacific Life had rejected the proposal and recommendation. Secondly, having an insurable interest on the life of his one-year old daughter, aside from being an insurance agent and an offense associate of petitioner Mondragon, private respondent Ngo Hing must have known and followed the progress on the processing of such application and could not pretend ignorance of the Company's rejection of the 20-year endowment life insurance application. At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from his dissenting opinion to the amended decision of the respondent court which completely reversed the original decision, the following: Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the desire for applicant's father to have the application considered as one for a 20-year endowment plan was ever duly communicated

to Ngo; Hing, father of the minor applicant. I am not quite conninced that this was so. Ngo Hing, as father of the applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-1). The unchallenged statement of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo Hing was "our associate" and that it was the latter who "insisted that the plan be placed on the 20-year endowment plan." Under these circumstances, it is inconceivable that the progress in the processing of the application was not brought home to his knowledge. He must have been duly apprised of the rejection of the application for a 20-year endowment plan otherwise Mondragon would not have asserted that it was Ngo Hing himself who insisted on the application as originally filed, thereby implictly declining the offer to consider the application under the Juvenile Triple Action Plan. Besides, the associate of Mondragon that he was, Ngo Hing should only be presumed to know what kind of policies are available in the company for minors below 7 years old. What he and Mondragon were apparently trying to do in the premises was merely to prod the company into going into the business of issuing endowment policies for minors just as other insurance companies allegedly do. Until such a definite policy is however,

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adopted by the company, it can hardly be said that it could have been bound at all under the binding slip for a plan of insurance that it could not have, by then issued at all. (Amended Decision, Rollo, pp52-53). 2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private respondent had deliberately concealed the state of health and piysical condition of his daughter Helen Go. Wher private regpondeit supplied the required essential data for the insurance application form, he was fully aware that his one-year old daughter is typically a mongoloid child. Such a congenital physical defect could never be ensconced nor disguished. Nonetheless, private respondent, in apparent bad faith, withheld the fact materal to the risk to be assumed by the insurance compary. As an insurance agent of Pacific Life, he ought to know, as he surely must have known. his duty and responsibility to such a material fact. Had he diamond said significant fact in the insurance application fom Pacific Life would have verified the same and would have had no choice but to disapprove the application outright. The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and perfect candor or openness and honesty; the absence of any concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether intentional or unintentional the concealment entitles the insurer to rescind the contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court

of Appeals, et al, 105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA 316). Private respondent appears guilty thereof. We are thus constrained to hold that no insurance contract was perfected between the parties with the noncompliance of the conditions provided in the binding receipt, and concealment, as legally defined, having been comraitted by herein private respondent. WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil liabilities as found by respondent Court and ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without interest, to private respondent, Ngo Hing. Costs against private respondent. SO ORDERED. G.R. No. 150751 2004 September 20,

CENTRAL SHIPPING COMPANY, INC., petitioner, vs. INSURANCE COMPANY OF NORTH AMERICA, respondent. DECISION PANGANIBAN, J.: A common carrier is presumed to be at fault or negligent. It shall be liable for the loss, destruction or deterioration of its cargo, unless it can prove that the sole and proximate cause of such event is one of the causes enumerated in Article 1734 of the Civil Code, or that it exercised extraordinary diligence to prevent or minimize the loss. In the present case, the

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weather condition encountered by petitioners vessel was not a "storm" or a natural disaster comprehended in the law. Given the known weather condition prevailing during the voyage, the manner of stowage employed by the carrier was insufficient to secure the cargo from the rolling action of the sea. The carrier took a calculated risk in improperly securing the cargo. Having lost that risk, it cannot now disclaim any liability for the loss. The Case Before the Court is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse and set aside the March 23, 2001 Decision2 of the Court of Appeals (CA) in CA-GR CV No. 48915. The assailed Decision disposed as follows: "WHEREFORE, the decision of the Regional Trial Court of Makati City, Branch 148 dated August 4, 1994 is hereby MODIFIED in so far as the award of attorneys fees is DELETED. The decision is AFFIRMED in all other respects."3 The CA denied petitioners Motion for Reconsideration in its November 7, 2001 Resolution.4 The Facts The factual antecedents, summarized by the trial court and adopted by the appellate court, are as follows: "On July 25, 1990 at Puerto Princesa, Palawan, the [petitioner] received on board its vessel, the M/V Central Bohol, 376 pieces [of] Philippine Apitong Round Logs and undertook to transport said shipment to Manila for delivery to Alaska Lumber Co., Inc.

"The cargo was insured for P3,000,000.00 against total loss under [respondents] Marine Cargo Policy No. MCPB-00170. "On July 25, 1990, upon completion of loading of the cargo, the vessel left Palawan and commenced the voyage to Manila. "At about 0125 hours on July 26, 1990, while enroute to Manila, the vessel listed about 10 degrees starboardside, due to the shifting of logs in the hold. "At about 0128 hours, after the listing of the vessel had increased to 15 degrees, the ship captain ordered his men to abandon ship and at about 0130 hours of the same day the vessel completely sank. Due to the sinking of the vessel, the cargo was totally lost. "[Respondent] alleged that the total loss of the shipment was caused by the fault and negligence of the [petitioner] and its captain and as direct consequence thereof the consignee suffered damage in the sum of P3,000,000.00. "The consignee, Alaska Lumber Co. Inc., presented a claim for the value of the shipment to the [petitioner] but the latter failed and refused to settle the claim, hence [respondent], being the insurer, paid said claim and now seeks to be subrogated to all the rights and actions of the consignee as against the [petitioner]. "[Petitioner], while admitting the sinking of the vessel, interposed the defense that the vessel was fully manned, fully equipped and in all respects seaworthy; that all the logs were properly loaded and secured;

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that the vessels master exercised due diligence to prevent or minimize the loss before, during and after the occurrence of the storm. "It raised as its main defense that the proximate and only cause of the sinking of its vessel and the loss of its cargo was a natural disaster, a tropical storm which neither [petitioner] nor the captain of its vessel could have foreseen."5 The RTC was unconvinced that the sinking of M/V Central Bohol had been caused by the weather or any other caso fortuito. It noted that monsoons, which were common occurrences during the months of July to December, could have been foreseen and provided for by an ocean-going vessel. Applying the rule of presumptive fault or negligence against the carrier, the trial court held petitioner liable for the loss of the cargo. Thus, the RTC deducted the salvage value of the logs in the amount of P200,000 from the principal claim of respondent and found that the latter was entitled to be subrogated to the rights of the insured. The court a quo disposed as follows: "WHEREFORE, premises considered, judgment is hereby rendered in favor of the [respondent] and against the [petitioner] ordering the latter to pay the following: 1) the amount of P2,800,000.00 with legal interest thereof from the filing of this complaint up to and until the same is fully paid; 2) P80,000.00 as and for attorneys fees; 3) Plus costs of suit."6 Ruling of the Court of Appeals

The CA affirmed the trial courts finding that the southwestern monsoon encountered by the vessel was not unforeseeable. Given the season of rains and monsoons, the ship captain and his crew should have anticipated the perils of the sea. The appellate court further held that the weather disturbance was not the sole and proximate cause of the sinking of the vessel, which was also due to the concurrent shifting of the logs in the hold that could have resulted only from improper stowage. Thus, the carrier was held responsible for the consequent loss of or damage to the cargo, because its own negligence had contributed thereto. The CA found no merit in petitioners assertion of the vessels seaworthiness. It held that the Certificates of Inspection and Drydocking were not conclusive proofs thereof. In order to consider a vessel to be seaworthy, it must be fit to meet the perils of the sea. Found untenable was petitioners insistence that the trial court should have given greater weight to the factual findings of the Board of Marine Inquiry (BMI) in the investigation of the Marine Protest filed by the ship captain, Enriquito Cahatol. The CA further observed that what petitioner had presented to the court a quo were mere excerpts of the testimony of Captain Cahatol given during the course of the proceedings before the BMI, not the actual findings and conclusions of the agency. Citing Arada v. CA,7 it said that findings of the BMI were limited to the administrative liability of the owner/operator, officers and crew of the vessel. However, the determination of whether the carrier observed extraordinary diligence in protecting the cargo it was transporting was a function of the courts, not of the BMI.

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The CA concluded that the doctrine of limited liability was not applicable, in view of petitioners negligence -- particularly its improper stowage of the logs. Hence, this Petition.8 Issues In its Memorandum, petitioner submits the following issues for our consideration: "(i) Whether or not the weather disturbance which caused the sinking of the vessel M/V Central Bohol was a fortuitous event. "(ii) Whether or not the investigation report prepared by Claimsmen Adjustment Corporation is hearsay evidence under Section 36, Rule 130 of the Rules of Court. "(iii) Whether or not the finding of the Court of Appeals that the logs in the hold shifted and such shifting could only be due to improper stowage has a valid and factual basis. "(iv) Whether or not M/V Central Bohol is seaworthy. "(v) Whether or not the Court of Appeals erred in not giving credence to the factual finding of the Board of Marine Inquiry (BMI), an independent government agency tasked to conduct inquiries on maritime accidents. "(vi) Whether or not the Doctrine of Limited Liability is applicable to the case at bar."9 The issues boil down to two: (1) whether the carrier is liable for the loss of the cargo; and (2) whether the doctrine of limited liability is applicable. These issues

involve a determination of factual questions of whether the loss of the cargo was due to the occurrence of a natural disaster; and if so, whether its sole and proximate cause was such natural disaster or whether petitioner was partly to blame for failing to exercise due diligence in the prevention of that loss. The Courts Ruling The Petition is devoid of merit. First Issue: Liability for Lost Cargo From the nature of their business and for reasons of public policy, common carriers are bound to observe extraordinary diligence over the goods they transport, according to all the circumstances of each case.10 In the event of loss, destruction or deterioration of the insured goods, common carriers are responsible; that is, unless they can prove that such loss, destruction or deterioration was brought about -- among others -- by "flood, storm, earthquake, lightning or other natural disaster or calamity."11 In all other cases not specified under Article 1734 of the Civil Code, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence.12 In the present case, petitioner disclaims responsibility for the loss of the cargo by claiming the occurrence of a "storm" under Article 1734(1). It attributes the sinking of its vessel solely to the weather condition between 10:00 p.m. on July 25, 1990 and 1:25 a.m. on July 26, 1990. At the outset, it must be stressed that only questions of law13 may be raised in a petition for review on certiorari under Rule 45 of the Rules of Court. Questions of fact are not proper subjects in this mode of

appeal, for "[t]he Supreme Court is not a trier of facts."15 Factual findings of the CA may be reviewed on appeal16 only under exceptional circumstances such as, among others, when the inference is manifestly mistaken,17 the judgment is based on a misapprehension of facts,18 or the CA manifestly overlooked certain relevant and undisputed facts that, if properly considered, would justify a different conclusion.19 In the present case, petitioner has not given the Court sufficient cogent reasons to disturb the conclusion of the CA that the weather encountered by the vessel was not a "storm" as contemplated by Article 1734(1). Established is the fact that between 10:00 p.m. on July 25, 1990 and 1:25 a.m. on July 26, 1990, M/V Central Bohol encountered a southwestern monsoon in the course of its voyage. The Note of Marine Protest,20 which the captain of the vessel issued under oath, stated that he and his crew encountered a southwestern monsoon about 2200 hours on July 25, 1990, and another monsoon about 2400 hours on July 26, 1990. Even petitioner admitted in its Answer that the sinking of M/V Central Bohol had been caused by the strong southwest monsoon.21 Having made such factual representation, it cannot now be allowed to retreat and claim that the southwestern monsoon was a "storm." The pieces of evidence with respect to the weather conditions encountered by the vessel showed that there was a southwestern monsoon at the time. Normally expected on sea voyages, however, were such monsoons, during which strong winds were not unusual. Rosa S. Barba, weather specialist of the Philippine Atmospheric Geophysical and Astronomical Services Administration (PAGASA), testified that a thunderstorm

14

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might occur in the midst of a southwest monsoon. According to her, one did occur between 8:00 p.m. on July 25, 1990, and 2 a.m. on July 26, 1990, as recorded by the PAGASA Weather Bureau.22 Nonetheless, to our mind it would not be sufficient to categorize the weather condition at the time as a "storm" within the absolutory causes enumerated in the law. Significantly, no typhoon was observed within the Philippine area of responsibility during that period.23 According to PAGASA, a storm has a wind force of 48 to 55 knots,24 equivalent to 55 to 63 miles per hour or 10 to 11 in the Beaufort Scale. The second mate of the vessel stated that the wind was blowing around force 7 to 8 on the Beaufort Scale.25 Consequently, the strong winds accompanying the southwestern monsoon could not be classified as a "storm." Such winds are the ordinary vicissitudes of a sea voyage.26 Even if the weather encountered by the ship is to be deemed a natural disaster under Article 1739 of the Civil Code, petitioner failed to show that such natural disaster or calamity was the proximate and only cause of the loss. Human agency must be entirely excluded from the cause of injury or loss. In other words, the damaging effects blamed on the event or phenomenon must not have been caused, contributed to, or worsened by the presence of human participation.27 The defense of fortuitous event or natural disaster cannot be successfully made when the injury could have been avoided by human precaution.28 Hence, if a common carrier fails to exercise due diligence -- or that ordinary care that the circumstances of the particular case demand -- to prevent or minimize the loss before, during and after the occurrence of the natural disaster, the carrier shall be

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deemed to have been negligent. The loss or injury is not, in a legal sense, due to a natural disaster under Article 1734(1).29 We also find no reason to disturb the CAs finding that the loss of the vessel was caused not only by the southwestern monsoon, but also by the shifting of the logs in the hold. Such shifting could been due only to improper stowage. The assailed Decision stated: "Notably, in Master Cahatols account, the vessel encountered the first southwestern monsoon at about 1[0]:00 in the evening. The monsoon was coupled with heavy rains and rough seas yet the vessel withstood the onslaught. The second monsoon attack occurred at about 12:00 midnight. During this occasion, the master felt that the logs in the hold shifted, prompting him to order second mate Percival Dayanan to look at the bodega. Complying with the captains order, 2nd mate Percival Dayanan found that there was seawater in the bodega. 2nd mate Dayanans account was: 14.T Kung inyo pong natatandaan ang mga pangyayari, maari mo bang isalaysay ang naganap na paglubog sa barkong M/V Central Bohol? S Opo, noong ika-26 ng Julio 1990 humigit kumulang alas 1:20 ng umaga (dst) habang kami ay nagnanabegar patungong Maynila sa tapat ng Cadlao Island at Cauayan Island sakop ng El Nido, Palawan, inutusan ako ni Captain Enriquito Cahatol na tingnan ko ang bodega; nang ako ay nasa bodega, nakita ko ang loob nang bodega na

maraming tubig at naririnig ko ang malakas na agos ng tubigdagat na pumapasok sa loob ng bodega ng barko; agad bumalik ako kay Captain Enriquito Cahatol at sinabi ko ang malakas na pagpasok ng tubig-dagat sa loob nang bodega ng barko na ito ay naka-tagilid humigit kumulang sa 020 degrees, nag-order si Captain Cahatol na standby engine at tinawag ang lahat ng mga officials at mga crew nang maipon kaming lahat ang barko ay naka-tagilid at ito ay tuloy-tuloy ang pagtatagilid na ang ilan sa mga officials ay naka-hawak na sa barandilla ng barko at di-nagtagal sumigaw nang ABANDO[N] SHIP si Captain Cahatol at kami ay nagkanya-kanya nang talunan at languyan sa dagat na malakas ang alon at nang ako ay lumingon sa barko ito ay di ko na nakita. "Additionally, [petitioners] own witnesses, boatswain Eduardo Vias Castro and oiler Frederick Perena, are one in saying that the vessel encountered two weather disturbances, one at around 10 oclock to 11 oclock in the evening and the other at around 12 oclock midnight. Both disturbances were coupled with waves and heavy rains, yet, the vessel endured the first and not the second. Why? The reason is plain. The vessel felt the strain during the second onslaught because the logs in the bodega shifted and there were already seawater that seeped inside."30 The above conclusion is supported by the fact that the vessel proceeded through the

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first southwestern monsoon without any mishap, and that it began to list only during the second monsoon immediately after the logs had shifted and seawater had entered the hold. In the hold, the sloshing of tons of water back and forth had created pressures that eventually caused the ship to sink. Had the logs not shifted, the ship could have survived and reached at least the port of El Nido. In fact, there was another motor launch that had been buffeted by the same weather condition within the same area, yet it was able to arrive safely at El Nido.31 In its Answer, petitioner categorically admitted the allegation of respondent in paragraph 5 of the latters Complaint "[t]hat at about 0125 hours on 26 July 1990, while enroute to Manila, the M/V Central Bohol listed about 10 degrees starboardside, due to the shifting of logs in the hold." Further, petitioner averred that "[t]he vessel, while navigating through this second southwestern monsoon, was under extreme stress. At about 0125 hours, 26 July 1990, a thud was heard in the cargo hold and the logs therein were felt to have shifted. The vessel thereafter immediately listed by ten (10) degrees starboardside."32 Yet, petitioner now claims that the CAs conclusion was grounded on mere speculations and conjectures. It alleges that it was impossible for the logs to have shifted, because they had fitted exactly in the hold from the port to the starboard side. After carefully studying the records, we are inclined to believe that the logs did indeed shift, and that they had been improperly loaded. According to the boatswains testimony, the logs were piled properly, and the entire shipment was lashed to the vessel by cable wire.33 The ship captain testified that out of the 376 pieces of round logs, around 360

had been loaded in the lower hold of the vessel and 16 on deck. The logs stored in the lower hold were not secured by cable wire, because they fitted exactly from floor to ceiling. However, while they were placed side by side, there were unavoidable clearances between them owing to their round shape. Those loaded on deck were lashed together several times across by cable wire, which had a diameter of 60 millimeters, and were secured from starboard to port.34 It is obvious, as a matter of common sense, that the manner of stowage in the lower hold was not sufficient to secure the logs in the event the ship should roll in heavy weather. Notably, they were of different lengths ranging from 3.7 to 12.7 meters.35 Being clearly prone to shifting, the round logs should not have been stowed with nothing to hold them securely in place. Each pile of logs should have been lashed together by cable wire, and the wire fastened to the side of the hold. Considering the strong force of the wind and the roll of the waves, the loose arrangement of the logs did not rule out the possibility of their shifting. By force of gravity, those on top of the pile would naturally roll towards the bottom of the ship. The adjusters Report, which was heavily relied upon by petitioner to strengthen its claim that the logs had not shifted, stated that "the logs were still properly lashed by steel chains on deck." Parenthetically, this statement referred only to those loaded on deck and did not mention anything about the condition of those placed in the lower hold. Thus, the finding of the surveyor that the logs were still intact clearly pertained only to those lashed on deck. The evidence indicated that strong southwest monsoons were common occurrences during the month of July.

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Thus, the officers and crew of M/V Central Bohol should have reasonably anticipated heavy rains, strong winds and rough seas. They should then have taken extra precaution in stowing the logs in the hold, in consonance with their duty of observing extraordinary diligence in safeguarding the goods. But the carrier took a calculated risk in improperly securing the cargo. Having lost that risk, it cannot now escape responsibility for the loss. Second Issue: Doctrine of Limited Liability The doctrine of limited liability under Article 587 of the Code of Commerce36 is not applicable to the present case. This rule does not apply to situations in which the loss or the injury is due to the concurrent negligence of the shipowner and the captain.37 It has already been established that the sinking of M/V Central Bohol had been caused by the fault or negligence of the ship captain and the crew, as shown by the improper stowage of the cargo of logs. "Closer supervision on the part of the shipowner could have prevented this fatal miscalculation."38 As such, the shipowner was equally negligent. It cannot escape liability by virtue of the limited liability rule. WHEREFORE, the Petition is DENIED, and the assailed Decision and Resolution AFFIRMED. Costs against petitioner. SO ORDERED. G.R. No. 181132 June 5, 2009

BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE CORPORATION, Respondents. DECISION NACHURA, J.: This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to reverse and set aside the Resolution2 dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No. 85948, dismissing petitioners appeal for lack of jurisdiction. The case stems from a petition3 filed against respondents with the Regional Trial Court, Branch 29, for revocation and/or reduction of insurance proceeds for being void and/or inofficious, with prayer for a temporary restraining order (TRO) and a writ of preliminary injunction. The petition alleged that: (1) petitioners were the legitimate wife and children of Loreto Maramag (Loreto), while respondents were Loretos illegitimate family; (2) Eva de Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the killing of the latter, thus, she is disqualified to receive any proceeds from his insurance policies from Insular Life Assurance Company, Ltd. (Insular)4 and Great Pacific Life Assurance Corporation (Grepalife);5 (3) the illegitimate children of LoretoOdessa, Karl Brian, and Trisha Angeliewere entitled only to one-half of the legitime of the legitimate children, thus, the proceeds released to Odessa and those to be released to Karl Brian and Trisha Angelie were inofficious and should be reduced; and (4) petitioners could not be deprived of their legitimes, which should be satisfied first. In support of the prayer for TRO and writ of preliminary injunction, petitioners

HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN MARAMAG, Petitioners, vs. EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL

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alleged, among others, that part of the insurance proceeds had already been released in favor of Odessa, while the rest of the proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon the appointment of their legal guardian. Petitioners also prayed for the total amount of P320,000.00 as actual litigation expenses and attorneys fees. In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife and Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they filed their claims for the insurance proceeds of the insurance policies; that when it ascertained that Eva was not the legal wife of Loreto, it disqualified her as a beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie, as the remaining designated beneficiaries; and that it released Odessas share as she was of age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie pending submission of letters of guardianship. Insular alleged that the complaint or petition failed to state a cause of action insofar as it sought to declare as void the designation of Eva as beneficiary, because Loreto revoked her designation as such in Policy No. A001544070 and it disqualified her in Policy No. A001693029; and insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie, considering that no settlement of Loretos estate had been filed nor had the respective shares of the heirs been determined. Insular further claimed that it was bound to honor the insurance policies designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance Code. In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was not designated as an insurance policy beneficiary; that the claims filed by

Odessa, Karl Brian, and Trisha Angelie were denied because Loreto was ineligible for insurance due to a misrepresentation in his application form that he was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in September 2001; that the case was premature, there being no claim filed by the legitimate family of Loreto; and that the law on succession does not apply where the designation of insurance beneficiaries is clear. As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known to petitioners, summons by publication was resorted to. Still, the illegitimate family of Loreto failed to file their answer. Hence, the trial court, upon motion of petitioners, declared them in default in its Order dated May 7, 2004. During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the issues raised in their respective answers be resolved first. The trial court ordered petitioners to comment within 15 days. In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal whether the complaint itself was proper or not and that the designation of a beneficiary is an act of liberality or a donation and, therefore, subject to the provisions of Articles 7528 and 7729 of the Civil Code. In reply, both Insular and Grepalife countered that the insurance proceeds belong exclusively to the designated beneficiaries in the policies, not to the estate or to the heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a beneficiary when it ascertained that Loreto was legally married to Vicenta Pangilinan Maramag.

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On September 21, 2004, the trial court issued a Resolution, the dispositive portion of which reads WHEREFORE, the motion to dismiss incorporated in the answer of defendants Insular Life and Grepalife is granted with respect to defendants Odessa, Karl Brian and Trisha Maramag. The action shall proceed with respect to the other defendants Eva Verna de Guzman, Insular Life and Grepalife. SO ORDERED.10 In so ruling, the trial court ratiocinated thus Art. 2011 of the Civil Code provides that the contract of insurance is governed by the (sic) special laws. Matters not expressly provided for in such special laws shall be regulated by this Code. The principal law on insurance is the Insurance Code, as amended. Only in case of deficiency in the Insurance Code that the Civil Code may be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.) The Insurance Code, as amended, contains a provision regarding to whom the insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made, unless otherwise specified in the policy. Since the defendants are the ones named as the primary beneficiary (sic) in the insurances (sic) taken by the deceased Loreto C. Maramag and there is no showing that herein plaintiffs were also included as beneficiary (sic) therein the insurance proceeds shall exclusively be paid to them. This is because the beneficiary has a vested right to the indemnity, unless the insured reserves the right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil. [sic] 63).

Neither could the plaintiffs invoked (sic) the law on donations or the rules on testamentary succession in order to defeat the right of herein defendants to collect the insurance indemnity. The beneficiary in a contract of insurance is not the donee spoken in the law of donation. The rules on testamentary succession cannot apply here, for the insurance indemnity does not partake of a donation. As such, the insurance indemnity cannot be considered as an advance of the inheritance which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern Luzon Employees Association v. Juanita Golpeo, et al., the Honorable Supreme Court made the following pronouncements[:] "With the finding of the trial court that the proceeds to the Life Insurance Policy belongs exclusively to the defendant as his individual and separate property, we agree that the proceeds of an insurance policy belong exclusively to the beneficiary and not to the estate of the person whose life was insured, and that such proceeds are the separate and individual property of the beneficiary and not of the heirs of the person whose life was insured, is the doctrine in America. We believe that the same doctrine obtains in these Islands by virtue of Section 428 of the Code of Commerce x x x." In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for the reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag. However, herein plaintiffs are not totally bereft of any cause of action. One of the named beneficiary (sic) in the insurances

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(sic) taken by the late Loreto C. Maramag is his concubine Eva Verna De Guzman. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy of the person who cannot make any donation to him, according to said article (Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the insurance contract will still remain valid, but the indemnity must go to the legal heirs and not to the concubine, for evidently, what is prohibited under Art. 2012 is the naming of the improper beneficiary. In such case, the action for the declaration of nullity may be brought by the spouse of the donor or donee, and the guilt of the donor and donee may be proved by preponderance of evidence in the same action (Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna de Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil Code, the insurance indemnity that should be paid to her must go to the legal heirs of the deceased which this court may properly take cognizance as the action for the declaration for the nullity of a void donation falls within the general jurisdiction of this Court.11 Insular12 and Grepalife13 filed their respective motions for reconsideration, arguing, in the main, that the petition failed to state a cause of action. Insular further averred that the proceeds were divided among the three children as the remaining named beneficiaries. Grepalife, for its part, also alleged that the premiums paid had already been refunded. Petitioners, in their comment, reiterated their earlier arguments and posited that whether the complaint may be dismissed for failure to state a cause of action must

be determined solely on the basis of the allegations in the complaint, such that the defenses of Insular and Grepalife would be better threshed out during trial.1avvphi1 On June 16, 2005, the trial court issued a Resolution, disposing, as follows: WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration filed by defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the portion of the Resolution of this Court dated 21 September 2004 which ordered the prosecution of the case against defendant Eva Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case against them is hereby ordered DISMISSED. SO ORDERED.14 In granting the motions for reconsideration of Insular and Grepalife, the trial court considered the allegations of Insular that Loreto revoked the designation of Eva in one policy and that Insular disqualified her as a beneficiary in the other policy such that the entire proceeds would be paid to the illegitimate children of Loreto with Eva pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases where there are no beneficiaries designated, or when the only designated beneficiary is disqualified, that the proceeds should be paid to the estate of the insured. As to the claim that the proceeds to be paid to Loretos illegitimate children should be reduced based on the rules on legitime, the trial court held that the distribution of the insurance proceeds is governed primarily by the Insurance Code, and the provisions of the Civil Code are irrelevant and inapplicable. With respect to the Grepalife policy, the trial court noted that Eva was never designated as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as

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to the illegitimate children. It further held that the matter of Loretos misrepresentation was premature; the appropriate action may be filed only upon denial of the claim of the named beneficiaries for the insurance proceeds by Grepalife. Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a cause of action involved a pure question of law. The appellate court also noted that petitioners did not file within the reglementary period a motion for reconsideration of the trial courts Resolution, dated September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the said Resolution had already attained finality. Hence, this petition raising the following issues: a. In determining the merits of a motion to dismiss for failure to state a cause of action, may the Court consider matters which were not alleged in the Complaint, particularly the defenses put up by the defendants in their Answer? b. In granting a motion for reconsideration of a motion to dismiss for failure to state a cause of action, did not the Regional Trial Court engage in the examination and determination of what were the facts and their probative value, or the truth thereof, when it premised the dismissal on allegations of the defendants in their answer which had not been proven? c. x x x (A)re the members of the legitimate family entitled to the

proceeds of the insurance for the concubine?15 In essence, petitioners posit that their petition before the trial court should not have been dismissed for failure to state a cause of action because the finding that Eva was either disqualified as a beneficiary by the insurance companies or that her designation was revoked by Loreto, hypothetically admitted as true, was raised only in the answers and motions for reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to prosper on that ground, only the allegations in the complaint should be considered. They further contend that, even assuming Insular disqualified Eva as a beneficiary, her share should not have been distributed to her children with Loreto but, instead, awarded to them, being the legitimate heirs of the insured deceased, in accordance with law and jurisprudence. The petition should be denied. The grant of the motion to dismiss was based on the trial courts finding that the petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads SECTION 1. Grounds. Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may be made on any of the following grounds: xxxx (g) That the pleading asserting the claim states no cause of action. A cause of action is the act or omission by which a party violates a right of another.16 A complaint states a cause of action when it contains the three (3) elements of a cause of action(1) the legal right of the plaintiff; (2) the correlative obligation of

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the defendant; and (3) the act or omission of the defendant in violation of the legal right. If any of these elements is absent, the complaint becomes vulnerable to a motion to dismiss on the ground of failure to state a cause of action.17 When a motion to dismiss is premised on this ground, the ruling thereon should be based only on the facts alleged in the complaint. The court must resolve the issue on the strength of such allegations, assuming them to be true. The test of sufficiency of a cause of action rests on whether, hypothetically admitting the facts alleged in the complaint to be true, the court can render a valid judgment upon the same, in accordance with the prayer in the complaint. This is the general rule. However, this rule is subject to wellrecognized exceptions, such that there is no hypothetical admission of the veracity of the allegations if: 1. the falsity of the allegations is subject to judicial notice; 2. such allegations are legally impossible; 3. the allegations refer to facts which are inadmissible in evidence; 4. by the record or document in the pleading, the allegations appear unfounded; or 5. there is evidence which has been presented to the court by stipulation of the parties or in the course of the hearings related to the case.18 In this case, it is clear from the petition filed before the trial court that, although petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries in the insurance policies issued by Insular and Grepalife. The basis

of petitioners claim is that Eva, being a concubine of Loreto and a suspect in his murder, is disqualified from being designated as beneficiary of the insurance policies, and that Evas children with Loreto, being illegitimate children, are entitled to a lesser share of the proceeds of the policies. They also argued that pursuant to Section 12 of the Insurance Code,19 Evas share in the proceeds should be forfeited in their favor, the former having brought about the death of Loreto. Thus, they prayed that the share of Eva and portions of the shares of Loretos illegitimate children should be awarded to them, being the legitimate heirs of Loreto entitled to their respective legitimes. It is evident from the face of the complaint that petitioners are not entitled to a favorable judgment in light of Article 2011 of the Civil Code which expressly provides that insurance contracts shall be governed by special laws, i.e., the Insurance Code. Section 53 of the Insurance Code states SECTION 53. The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy. Pursuant thereto, it is obvious that the only persons entitled to claim the insurance proceeds are either the insured, if still alive; or the beneficiary, if the insured is already deceased, upon the maturation of the policy.20 The exception to this rule is a situation where the insurance contract was intended to benefit third persons who are not parties to the same in the form of favorable stipulations or indemnity. In such a case, third parties may directly sue and claim from the insurer.21 Petitioners are third parties to the insurance contracts with Insular and Grepalife and, thus, are not entitled to the proceeds thereof. Accordingly, respondents

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Insular and Grepalife have no legal obligation to turn over the insurance proceeds to petitioners. The revocation of Eva as a beneficiary in one policy and her disqualification as such in another are of no moment considering that the designation of the illegitimate children as beneficiaries in Loretos insurance policies remains valid. Because no legal proscription exists in naming as beneficiaries the children of illicit relationships by the insured,22 the shares of Eva in the insurance proceeds, whether forfeited by the court in view of the prohibition on donations under Article 739 of the Civil Code or by the insurers themselves for reasons based on the insurance contracts, must be awarded to the said illegitimate children, the designated beneficiaries, to the exclusion of petitioners. It is only in cases where the insured has not designated any beneficiary,23 or when the designated beneficiary is disqualified by law to receive the proceeds,24 that the insurance policy proceeds shall redound to the benefit of the estate of the insured. In this regard, the assailed June 16, 2005 Resolution of the trial court should be upheld. In the same light, the Decision of the CA dated January 8, 2008 should be sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the appeal; the issue of failure to state a cause of action is a question of law and not of fact, there being no findings of fact in the first place.25 WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners. SO ORDERED. G.R. No. 119655 May 24, 1996 SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA M. RORALDO, VIRGILIO M.

RORALDO, MYRNA M. RORALDO and ROSABELLA M. RORALDO, petitioners, vs. COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC., respondents.

BELLOSILLO, J.:p May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium? On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE) issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their twostorey residential building located at 5855 Zobel Street, Makati City, together with all their personal effects therein. The insurance was for P600,000.00 covering the period from 23 January 1987 to 23 January 1988. On 23 January 1987, of the total premium of P2,983.50, petitioner Violeta Tibay only paid P600.00 thus leaving a considerable balance unpaid. On 8 March 1987 the insured building was completely destroyed by fire. Two days later or on 10 March 1987 Violeta Tibay paid the balance of the premium. On the same day, she filed with FORTUNE a claim on the fire insurance policy. Her claim was accordingly referred to its adjuster, Goodwill Adjustment Services, Inc. (GASI), which immediately wrote Violeta requesting her to furnish it with the necessary documents for the investigation and processing of her claim. Petitioner forthwith complied. On 28 March 1987 she signed a non-waiver agreement with GASI to the effect that any action taken by the companies or their representatives in investigating the claim made by the claimant for his loss which occurred at 5855 Zobel Roxas, Makati on March 8,

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1987, or in the investigating or ascertainment of the amount of actual cash value and loss, shall not waive or invalidate any condition of the policies of such companies held by said claimant, nor the rights of either or any of the parties to this agreement, and such action shall not be, or be claimed to be, an admission of liability on the part of said companies or any of them. 1 In a letter dated 11 June 1987 FORTUNE denied the claim of Violeta for violation of Policy Condition No. 2 and of Sec. 77 of the Insurance Code. Efforts to settle the case before the Insurance Commission proved futile. On 3 March 1988 Violets and the other petitioners sued FORTUNE for damages in the amount of P600,000.00 representing the total coverage of the fire insurance policy plus 12% interest per annum, P100,000.00 moral damages, and attorney's fees equivalent to 20% of the total claim. On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value of the insured building and personal properties in the amount of P600,000.00 plus interest at the legal rate of 6% per annum from the filing of the complaint until full payment, and attorney's fees equivalent to 20% of the total amount claimed plus costs of suit. 2 On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be liable to plaintiffappellees therein but ordering defendantappellant to return to the former the premium of P2,983.50 plus 12% interest from 10 March 1987 until full payment. 3 Hence this petition for review with petitioners contending mainly that contrary to the conclusion of the appellate court, FORTUNE remains liable under the subject fire insurance policy in spite of the failure of petitioners to pay their premium in full.

We find no merit in the petition; hence, we affirm the Court of Appeals. Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. 4 The consideration is the premium, which must be paid at the time and in the way and manner specified in the policy, and if not so paid, the policy will lapse and be forfeited by its own terms. 5 The pertinent provisions in the Policy on premium read THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the Company in accordance with Policy Condition No. 2 of the total premiums by the insured as stipulated above for the period aforementioned for insuring against Loss or Damage by Fire or Lightning as herein appears, the Property herein described . .. 2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the premium has been fully paid to and duly receipted by the Company in the manner provided herein. Any supplementary agreement seeking to amend this condition prepared by agent, broker or Company official, shall be deemed invalid and of no effect. xxx xxx xxx Except only in those specific cases where corresponding rules and regulations which are

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or may hereafter be in force provide for the payment of the stipulated premiums in periodic installments at fixed percentage, it is hereby declared, agreed and warranted that this policy shall be deemed effective, valid and binding upon the Company only when the premiums therefor have actually been paid in full and duly acknowledged in a receipt signed by any authorized official or representative/agent of the Company in such manner as provided herein. (emphasis supplied). 6 Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only been partially paid and the balance paid only after the peril insured against has occurred, the insurance contract did not take effect and the insured cannot collect at all on the policy. This is fully supported by Sec. 77 of the Insurance Code which provides Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies (emphasis supplied). Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has been paid." This leads

us to the manner of payment envisioned by the law to make the insurance policy operative and binding. For whatever judicial construction may be accorded the disputed phrase must ultimately yield to the clear mandate of the law. The principle that where the law does not distinguish the court should neither distinguish assumes that the legislature made no qualification on the use of a general word or expression. In Escosura v. San Miguel Brewery, Inc., 7 the Court through Mr. Justice Jesus G. Barrera, interpreting the phrase "with pay" used in connection with leaves of absence with pay granted to employees, ruled . . . the legislative practice seems to be that when the intention is to distinguish between full and partial payment, the modifying term is used . . . Citing C.A. No. 647 governing maternity leaves of married women in government, R. A. No. 679 regulating employment of women and children, R.A. No. 843 granting vacation and sick leaves to judges of municipal courts and justices of the peace, and finally, Art. 1695 of the New Civil Code providing that every househelp shall be allowed four (4) days vacation each month, which laws simply stated "with pay," the Court concluded that it was undisputed that in all these laws the phrase "with pay" used without any qualifying adjective meant that the employee was entitled to full compensation during his leave of absence. Petitioners maintain otherwise. Insisting that FORTUNE is liable on the policy despite partial payment of the premium due and the express stipulation thereof to the contrary, petitioners rely heavily on the

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1967 case of Philippine Phoenix and Insurance Co., Inc. v. Woodworks, Inc. 8 where the Court through Mr. Justice Arsenio P. Dizon sustained the ruling of the trial court that partial payment of the premium made the policy effective during the whole period of the policy. In that case, the insurance company commenced action against the insured for the unpaid balance on a fire insurance policy. In its defense the insured claimed that nonpayment of premium produced the cancellation of the insurance contract. Ruling otherwise the Court held It is clear . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by appellee and delivered to appellant, and that on September 22 of the same year, the latter paid to the former the sum of P3,000.00 on account of the total premium of P6,051.95 due thereon. There is, consequently, no doubt at all that, as between the insurer and the insured, there was not only a perfected contract of insurance but a partially performed one as far as the payment of the agreed premium was concerned. Thereafter the obligation of the insurer to pay the insured the amount, for which the policy was issued in case the conditions therefor had been complied with, arose and became binding upon it, while the obligation of the insured to pay the remainder of the total amount of the premium due became demandable. The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the factual scenario is different. In

Phoenix it was the insurance company that sued for the balance of the premium, i.e., it recognized and admitted the existence of an insurance contract with the insured. In the case before us, there is, quite unlike in Phoenix, a specific stipulation that (t)his policy . . . is not in force until the premium has been fully paid and duly receipted by the Company . . . Resultantly, it is correct to say that in Phoenix a contract was perfected upon partial payment of the premium since the parties had not otherwise stipulated that prepayment of the premium in full was a condition precedent to the existence of a contract. In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the premium without any other precondition to its enforceability as in the instant case, the insurer in effect had shown its intention to continue with the existing contract of insurance, as in fact it was enforcing its right to collect premium, or exact specific performance from the insured. This is not so here. By express agreement of the parties, no vinculum juris or bond of law was to be established until full payment was effected prior to the occurrence of the risk insured against. In Makati Tuscany Condominium Corp. v. Court of Appeals 9 the parties mutually agreed that the premiums could be paid in installments, which in fact they did for three (3) years, hence, this Court refused to invalidate the insurance policy. In giving effect to the policy, the Court quoted with approval the Court of Appeals The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire premium. Here, the parties . . . agreed to make the premiums payable in installments, and

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there is no pretense that the parties never envisioned to make the insurance contract binding between them. It was renewed for two succeeding years, the second and third policies being a renewal/replacement for the previous one. And the insured never informed the insurer that it was terminating the policy because the terms were unacceptable. While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make the insurance contract valid and binding without payment of premiums, there is nothing in said section which suggests that the parties may not agree to allow payment of the premiums in installment, or to consider the contract as valid and binding upon payment of the first premium. Otherwise we would allow the insurer to renege on its liability under the contract, had a loss incurred (sic) before completion of payment of the entire premium, despite its voluntary acceptance of partial payments, a result eschewed by basic considerations of fairness and equity . . . These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or implied, of prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in Phoenix, and expressly, by agreeing to make premiums payable in installments as in Tuscany. But contrary to the stance taken by petitioners, there is no waiver express or implied in the

case at bench. Precisely, the insurer and the insured expressly stipulated that (t)his policy including any renewal thereof and/or any indorsement thereon is not in force until the premium has been fully paid to and duly receipted by the Company . . . and that this policy shall be deemed effective, valid and binding upon the Company only when the premiums therefor have actually been paid in full and duly acknowledged. Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77 of the Insurance Code the payment of partial premium by the assured in this particular instance should not be considered the payment required by the law and the stipulation of the parties. Rather, it must be taken in the concept of a deposit to be held in trust by the insurer until such time that the full amount has been tendered and duly receipted for. In other words, as expressly agreed upon in the contract, full payment must be made before the risk occurs for the policy to be considered effective and in force. Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever resulted from the fractional payment of premium. The insurance contract itself expressly provided that the policy would be effective only when the premium was paid in full. It would have been altogether different were it not so stipulated. Ergo, petitioners had absolute freedom of choice whether or not to be insured by FORTUNE under the terms of its policy and they freely opted to adhere thereto. Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is the intention of the parties as expressed in the policy. 10 Courts have no other function but to enforce the same. The rule that

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contracts of insurance will be construed in favor of the insured and most strongly against the insurer should not be permitted to have the effect of making a plain agreement ambiguous and then construe it in favor of the insured. 11 Verily, it is elemental law that the payment of premium is requisite to keep the policy of insurance in force. If the premium is not paid in the manner prescribed in the policy as intended by the parties the policy is ineffective. Partial payment even when accepted as a partial payment will not keep the policy alive even for such fractional part of the year as the part payment bears to the whole payment. 12 Applying further the rules of statutory construction, the position maintained by petitioners becomes even more untenable. The case of South Sea Surety and Insurance Company, Inc. v. Court Of Appeals, 13 speaks only of two (2) statutory exceptions to the requirement of payment of the entire premium as a prerequisite to the validity of the insurance contract. These exceptions are: (a) in case the insurance coverage relates to life or industrial life (health) insurance when a grace period applies, and (b) when the insurer makes a written acknowledgment of the receipt of premium, this acknowledgment being declared by law to be then conclusive evidence of the premium payment. 14 A maxim of recognized practicality is the rule that the expressed exception or exemption excludes others. Exceptio firmat regulim in casibus non exceptis. The express mention of exceptions operates to exclude other exceptions; conversely, those which are not within the enumerated exceptions are deemed included in the general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and the law has not expressly excepted partial

payments, there is no valid and binding contract. Hence, in the absence of clear waiver of prepayment in full by the insurer, the insured cannot collect on the proceeds of the policy. In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is primarily a risk distributing device, a mechanism by which all members of a group exposed to a particular risk contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled upon the happening of the contingency to pay the entire sum agreed upon, and the insured, that of parting with the amount required as premium, without receiving anything therefor in case the contingency does not happen. To ensure payment for these losses, the law mandates all insurance companies to maintain a legal reserve fund in favor of those claiming under their policies. 15 It should be understood that the integrity of this fund cannot be secured and maintained if by judicial fiat partial offerings of premiums were to be construed as a legal nexus between the applicant and the insurer despite an express agreement to the contrary. For what could prevent the insurance applicant from deliberately or wilfully holding back full premium payment and wait for the risk insured against to transpire and then conveniently pass on the balance of the premium to be deducted from the proceeds of the insurance? Worse, what if the insured makes an initial payment of only 10%, or even 1%, of the required premium, and when the risk occurs simply points to the proceeds from where to source the balance? Can an insurance company then exist and survive upon the payment of 1%, or even 10%, of the premium stipulated in the policy on the

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basis that, after all, the insurer can deduct from the proceeds of the insurance should the risk insured against occur? Interpreting the contract of insurance stringently against the insurer but liberally in favor of the insured despite clearly defined obligations of the parties to the policy can be carried out to extremes that there is the danger that we may, so to speak, "kill the goose that lays the golden egg." We are well aware of insurance companies falling into the despicable habit of collecting premiums promptly yet resorting to all kinds of excuses to deny or delay payment of just insurance claims. But, in this case, the law is manifestly on the side of the insurer. For as long as the current Insurance Code remains unchanged and partial payment of premiums is not mentioned at all as among the exceptions provided in Sees. 77 and 78, no policy of insurance can ever pretend to be efficacious or effective until premium has been fully paid. And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the public, hence, the imperative need for its prompt payment and full satisfaction. 16 It must be emphasized here that all actuarial calculations and various tabulations of probabilities of losses under the risks insured against are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock insurance firms are enabled to offer the assurance of security to the public at favorable rates. But once payment of premium is left to the whim and caprice of the insured, as when the courts tolerate the payment of a mere P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and the balance to be paid even after the risk insured against has occurred, as

petitioners have done in this case, on the principle that the strength of the vinculum juris is not measured by any specific amount of premium payment, we will surely wreak havoc on the business and set to naught what has taken actuarians centuries to devise to arrive at a fair and equitable distribution of risks and benefits between the insurer and the insured. The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of statutory prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and to impose whatever conditions they deem best upon their obligations not inconsistent with public policy. 17 The validity of these limitations is by law passed upon by the Insurance Commissioner who is empowered to approve all forms of policies, certificates or contracts of insurance which insurers intend to issue or deliver. That the policy contract in the case at bench was approved and allowed issuance simply reaffirms the validity of such policy, particularly the provision in question. WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24 March 1995 is AFFIRMED. SO ORDERED. G.R. No. L-22375 July 18, 1975 THE CAPITAL INSURANCE & SURETY CO., INC., petitioner, vs. PLASTIC ERA CO., INC., AND COURT OF APPEALS, respondents. Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner. K.V. Faylona for Private respondent.

MARTIN, J.: Petition for review of a decision of the Court of Appeals affirming the decision of the Court of First Instance of Manila in Civil Case No. 47934 entitled "Plastic Era Manufacturing Co., Inc. versus The Capital Insurance and Surety Co., Inc." On December 17, 1960, petitioner Capital Insurance & Surety Co., Inc. (hereinafter referred to as Capital Insurance) delivered to the respondent Plastic Era Manufacturing Co., Inc., (hereinafter referred to as Plastic Era) its open Fire Policy No. 22760 1 wherein the former undertook to insure the latter's building, equipments, raw materials, products and accessories located at Sheridan Street, Mandaluyong, Rizal. The policy expressly provides that if the property insured would be destroyed or damaged by fire after the payment of the premiums, at anytime between the 15th day of December 1960 and one o'clock in the afternoon of the 15th day of December 1961, the insurance company shall make good all such loss or damage in an amount not exceeding P100,000.00. When the policy was delivered, Plastic Era failed to pay the corresponding insurance premium. However, through its duly authorized representative, it executed the following acknowledgment receipt: This acknowledged receipt of Fire Policy) NO. 22760 Premium x x x x x) (I promise to pay) (P2,220.00) (has been paid) THIRTY DAYS AFTER on effective date --------------------(Date) On January 8, 1961, in partial payment of the insurance premium, Plastic Era

delivered to Capital Insurance, a check 2 for the amount of P1,000.00 postdated January 16, 1961 payable to the order of the latter and drawn against the Bank of America. However, Capital Insurance tried to deposit the check only on February 20, 1961 and the same was dishonored by the bank for lack of funds. The records show that as of January 19, 1961 Plastic Era had a balance of P1,193.41 with the Bank of America. On January 18, 1961 or two days after the insurance premium became due, at about 4:00 to 5:00 o'clock in the morning, the property insured by Plastic Era was destroyed by fire. In due time, the latter notified Capital Insurance of the loss of the insured property by fire 3 and accordingly filed its claim for indemnity thru the Manila Adjustment Company. 4 The loss and/or damage suffered by Plastic Era was estimated by the Manila Adjustment Company to be P283,875. However, according to the records the same property has been insured by Plastic Era with the Philamgen Insurance Company for P200,000.00. In less than a month Plastic Era demanded from Capital Insurance the payment of the sum of P100,000.00 as indemnity for the loss of the insured property under Policy No. 22760 but the latter refused for the reason that, among others, Plastic Era failed to pay the insurance premium.

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On August 25, 1961, Plastic Era filed its complaint against Capital Insurance for the recovery of the sum of P100,000.00 plus P25,000.00 for attorney's fees and P20,000.00 for additional expenses. Capital Insurance filed a counterclaim of P25,000.00 as and for attorney's fees. On November 15, 1961, the trial court rendered judgment, the dispositive portion of which reads as follows:

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WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant for the sum of P88,325.63 with interest at the legal rate from the filing of the complaint and to pay the costs. From said decision, Capital Insurance appealed to the Court of Appeals. On December 5, 1963, the Court of Appeals rendered its decision affirming that of the trial court. Hence, this petition for review by certiorari to this Court. Assailing the decision of the Court of Appeals petitioner assigns the following errors, to wit: 1. THE COURT OF APPEALS ERRED IN SENTENCING PETITIONER TO PAY PLASTIC ERA THE SUM OF P88,325.63 PLUS INTEREST, AND COST OF SUIT, ALTHOUGH PLASTIC ERA NEVER PAID PETITIONER THE INSURANCE PREMIUM OF P2,220.88. 2. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER SHOULD HAVE INSTITUTED AN ACTION FOR RESCISSION OF THE INSURANCE CONTRACT ENTERED INTO BETWEEN IT AND PLASTIC ERA BEFORE PETITIONER COULD BE RELIEVED OF RESPONSIBILITY UNDER ITS FIRE INSURANCE POLICY. 3. WE HAVE SHOWN ABOVE THAT PLASTIC ERA'S ACTION WAS UNWARRANTED AND THAT THE PETITIONER SHOULD HAVE BEEN ABSOLVED FROM THE

COMPLAINT, AND CONSEQUENTLY, THE LOWER COURT SHOULD HAVE AWARDED PETITIONER A REASONABLE SUM AND AS ATTORNEY'S FEES P25,000.00. The pivotal issue in this petition is whether or not a contract of insurance has been duly perfected between the petitioner, Capital Insurance, and respondent Plastic Era. Necessarily, the issue calls for a correct interpretation of the insurance policy which states: This Policy of Insurance Witnesseth That in consideration of PLASTIC ERA MANUFACTURING COMPANY, INC. hereinafter called the Insured, paying to the Capital Insurance & Surety Co., Inc., hereinafter called the Company, the sum of PESOS TWO THOUSAND ONE HUNDRED EIGHTY EIGHT the premium for the first period hereinafter mentioned, for insuring against Loss or Damage by only Fire or Lightning, as hereinafter appears, the Property hereinafter described and contained, or described herein and not elsewhere, in the several sums following namely: PESOS ONE HUNDRED THOUSAND ONLY, PHILIPPINE CURRENCY; ... THE COMPANY HEREBY AGREES with the Insured but subject to the terms and conditions endorsed or otherwise expressed hereon, which are to be taken as part of this Policy), that if the Property described, or any part thereof, shall be destroyed or damaged by Fire or Lightning

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after payment of the Premiums, at anytime between the 15th day of December One Thousand Nine Hundred and Sixty and 1 'clock in the afternoon of the 15th day of December One Thousand Nine Hundred and Sixty-One of the last day of any subsequent period in respect of which the insured, or a successor in interest to whom the insurance is by an endorsement hereon declared to be or is otherwise continued, shall pay to the Company and the Company shall accept the sum required for the renewal of this Policy, the Company will pay or make good all such loss or Damage, to an amount not exceeding during any one period of the insurance in respect of the several matters specified, the sum; set opposite thereto respectively, and not exceeding the whole sum of PESOS, ONE HUNDRED THOUSAND ONLY, PHIL. CUR.... In clear and unequivocal terms the insurance policy provides that it is only upon payment of the premiums by Plastic Era that Capital Insurance agrees to insure the properties of the former against loss or damage in an amount not exceeding P100,000.00. The crux of the problem then is whether at the time the insurance policy was delivered to Plastic Era on December 17, 1960, the latter was able to pay the stipulated premium. It appears on record that on the day the insurance policy was delivered, Plastic Era did not pay the Capital Insurance, but instead executed an acknowledgment receipt of Policy No.

22760. In said receipt Plastic Era promised to pay the premium within thirty (30) days from the effectivity date of the policy on December 17, 1960 and Capital Insurance accepted it. What then is the effect of accepting such acknowledgment receipt from the Plastic Era? Did the Capital Insurance mean to agree to make good its undertaking under the policy if the premium could be paid on or before January 16, 1961? And what would be the effect of the delivery to Capital Insurance on January 8, 1961 of a postdated check (January 16, 1961) in the amount of P1,000.00, payable to the order of the latter? Could not this have been considered a valid payment of the insurance premium? Pursuant to Article 1249 of the New Civil Code: xxx xxx xxx The delivery of promissory notes payable to order, or bills of exchange or other mercantile documents shall produce the effect of payment only when they have been cashed, or when through the fault of the creditor they have been impaired. xxx xxx xxx In the meantime, the action derived from the original obligation shall be held in abeyance. Under this provision the mere delivery of a bill of exchange in payment of a debt does not immediately effect payment. It simply suspends the action arising from the original obligation in satisfaction of which it was delivered, until payment is accomplished either actually or presumptively. 5 Tender of draft or check in order to effect payment that would extinguish the debtor's liability should be

actually cashed. If the delivery of the check of Plastic Era to Capital Insurance were to be viewed in the light of the foregoing, no payment of the premium had been effected, for it is only when the check is cashed that it is said to effect payment. Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to pay the insurance premium within thirty (30) days from the effective date of policy. By so doing, it has implicitly agreed to modify the tenor of the insurance policy and in effect, waived the provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium. Considering that the insurance policy is silent as to the mode of payment, Capital Insurance is deemed to have accepted the promissory note in payment of the premium. This rendered the policy immediately operative on the date it was delivered. The view taken in most cases in the United States: ... is that although one of conditions of an insurance policy is that "it shall not be valid or binding until the first premium is paid", if it is silent as to the mode of payment, promissory notes received by the company must be deemed to have been accepted in payment of the premium. In other words, a requirement for the payment of the first or initial premium in advance or actual cash may be waived by acceptance of a promissory note ... 7 Precisely, this was what actually happened when the Capital Insurance accepted the acknowledgment receipt of the Plastic Era promising to pay the insurance premium within thirty (30) days from December 17,

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1960. Hence, when the damage or loss of the insured property occurred, the insurance policy was in full force and effect. The fact that the check issued by Plastic Era in partial payment of the promissory note was later on dishonored did not in any way operate as a forfeiture of its rights under the policy, there being no express stipulation therein to that effect. In the absence of express agreement or stipulation to that effect in the policy, the non-payment at maturity of a note given for and accepted as premium on a policy does not operate to forfeit the rights of the insured even though the note is given for an initial premium, nor does the fact that the collection of the note had been enjoined by the insured in any way affect the policy. 8 ... If the check is accepted as payment of the premium even though it turns out to be worthless, there is payment which will prevent forfeiture. 9 By accepting its promise to pay the insurance premium within thirty (30) days from the effectivity date of the policy December 17, 1960 Capital Insurance had in effect extended credit to Plastic Era. The payment of the premium on the insurance policy therefore became an independent obligation the non-fulfillment of which would entitle Capital Insurance to recover. It could just deduct the premium due and unpaid upon the satisfaction of the loss under the policy. 10 It did not have the right to cancel the policy for nonpayment of the premium except by putting Plastic Era in default and giving it personal notice

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to that effect. This Capital Insurance failed to do. ... Where credit is given by an insurance company for the payment of the premium it has no right to cancel the policy for nonpayment except by putting the insured in default and giving him personal notice.... 11 On the contrary Capital Insurance had accepted a check for P1,000.00 from Plastic Era in partial payment of the premium on the insurance policy. Although the check was due for payment on January 16, 1961 and Plastic Era had sufficient funds to cover it as of January 19, 1961, Capital Insurance decided to hold the same for thirty-five (35) days before presenting it for payment. Having held the check for such an unreasonable period of time, Capital Insurance was estopped from claiming a forfeiture of its policy for nonpayment even if the check had been dishonored later.1wph1.t Where the check is held for an unreasonable time before presenting it for payment, the insurer may be held estopped from claiming a forfeiture if the check is dishonored. 12 Finally, it is submitted by petitioner that: We are here concerned with a case of reciprocal obligations, and respondent having failed to comply with its obligation to pay the insurance premium due on the policy within thirty days from December 17, 1960, petitioner was relieved of its obligation to pay anything under the policy, without the necessity of first instituting an action for rescission of the

contract of insurance entered into by the parties. But precisely in this case, Plastic Era has complied with its obligation to pay the insurance premium and therefore Capital Insurance is obliged to make good its undertaking to Plastic Era. WHEREFORE, finding no reversible error in the decision appealed from, We hereby affirm the same in toto. Costs against the petitioner. SO ORDERED. G.R. No. 81026 April 3, 1990 PAN MALAYAN INSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS, ERLINDA FABIE AND HER UNKNOWN DRIVER, respondents. Regulus E. Cabote & Associates for petitioner. Benito P. Fabie for private respondents.

CORTES, J.: Petitioner Pan Malayan Insurance Company (PANMALAY) seeks the reversal of a decision of the Court of Appeals which upheld an order of the trial court dismissing for no cause of action PANMALAY's complaint for damages against private respondents Erlinda Fabie and her driver. The principal issue presented for resolution before this Court is whether or not the insurer PANMALAY may institute an action to recover the amount it had paid its assured in settlement of an insurance claim against private respondents as the parties

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allegedly responsible for the damage caused to the insured vehicle. On December 10, 1985, PANMALAY filed a complaint for damages with the RTC of Makati against private respondents Erlinda Fabie and her driver. PANMALAY averred the following: that it insured a Mitsubishi Colt Lancer car with plate No. DDZ-431 and registered in the name of Canlubang Automotive Resources Corporation [CANLUBANG]; that on May 26, 1985, due to the "carelessness, recklessness, and imprudence" of the unknown driver of a pick-up with plate no. PCR-220, the insured car was hit and suffered damages in the amount of P42,052.00; that PANMALAY defrayed the cost of repair of the insured car and, therefore, was subrogated to the rights of CANLUBANG against the driver of the pick-up and his employer, Erlinda Fabie; and that, despite repeated demands, defendants, failed and refused to pay the claim of PANMALAY. Private respondents, thereafter, filed a Motion for Bill of Particulars and a supplemental motion thereto. In compliance therewith, PANMALAY clarified, among others, that the damage caused to the insured car was settled under the "own damage", coverage of the insurance policy, and that the driver of the insured car was, at the time of the accident, an authorized driver duly licensed to drive the vehicle. PANMALAY also submitted a copy of the insurance policy and the Release of Claim and Subrogation Receipt executed by CANLUBANG in favor of PANMALAY. On February 12, 1986, private respondents filed a Motion to Dismiss alleging that PANMALAY had no cause of action against them. They argued that payment under the "own damage" clause of the insurance policy precluded subrogation under Article 2207 of the Civil Code, since indemnification thereunder was made on

the assumption that there was no wrongdoer or no third party at fault. After hearings conducted on the motion, opposition thereto, reply and rejoinder, the RTC issued an order dated June 16, 1986 dismissing PANMALAY's complaint for no cause of action. On August 19, 1986, the RTC denied PANMALAY's motion for reconsideration. On appeal taken by PANMALAY, these orders were upheld by the Court of Appeals on November 27, 1987. Consequently, PANMALAY filed the present petition for review. After private respondents filed its comment to the petition, and petitioner filed its reply, the Court considered the issues joined and the case submitted for decision. Deliberating on the various arguments adduced in the pleadings, the Court finds merit in the petition. PANMALAY alleged in its complaint that, pursuant to a motor vehicle insurance policy, it had indemnified CANLUBANG for the damage to the insured car resulting from a traffic accident allegedly caused by the negligence of the driver of private respondent, Erlinda Fabie. PANMALAY contended, therefore, that its cause of action against private respondents was anchored upon Article 2207 of the Civil Code, which reads: If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the

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person who has violated the contract. . . . PANMALAY is correct. Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the insured property is destroyed or damaged through the fault or negligence of a party other than the assured, then the insurer, upon payment to the assured, will be subrogated to the rights of the assured to recover from the wrongdoer to the extent that the insurer has been obligated to pay. Payment by the insurer to the assured operates as an equitable assignment to the former of all remedies which the latter may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It accrues simply upon payment of the insurance claim by the insurer [Compania Maritima v. Insurance Company of North America, G.R. No. L-18965, October 30, 1964, 12 SCRA 213; Fireman's Fund Insurance Company v. Jamilla & Company, Inc., G.R. No. L27427, April 7, 1976, 70 SCRA 323]. There are a few recognized exceptions to this rule. For instance, if the assured by his own act releases the wrongdoer or third party liable for the loss or damage, from liability, the insurer's right of subrogation is defeated [Phoenix Ins. Co. of Brooklyn v. Erie & Western Transport, Co., 117 US 312, 29 L. Ed. 873 (1886); Insurance Company of North America v. Elgin, Joliet & Eastern Railway Co., 229 F 2d 705 (1956)]. Similarly, where the insurer pays the assured the value of the lost goods without notifying the carrier who has in good faith settled the assured's claim for loss, the settlement is binding on both the assured and the insurer, and the latter cannot bring an action against the carrier

on his right of subrogation [McCarthy v. Barber Steamship Lines, Inc., 45 Phil. 488 (1923)]. And where the insurer pays the assured for a loss which is not a risk covered by the policy, thereby effecting "voluntary payment", the former has no right of subrogation against the third party liable for the loss [Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, G. R. No. L-22146, September 5, 1967, 21 SCRA 12]. None of the exceptions are availing in the present case. The lower court and Court of Appeals, however, were of the opinion that PANMALAY was not legally subrogated under Article 2207 of the Civil Code to the rights of CANLUBANG, and therefore did not have any cause of action against private respondents. On the one hand, the trial court held that payment by PANMALAY of CANLUBANG's claim under the "own damage" clause of the insurance policy was an admission by the insurer that the damage was caused by the assured and/or its representatives. On the other hand, the Court of Appeals in applying the ejusdem generis rule held that Section III-1 of the policy, which was the basis for settlement of CANLUBANG's claim, did not cover damage arising from collision or overturning due to the negligence of third parties as one of the insurable risks. Both tribunals concluded that PANMALAY could not now invoke Article 2207 and claim reimbursement from private respondents as alleged wrongdoers or parties responsible for the damage. The above conclusion is without merit. It must be emphasized that the lower court's ruling that the "own damage" coverage under the policy implies damage to the insured car caused by the assured itself, instead of third parties, proceeds from an incorrect comprehension of the

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phrase "own damage" as used by the insurer. When PANMALAY utilized the phrase "own damage" a phrase which, incidentally, is not found in the insurance policy to define the basis for its settlement of CANLUBANG's claim under the policy, it simply meant that it had assumed to reimburse the costs for repairing the damage to the insured vehicle [See PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, p. 1; Record, p. 31]. It is in this sense that the so-called "own damage" coverage under Section III of the insurance policy is differentiated from Sections I and IV-1 which refer to "Third Party Liability" coverage (liabilities arising from the death of, or bodily injuries suffered by, third parties) and from Section IV-2 which refer to "Property Damage" coverage (liabilities arising from damage caused by the insured vehicle to the properties of third parties). Neither is there merit in the Court of Appeals' ruling that the coverage of insured risks under Section III-1 of the policy does not include to the insured vehicle arising from collision or overturning due to the negligent acts of the third party. Not only does it stem from an erroneous interpretation of the provisions of the section, but it also violates a fundamental rule on the interpretation of property insurance contracts. It is a basic rule in the interpretation of contracts that the terms of a contract are to be construed according to the sense and meaning of the terms which the parties thereto have used. In the case of property insurance policies, the evident intention of the contracting parties, i.e., the insurer and the assured, determine the import of the various terms and provisions embodied in the policy. It is only when the terms of the policy are ambiguous, equivocal or uncertain, such that the parties themselves disagree about the meaning of particular

provisions, that the courts will intervene. In such an event, the policy will be construed by the courts liberally in favor of the assured and strictly against the insurer [Union Manufacturing Co., Inc. v. Philippine Guaranty Co., Inc., G.R., No. L-27932, October 30, 1972, 47 SCRA 271; National Power Corporation v. Court of Appeals, G.R. No. L-43706, November 14, 1986, 145 SCRA 533; Pacific Banking Corporation v. Court of Appeals, G.R. No. L-41014, November 28, 1988, 168 SCRA 1. Also Articles 1370-1378 of the Civil Code]. Section III-1 of the insurance policy which refers to the conditions under which the insurer PANMALAY is liable to indemnify the assured CANLUBANG against damage to or loss of the insured vehicle, reads as follows: SECTION III LOSS OR DAMAGE 1. The Company will, subject to the Limits of Liability, indemnify the Insured against loss of or damage to the Scheduled Vehicle and its accessories and spare parts whilst thereon: (a) by accidental collision or overturning, or collision or overturning consequent upon mechanical breakdown or consequent upon wear and tear; (b) by fire, external explosion, self ignition or lightning or burglary,

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housebreaking or theft; (c) by malicious act; (d) whilst in transit (including the processes of loading and unloading) incidental to such transit by road, rail, inland, waterway, lift or elevator. xxx xxx xxx [Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars; Record, p. 34; Emphasis supplied]. PANMALAY contends that the coverage of insured risks under the above section, specifically Section III-1(a), is comprehensive enough to include damage to the insured vehicle arising from collision or overturning due to the fault or negligence of a third party. CANLUBANG is apparently of the same understanding. Based on a police report wherein the driver of the insured car reported that after the vehicle was sideswiped by a pick-up, the driver thereof fled the scene [Record, p. 20], CANLUBANG filed its claim with PANMALAY for indemnification of the damage caused to its car. It then accepted payment from PANMALAY, and executed a Release of Claim and Subrogation Receipt in favor of latter. Considering that the very parties to the policy were not shown to be in disagreement regarding the meaning and coverage of Section III-1, specifically subparagraph (a) thereof, it was improper for

the appellate court to indulge in contract construction, to apply the ejusdem generis rule, and to ascribe meaning contrary to the clear intention and understanding of these parties. It cannot be said that the meaning given by PANMALAY and CANLUBANG to the phrase "by accidental collision or overturning" found in the first paint of subparagraph (a) is untenable. Although the terms "accident" or "accidental" as used in insurance contracts have not acquired a technical meaning, the Court has on several occasions defined these terms to mean that which takes place "without one's foresight or expectation, an event that proceeds from an unknown cause, or is an unusual effect of a known cause and, therefore, not expected" [De la Cruz v. The Capital Insurance & Surety Co., Inc., G.R. No. L-21574, June 30, 1966, 17 SCRA 559; Filipino Merchants Insurance Co., Inc. v. Court of Appeals, G.R. No. 85141, November 28, 1989]. Certainly, it cannot be inferred from jurisprudence that these terms, without qualification, exclude events resulting in damage or loss due to the fault, recklessness or negligence of third parties. The concept "accident" is not necessarily synonymous with the concept of "no fault". It may be utilized simply to distinguish intentional or malicious acts from negligent or careless acts of man. Moreover, a perusal of the provisions of the insurance policy reveals that damage to, or loss of, the insured vehicle due to negligent or careless acts of third parties is not listed under the general and specific exceptions to the coverage of insured risks which are enumerated in detail in the insurance policy itself [See Annex "A-1" of PANMALAY's Compliance with Supplementary Motion for Bill of Particulars, supra.]

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The Court, furthermore. finds it noteworthy that the meaning advanced by PANMALAY regarding the coverage of Section III-1(a) of the policy is undeniably more beneficial to CANLUBANG than that insisted upon by respondents herein. By arguing that this section covers losses or damages due not only to malicious, but also to negligent acts of third parties, PANMALAY in effect advocates for a more comprehensive coverage of insured risks. And this, in the final analysis, is more in keeping with the rationale behind the various rules on the interpretation of insurance contracts favoring the assured or beneficiary so as to effect the dominant purpose of indemnity or payment [See Calanoc v. Court of Appeals, 98 Phil. 79 (1955); Del Rosario v. The Equitable Insurance and Casualty Co., Inc., G.R. No. L-16215, June 29, 1963, 8 SCRA 343; Serrano v. Court of Appeals, G.R. No. L-35529, July 16, 1984, 130 SCRA 327]. Parenthetically, even assuming for the sake of argument that Section III-1(a) of the insurance policy does not cover damage to the insured vehicle caused by negligent acts of third parties, and that PANMALAY's settlement of CANLUBANG's claim for damages allegedly arising from a collision due to private respondents' negligence would amount to unwarranted or "voluntary payment", dismissal of PANMALAY's complaint against private respondents for no cause of action would still be a grave error of law. For even if under the above circumstances PANMALAY could not be deemed subrogated to the rights of its assured under Article 2207 of the Civil Code, PANMALAY would still have a cause of action against private respondents. In the pertinent case of Sveriges Angfartygs Assurans Forening v. Qua Chee Gan, supra., the Court ruled that the insurer who may have no rights of subrogation due

to "voluntary" payment may nevertheless recover from the third party responsible for the damage to the insured property under Article 1236 of the Civil Code. In conclusion, it must be reiterated that in this present case, the insurer PANMALAY as subrogee merely prays that it be allowed to institute an action to recover from third parties who allegedly caused damage to the insured vehicle, the amount which it had paid its assured under the insurance policy. Having thus shown from the above discussion that PANMALAY has a cause of action against third parties whose negligence may have caused damage to CANLUBANG's car, the Court holds that there is no legal obstacle to the filing by PANMALAY of a complaint for damages against private respondents as the third parties allegedly responsible for the damage. Respondent Court of Appeals therefore committed reversible error in sustaining the lower court's order which dismissed PANMALAY's complaint against private respondents for no cause of action. Hence, it is now for the trial court to determine if in fact the damage caused to the insured vehicle was due to the "carelessness, recklessness and imprudence" of the driver of private respondent Erlinda Fabie. WHEREFORE, in view of the foregoing, the present petition is GRANTED. Petitioner's complaint for damages against private respondents is hereby REINSTATED. Let the case be remanded to the lower court for trial on the merits. SO ORDERED. G.R. No. 137775. March 31, 2005 FGU INSURANCE CORPORATION, Petitioners, vs. THE COURT OF APPEALS, SAN MIGUEL

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CORPORATION, and ESTATE OF ANG GUI, represented by LUCIO, JULIAN, and JAIME, all surnamed ANG, and CO TO, Respondents. G.R. No. 140704. March 31, 2005 ESTATE OF ANG GUI, Represented by LUCIO, JULIAN and JAIME, all surnamed ANG, and CO TO, Petitioners, vs. THE HONORABLE COURT OF APPEALS, SAN MIGUEL CORP., and FGU INSURANCE CORP., Respondents. DECISION CHICO-NAZARIO, J.: Before Us are two separate Petitions for review assailing the Decision1 of the Court of Appeals in CA-G.R. CV No. 49624 entitled, "San Miguel Corporation, PlaintiffAppellee versus Estate of Ang Gui, represented by Lucio, Julian and Jaime, all surnamed Ang, and Co To, DefendantsAppellants, ThirdParty Plaintiffs versus FGU Insurance Corporation, Third-Party Defendant-Appellant," which affirmed in toto the decision2 of the Regional Trial Court of Cebu City, Branch 22. The dispositive portion of the Court of Appeals decision reads: WHEREFORE, for all the foregoing, judgment is hereby rendered as follows: 1) Ordering defendants to pay plaintiff the sum of P1,346,197.00 and an interest of 6% per annum to be reckoned from the filing of this case on October 2, 1990; 2) Ordering defendants to pay plaintiff the sum of P25,000.00 for attorneys fees and an additional sum of P10,000.00 as litigation expenses; 3) With cost against defendants.

For the Third-Party Complaint: 1) Ordering third-party defendant FGU Insurance Company to pay and reimburse defendants the amount of P632,700.00.3 The Facts Evidence shows that Anco Enterprises Company (ANCO), a partnership between Ang Gui and Co To, was engaged in the shipping business. It owned the M/T ANCO tugboat and the D/B Lucio barge which were operated as common carriers. Since the D/B Lucio had no engine of its own, it could not maneuver by itself and had to be towed by a tugboat for it to move from one place to another. On 23 September 1979, San Miguel Corporation (SMC) shipped from Mandaue City, Cebu, on board the D/B Lucio, for towage by M/T ANCO, the following cargoes: Bill of Lading No. Shipment Destination 1 25,000 cases Pale Pilsen Estancia, Iloilo 350 cases Cerveza Negra Estancia, Iloilo 2 15,000 cases Pale Pilsen San Jose, Antique 200 cases Cerveza Negra San Jose, Antique The consignee for the cargoes covered by Bill of Lading No. 1 was SMCs Beer Marketing Division (BMD)-Estancia Beer Sales Office, Estancia, Iloilo, while the consignee for the cargoes covered by Bill of Lading No. 2 was SMCs BMD-San Jose Beer Sales Office, San Jose, Antique. The D/B Lucio was towed by the M/T ANCO all the way from Mandaue City to San Jose, Antique. The vessels arrived at San Jose, Antique, at about one oclock in the

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afternoon of 30 September 1979. The tugboat M/T ANCO left the barge immediately after reaching San Jose, Antique. When the barge and tugboat arrived at San Jose, Antique, in the afternoon of 30 September 1979, the clouds over the area were dark and the waves were already big. The arrastre workers unloading the cargoes of SMC on board the D/B Lucio began to complain about their difficulty in unloading the cargoes. SMCs District Sales Supervisor, Fernando Macabuag, requested ANCOs representative to transfer the barge to a safer place because the vessel might not be able to withstand the big waves. ANCOs representative did not heed the request because he was confident that the barge could withstand the waves. This, notwithstanding the fact that at that time, only the M/T ANCO was left at the wharf of San Jose, Antique, as all other vessels already left the wharf to seek shelter. With the waves growing bigger and bigger, only Ten Thousand Seven Hundred Ninety (10,790) cases of beer were discharged into the custody of the arrastre operator. At about ten to eleven oclock in the evening of 01 October 1979, the crew of D/B Lucio abandoned the vessel because the barges rope attached to the wharf was cut off by the big waves. At around midnight, the barge run aground and was broken and the cargoes of beer in the barge were swept away. As a result, ANCO failed to deliver to SMCs consignee Twenty-Nine Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. The value per case of Pale Pilsen was Forty-Five Pesos and Twenty Centavos (P45.20). The value of a case of Cerveza Negra was Forty-Seven Pesos and Ten Centavos (P47.10), hence, SMCs claim

against ANCO amounted to One Million Three Hundred Forty-Six Thousand One Hundred Ninety-Seven Pesos (P1,346,197.00). As a consequence of the incident, SMC filed a complaint for Breach of Contract of Carriage and Damages against ANCO for the amount of One Million Three Hundred Forty-Six Thousand One Hundred NinetySeven Pesos (P1,346,197.00) plus interest, litigation expenses and Twenty-Five Percent (25%) of the total claim as attorneys fees. Upon Ang Guis death, ANCO, as a partnership, was dissolved hence, on 26 January 1993, SMC filed a second amended complaint which was admitted by the Court impleading the surviving partner, Co To and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang. The substituted defendants adopted the original answer with counterclaim of ANCO "since the substantial allegations of the original complaint and the amended complaint are practically the same." ANCO admitted that the cases of beer Pale Pilsen and Cerveza Negra mentioned in the complaint were indeed loaded on the vessel belonging to ANCO. It claimed however that it had an agreement with SMC that ANCO would not be liable for any losses or damages resulting to the cargoes by reason of fortuitous event. Since the cases of beer Pale Pilsen and Cerveza Negra were lost by reason of a storm, a fortuitous event which battered and sunk the vessel in which they were loaded, they should not be held liable. ANCO further asserted that there was an agreement between them and SMC to insure the cargoes in order to recover indemnity in case of loss. Pursuant to that agreement, the cargoes to the extent of Twenty Thousand (20,000) cases was insured with

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FGU Insurance Corporation (FGU) for the total amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) per Marine Insurance Policy No. 29591. Subsequently, ANCO, with leave of court, filed a Third-Party Complaint against FGU, alleging that before the vessel of ANCO left for San Jose, Antique with the cargoes owned by SMC, the cargoes, to the extent of Twenty Thousand (20,000) cases, were insured with FGU for a total amount of Eight Hundred Fifty-Eight Thousand Five Hundred Pesos (P858,500.00) under Marine Insurance Policy No. 29591. ANCO further alleged that on or about 02 October 1979, by reason of very strong winds and heavy waves brought about by a passing typhoon, the vessel run aground near the vicinity of San Jose, Antique, as a result of which, the vessel was totally wrecked and its cargoes owned by SMC were lost and/or destroyed. According to ANCO, the loss of said cargoes occurred as a result of risks insured against in the insurance policy and during the existence and lifetime of said insurance policy. ANCO went on to assert that in the remote possibility that the court will order ANCO to pay SMCs claim, the third-party defendant corporation should be held liable to indemnify or reimburse ANCO whatever amounts, or damages, it may be required to pay to SMC. In its answer to the Third-Party complaint, third-party defendant FGU admitted the existence of the Insurance Policy under Marine Cover Note No. 29591 but maintained that the alleged loss of the cargoes covered by the said insurance policy cannot be attributed directly or indirectly to any of the risks insured against in the said insurance policy. According to FGU, it is only liable under the policy to Third-party Plaintiff ANCO and/or Plaintiff SMC in case of any of the following:

a) total loss of the entire shipment; b) loss of any case as a result of the sinking of the vessel; or c) loss as a result of the vessel being on fire. Furthermore, FGU alleged that the ThirdParty Plaintiff ANCO and Plaintiff SMC failed to exercise ordinary diligence or the diligence of a good father of the family in the care and supervision of the cargoes insured to prevent its loss and/or destruction. Third-Party defendant FGU prayed for the dismissal of the Third-Party Complaint and asked for actual, moral, and exemplary damages and attorneys fees. The trial court found that while the cargoes were indeed lost due to fortuitous event, there was failure on ANCOs part, through their representatives, to observe the degree of diligence required that would exonerate them from liability. The trial court thus held the Estate of Ang Gui and Co To liable to SMC for the amount of the lost shipment. With respect to the ThirdParty complaint, the court a quo found FGU liable to bear Fifty-Three Percent (53%) of the amount of the lost cargoes. According to the trial court: . . . Evidence is to the effect that the D/B Lucio, on which the cargo insured, runaground and was broken and the beer cargoes on the said barge were swept away. It is the sense of this Court that the risk insured against was the cause of the loss. ... Since the total cargo was 40,550 cases which had a total amount of P1,833,905.00 and the amount of the policy was only for P858,500.00, defendants as assured,

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therefore, were considered co-insurers of third-party defendant FGU Insurance Corporation to the extent of 975,405.00 value of the cargo. Consequently, inasmuch as there was partial loss of only P1,346,197.00, the assured shall bear 53% of the loss4 [Emphasis ours] The appellate court affirmed in toto the decision of the lower court and denied the motion for reconsideration and the supplemental motion for reconsideration. Hence, the petitions. The Issues In G.R. No. 137775, the grounds for review raised by petitioner FGU can be summarized into two: 1) Whether or not respondent Court of Appeals committed grave abuse of discretion in holding FGU liable under the insurance contract considering the circumstances surrounding the loss of the cargoes; and 2) Whether or not the Court of Appeals committed an error of law in holding that the doctrine of res judicata applies in the instant case. In G.R. No. 140704, petitioner Estate of Ang Gui and Co To assail the decision of the appellate court based on the following assignments of error: 1) The Court of Appeals committed grave abuse of discretion in affirming the findings of the lower court that the negligence of the crewmembers of the D/B Lucio was the proximate cause of the loss of the cargoes; and 2) The respondent court acted with grave abuse of discretion when it ruled that the appeal was without merit despite the fact that said court had accepted the decision in Civil Case No. R-19341, as affirmed by the Court of Appeals and the Supreme Court, as res judicata. Ruling of the Court

First, we shall endeavor to dispose of the common issue raised by both petitioners in their respective petitions for review, that is, whether or not the doctrine of res judicata applies in the instant case. It is ANCOs contention that the decision in Civil Case No. R-19341,5 which was decided in its favor, constitutes res judicata with respect to the issues raised in the case at bar. The contention is without merit. There can be no res judicata as between Civil Case No. R-19341 and the case at bar. In order for res judicata to be made applicable in a case, the following essential requisites must be present: 1) the former judgment must be final; 2) the former judgment must have been rendered by a court having jurisdiction over the subject matter and the parties; 3) the former judgment must be a judgment or order on the merits; and 4) there must be between the first and second action identity of parties, identity of subject matter, and identity of causes of action.6 There is no question that the first three elements of res judicata as enumerated above are indeed satisfied by the decision in Civil Case No. R-19341. However, the doctrine is still inapplicable due to the absence of the last essential requisite of identity of parties, subject matter and causes of action. The parties in Civil Case No. R-19341 were ANCO as plaintiff and FGU as defendant while in the instant case, SMC is the plaintiff and the Estate of Ang Gui represented by Lucio, Julian and Jaime, all surnamed Ang and Co To as defendants, with the latter merely impleading FGU as third-party defendant. The subject matter of Civil Case No. R19341 was the insurance contract entered into by ANCO, the owner of the vessel,

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with FGU covering the vessel D/B Lucio, while in the instant case, the subject matter of litigation is the loss of the cargoes of SMC, as shipper, loaded in the D/B Lucio and the resulting failure of ANCO to deliver to SMCs consignees the lost cargo. Otherwise stated, the controversy in the first case involved the rights and liabilities of the shipowner vis--vis that of the insurer, while the present case involves the rights and liabilities of the shipper vis-vis that of the shipowner. Specifically, Civil Case No. R-19341 was an action for Specific Performance and Damages based on FGU Marine Hull Insurance Policy No. VMF-MH-13519 covering the vessel D/B Lucio, while the instant case is an action for Breach of Contract of Carriage and Damages filed by SMC against ANCO based on Bill of Lading No. 1 and No. 2, with defendant ANCO seeking reimbursement from FGU under Insurance Policy No. MA58486, should the former be held liable to pay SMC. Moreover, the subject matter of the thirdparty complaint against FGU in this case is different from that in Civil Case No. R19341. In the latter, ANCO was suing FGU for the insurance contract over the vessel while in the former, the third-party complaint arose from the insurance contract covering the cargoes on board the D/B Lucio. The doctrine of res judicata precludes the re-litigation of a particular fact or issue already passed upon by a court of competent jurisdiction in a former judgment, in another action between the same parties based on a different claim or cause of action. The judgment in the prior action operates as estoppel only as to those matters in issue or points controverted, upon the determination of which the finding or judgment was rendered.7 If a particular point or question is in issue in the second action, and the

judgment will depend on the determination of that particular point or question, a former judgment between the same parties or their privies will be final and conclusive in the second if that same point or question was in issue and adjudicated in the first suit.8 Since the case at bar arose from the same incident as that involved in Civil Case No. R-19341, only findings with respect to matters passed upon by the court in the former judgment are conclusive in the disposition of the instant case. A careful perusal of the decision in Civil Case No. R19341 will reveal that the pivotal issues resolved by the lower court, as affirmed by both the Court of Appeals and the Supreme Court, can be summarized into three legal conclusions: 1) that the D/B Lucio before and during the voyage was seaworthy; 2) that there was proper notice of loss made by ANCO within the reglementary period; and 3) that the vessel D/B Lucio was a constructive total loss. Said decision, however, did not pass upon the issues raised in the instant case. Absent therein was any discussion regarding the liability of ANCO for the loss of the cargoes. Neither did the lower court pass upon the issue of the alleged negligence of the crewmembers of the D/B Lucio being the cause of the loss of the cargoes owned by SMC. Therefore, based on the foregoing discussion, we are reversing the findings of the Court of Appeals that there is res judicata. Anent ANCOs first assignment of error, i.e., the appellate court committed error in concluding that the negligence of ANCOs representatives was the proximate cause of the loss, said issue is a question of fact assailing the lower courts appreciation of evidence on the negligence or lack thereof of the crewmembers of the D/B Lucio. As a

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rule, findings of fact of lower courts, particularly when affirmed by the appellate court, are deemed final and conclusive. The Supreme Court cannot review such findings on appeal, especially when they are borne out by the records or are based on substantial evidence.9 As held in the case of Donato v. Court of Appeals,10 in this jurisdiction, it is a fundamental and settled rule that findings of fact by the trial court are entitled to great weight on appeal and should not be disturbed unless for strong and cogent reasons because the trial court is in a better position to examine real evidence, as well as to observe the demeanor of the witnesses while testifying in the case.11 It is not the function of this Court to analyze or weigh evidence all over again, unless there is a showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute palpable error or grave abuse of discretion.12 A careful study of the records shows no cogent reason to fault the findings of the lower court, as sustained by the appellate court, that ANCOs representatives failed to exercise the extraordinary degree of diligence required by the law to exculpate them from liability for the loss of the cargoes. First, ANCO admitted that they failed to deliver to the designated consignee the Twenty Nine Thousand Two Hundred Ten (29,210) cases of Pale Pilsen and Five Hundred Fifty (550) cases of Cerveza Negra. Second, it is borne out in the testimony of the witnesses on record that the barge D/B Lucio had no engine of its own and could not maneuver by itself. Yet, the patron of ANCOs tugboat M/T ANCO left it to fend for itself notwithstanding the fact that as the two vessels arrived at the port of San

Jose, Antique, signs of the impending storm were already manifest. As stated by the lower court, witness Mr. Anastacio Manilag testified that the captain or patron of the tugboat M/T ANCO left the barge D/B Lucio immediately after it reached San Jose, Antique, despite the fact that there were already big waves and the area was already dark. This is corroborated by defendants own witness, Mr. Fernando Macabueg.13 The trial court continued: At that precise moment, since it is the duty of the defendant to exercise and observe extraordinary diligence in the vigilance over the cargo of the plaintiff, the patron or captain of M/T ANCO, representing the defendant could have placed D/B Lucio in a very safe location before they left knowing or sensing at that time the coming of a typhoon. The presence of big waves and dark clouds could have warned the patron or captain of M/T ANCO to insure the safety of D/B Lucio including its cargo. D/B Lucio being a barge, without its engine, as the patron or captain of M/T ANCO knew, could not possibly maneuver by itself. Had the patron or captain of M/T ANCO, the representative of the defendants observed extraordinary diligence in placing the D/B Lucio in a safe place, the loss to the cargo of the plaintiff could not have occurred. In short, therefore, defendants through their representatives, failed to observe the degree of diligence required of them under the provision of Art. 1733 of the Civil Code of the Philippines.14 Petitioners Estate of Ang Gui and Co To, in their Memorandum, asserted that the contention of respondents SMC and FGU that "the crewmembers of D/B Lucio should have left port at the onset of the typhoon is like advising the fish to jump from the frying pan into the fire and an advice that borders on madness."15

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The argument does not persuade. The records show that the D/B Lucio was the only vessel left at San Jose, Antique, during the time in question. The other vessels were transferred and temporarily moved to Malandong, 5 kilometers from wharf where the barge remained.16 Clearly, the transferred vessels were definitely safer in Malandong than at the port of San Jose, Antique, at that particular time, a fact which petitioners failed to dispute ANCOs arguments boil down to the claim that the loss of the cargoes was caused by the typhoon Sisang, a fortuitous event (caso fortuito), and there was no fault or negligence on their part. In fact, ANCO claims that their crewmembers exercised due diligence to prevent or minimize the loss of the cargoes but their efforts proved no match to the forces unleashed by the typhoon which, in petitioners own words was, by any yardstick, a natural calamity, a fortuitous event, an act of God, the consequences of which petitioners could not be held liable for.17 The Civil Code provides: Art. 1733. Common carriers, from the nature of their business and for reasons of public policy are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. Such extraordinary diligence in vigilance over the goods is further expressed in Articles 1734, 1735, and 1745 Nos. 5, 6, and 7 . . . Art. 1734. Common carriers are responsible for the loss, destruction, or deterioration of the goods, unless the same is due to any of the following causes only: (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity;

... Art. 1739. In order that the common carrier may be exempted from responsibility, the natural disaster must have been the proximate and only cause of the loss. However, the common carrier must exercise due diligence to prevent or minimize loss before, during and after the occurrence of flood, storm, or other natural disaster in order that the common carrier may be exempted from liability for the loss, destruction, or deterioration of the goods . . . (Emphasis supplied) Caso fortuito or force majeure (which in law are identical insofar as they exempt an obligor from liability)18 by definition, are extraordinary events not foreseeable or avoidable, events that could not be foreseen, or which though foreseen, were inevitable. It is therefore not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid.19 In this case, the calamity which caused the loss of the cargoes was not unforeseen nor was it unavoidable. In fact, the other vessels in the port of San Jose, Antique, managed to transfer to another place, a circumstance which prompted SMCs District Sales Supervisor to request that the D/B Lucio be likewise transferred, but to no avail. The D/B Lucio had no engine and could not maneuver by itself. Even if ANCOs representatives wanted to transfer it, they no longer had any means to do so as the tugboat M/T ANCO had already departed, leaving the barge to its own devices. The captain of the tugboat should have had the foresight not to leave the barge alone considering the pending storm. While the loss of the cargoes was admittedly caused by the typhoon Sisang, a natural disaster, ANCO could not escape

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liability to respondent SMC. The records clearly show the failure of petitioners representatives to exercise the extraordinary degree of diligence mandated by law. To be exempted from responsibility, the natural disaster should have been the proximate and only cause of the loss.20 There must have been no contributory negligence on the part of the common carrier. As held in the case of Limpangco Sons v. Yangco Steamship Co.:21 . . . To be exempt from liability because of an act of God, the tug must be free from any previous negligence or misconduct by which that loss or damage may have been occasioned. For, although the immediate or proximate cause of the loss in any given instance may have been what is termed an act of God, yet, if the tug unnecessarily exposed the two to such accident by any culpable act or omission of its own, it is not excused.22 Therefore, as correctly pointed out by the appellate court, there was blatant negligence on the part of M/T ANCOs crewmembers, first in leaving the engineless barge D/B Lucio at the mercy of the storm without the assistance of the tugboat, and again in failing to heed the request of SMCs representatives to have the barge transferred to a safer place, as was done by the other vessels in the port; thus, making said blatant negligence the proximate cause of the loss of the cargoes. We now come to the issue of whether or not FGU can be held liable under the insurance policy to reimburse ANCO for the loss of the cargoes despite the findings of the respondent court that such loss was occasioned by the blatant negligence of the latters employees. One of the purposes for taking out insurance is to protect the insured against the consequences of his own negligence

and that of his agents. Thus, it is a basic rule in insurance that the carelessness and negligence of the insured or his agents constitute no defense on the part of the insurer.23 This rule however presupposes that the loss has occurred due to causes which could not have been prevented by the insured, despite the exercise of due diligence. The question now is whether there is a certain degree of negligence on the part of the insured or his agents that will deprive him the right to recover under the insurance contract. We say there is. However, to what extent such negligence must go in order to exonerate the insurer from liability must be evaluated in light of the circumstances surrounding each case. When evidence show that the insureds negligence or recklessness is so gross as to be sufficient to constitute a willful act, the insurer must be exonerated. In the case of Standard Marine Ins. Co. v. Nome Beach L. & T. Co.,24 the United States Supreme Court held that: The ordinary negligence of the insured and his agents has long been held as a part of the risk which the insurer takes upon himself, and the existence of which, where it is the proximate cause of the loss, does not absolve the insurer from liability. But willful exposure, gross negligence, negligence amounting to misconduct, etc., have often been held to release the insurer from such liability.25 [Emphasis ours] ... In the case of Williams v. New England Insurance Co., 3 Cliff. 244, Fed. Cas. No. 17,731, the owners of an insured vessel attempted to put her across the bar at Hatteras Inlet. She struck on the bar and was wrecked. The master knew that the depth of water on the bar was such as to make the attempted passage dangerous.

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Judge Clifford held that, under the circumstances, the loss was not within the protection of the policy, saying: Authorities to prove that persons insured cannot recover for a loss occasioned by their own wrongful acts are hardly necessary, as the proposition involves an elementary principle of universal application. Losses may be recovered by the insured, though remotely occasioned by the negligence or misconduct of the master or crew, if proximately caused by the perils insured against, because such mistakes and negligence are incident to navigation and constitute a part of the perils which those who engage in such adventures are obliged to incur; but it was never supposed that the insured could recover indemnity for a loss occasioned by his own wrongful act or by that of any agent for whose conduct he was responsible.26 [Emphasis ours] From the above-mentioned decision, the United States Supreme Court has made a distinction between ordinary negligence and gross negligence or negligence amounting to misconduct and its effect on the insureds right to recover under the insurance contract. According to the Court, while mistake and negligence of the master or crew are incident to navigation and constitute a part of the perils that the insurer is obliged to incur, such negligence or recklessness must not be of such gross character as to amount to misconduct or wrongful acts; otherwise, such negligence shall release the insurer from liability under the insurance contract. In the case at bar, both the trial court and the appellate court had concluded from the evidence that the crewmembers of both the D/B Lucio and the M/T ANCO were blatantly negligent. To wit: There was blatant negligence on the part of the employees of defendants-appellants

when the patron (operator) of the tug boat immediately left the barge at the San Jose, Antique wharf despite the looming bad weather. Negligence was likewise exhibited by the defendants-appellants representative who did not heed Macabuags request that the barge be moved to a more secure place. The prudent thing to do, as was done by the other sea vessels at San Jose, Antique during the time in question, was to transfer the vessel to a safer wharf. The negligence of the defendants-appellants is proved by the fact that on 01 October 1979, the only simple vessel left at the wharf in San Jose was the D/B Lucio.27 [Emphasis ours] As stated earlier, this Court does not find any reason to deviate from the conclusion drawn by the lower court, as sustained by the Court of Appeals, that ANCOs representatives had failed to exercise extraordinary diligence required of common carriers in the shipment of SMCs cargoes. Such blatant negligence being the proximate cause of the loss of the cargoes amounting to One Million Three Hundred Forty-Six Thousand One Hundred NinetySeven Pesos (P1,346,197.00) This Court, taking into account the circumstances present in the instant case, concludes that the blatant negligence of ANCOs employees is of such gross character that it amounts to a wrongful act which must exonerate FGU from liability under the insurance contract. WHEREFORE, premises considered, the Decision of the Court of Appeals dated 24 February 1999 is hereby AFFIRMED with MODIFICATION dismissing the third-party complaint. SO ORDERED. G.R. No. L-30685 May 30, 1983

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NG GAN ZEE, plaintiff-appellee, vs. ASIAN CRUSADER LIFE ASSURANCE CORPORATION, defendant-appellant. Alberto Q. Ubay for plaintiff-appellee. Santiago F. A lidio for defendant-appellant.

the policy. On the same date, she submitted the required proof of death of the insured. Appellant denied the claim on the ground that the answers given by the insured to the questions appealing in his application for life insurance were untrue. Appellee brought the matter to the attention of the Insurance Commissioner, the Hon. Francisco Y. Mandamus, and the latter, after conducting an investigation, wrote the appellant that he had found no material concealment on the part of the insured and that, therefore, appellee should be paid the full face value of the policy. This opinion of the Insurance Commissioner notwithstanding, appellant refused to settle its obligation. Appellant alleged that the insured was guilty of misrepresentation when he answered "No" to the following question appearing in the application for life insuranceHas any life insurance company ever refused your application for insurance or for reinstatement of a lapsed policy or offered you a policy different from that applied for? If, so, name company and date. In its brief, appellant rationalized its thesis thus: ... As pointed out in the foregoing summary of the essential facts in this case, the insured had in January, 1962, applied for reinstatement of his lapsed life insurance policy with the Insular Life Insurance Co., Ltd, but this was declined by the insurance company, although later on approved for reinstatement with a very high premium as a result of his

ESCOLIN, J.: This is an appeal from the judgment of the Court of First Instance of Manila, ordering the appellant Asian-Crusader Life Assurance Corporation to pay the face value of an insurance policy issued on the life of Kwong Nam the deceased husband of appellee Ng Gan Zee. Misrepresentation and concealment of material facts in obtaining the policy were pleaded to avoid the policy. The lower court rejected the appellant's theory and ordered the latter to pay appellee "the amount of P 20,000.00, with interest at the legal rate from July 24, 1964, the date of the filing of the complaint, until paid, and the costs. " The Court of Appeals certified this appeal to Us, as the same involves solely a question of law. On May 12, 1962, Kwong Nam applied for a 20-year endowment insurance on his life for the sum of P20,000.00, with his wife, appellee Ng Gan Zee as beneficiary. On the same date, appellant, upon receipt of the required premium from the insured, approved the application and issued the corresponding policy. On December 6, 1963, Kwong Nam died of cancer of the liver with metastasis. All premiums had been religiously paid at the time of his death. On January 10, 1964, his widow Ng Gan Zee presented a claim in due form to appellant for payment of the face value of

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medical examination. Thus notwithstanding the said insured answered 'No' to the [above] question propounded to him. ... 1 The lower court found the argument bereft of factual basis; and We quote with approval its disquisition on the matterOn the first question there is no evidence that the Insular Life Assurance Co., Ltd. ever refused any application of Kwong Nam for insurance. Neither is there any evidence that any other insurance company has refused any application of Kwong Nam for insurance. ... The evidence shows that the Insular Life Assurance Co., Ltd. approved Kwong Nam's request for reinstatement and amendment of his lapsed insurance policy on April 24, 1962 [Exh. L-2 Stipulation of Facts, Sept. 22, 1965). The Court notes from said application for reinstatement and amendment, Exh. 'L', that the amount applied for was P20,000.00 only and not for P50,000.00 as it was in the lapsed policy. The amount of the reinstated and amended policy was also for P20,000.00. It results, therefore, that when on May 12, 1962 Kwong Nam answered 'No' to the question whether any life insurance company ever refused his application for reinstatement of a lapsed policy he did not misrepresent any fact. ... the evidence shows that the application of Kwong Nam with

the Insular Life Assurance Co., Ltd. was for the reinstatement and amendment of his lapsed insurance policy-Policy No. 369531 -not an application for a 'new insurance policy. The Insular Life Assurance Co., Ltd. approved the said application on April 24, 1962. Policy No. 369531 was reinstated for the amount of P20,000.00 as applied for by Kwong Nam [Exhs. 'L', 'L-l' and 'L-2']. No new policy was issued by the Insular Life Assurance Co., Ltd. to Kwong Nam in connection with said application for reinstatement and amendment. Such being the case, the Court finds that there is no misrepresentation on this matter. 2 Appellant further maintains that when the insured was examined in connection with his application for life insurance, he gave the appellant's medical examiner false and misleading information as to his ailment and previous operation. The alleged false statements given by Kwong Nam are as follows: Operated on for a Tumor [mayoma] of the stomach. Claims that Tumor has been associated with ulcer of stomach. Tumor taken out was hard and of a hen's egg size. Operation was two [2] years ago in Chinese General Hospital by Dr. Yap. Now, claims he is completely recovered. To demonstrate the insured's misrepresentation, appellant directs Our attention to:

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[1] The report of Dr. Fu Sun Yuan the physician who treated Kwong Nam at the Chinese General Hospital on May 22, 1960, i.e., about 2 years before he applied for an insurance policy on May 12, 1962. According to said report, Dr. Fu Sun Yuan had diagnosed the patient's ailment as 'peptic ulcer' for which, an operation, known as a 'sub-total gastric resection was performed on the patient by Dr. Pacifico Yap; and [2] The Surgical Pathology Report of Dr. Elias Pantangco showing that the specimen removed from the patient's body was 'a portion of the stomach measuring 12 cm. and 19 cm. along the lesser curvature with a diameter of 15 cm. along the greatest dimension. On the bases of the above undisputed medical data showing that the insured was operated on for peptic ulcer", involving the excision of a portion of the stomach, appellant argues that the insured's statement in his application that a tumor, "hard and of a hen's egg size," was removed during said operation, constituted material concealment. The question to be resolved may be propounded thus: Was appellant, because of insured's aforesaid representation, misled or deceived into entering the contract or in accepting the risk at the rate of premium agreed upon? The lower court answered this question in the negative, and We agree. Section 27 of the Insurance Law [Act 2427] provides: Sec. 27. Such party a contract of insurance must communicate to the other, in good faith, all facts within his knowledge which are material to the contract, and which the

other has not the means of ascertaining, and as to which he makes no warranty. 3 Thus, "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 assurer, but he designedly and intentionally withholds the same." 4 It has also been held "that the concealment must, in the absence of inquiries, be not only material, but fraudulent, or the fact must have been intentionally withheld." 5 Assuming that the aforesaid answer given by the insured is false, as claimed by the appellant. Sec. 27 of the Insurance Law, above-quoted, nevertheless requires that fraudulent intent on the part of the insured be established to entitle the insurer to rescind the contract. And as correctly observed by the lower court, "misrepresentation as a defense of the insurer to avoid liability is an 'affirmative' defense. The duty to establish such a defense by satisfactory and convincing evidence rests upon the defendant. The evidence before the Court does not clearly and satisfactorily establish that defense." It bears emphasis that Kwong Nam had informed the appellant's medical examiner that the tumor for which he was operated on was "associated with ulcer of the stomach." In the absence of evidence that the insured had sufficient medical knowledge as to enable him to distinguish between "peptic ulcer" and "a tumor", his statement that said tumor was "associated with ulcer of the stomach, " should be construed as an expression made in good faith of his belief as to the nature of his ailment and operation. Indeed, such statement must be presumed to have been made by him without knowledge of its

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incorrectness and without any deliberate intent on his part to mislead the appellant. While it may be conceded that, from the viewpoint of a medical expert, the information communicated was imperfect, the same was nevertheless sufficient to have induced appellant to make further inquiries about the ailment and operation of the insured. Section 32 of Insurance Law [Act No. 24271 provides as follows: Section 32. The right to information of material facts maybe waived either by the terms of insurance or by neglect to make inquiries as to such facts where they are distinctly implied in other facts of which information is communicated. It has been held that where, upon the face of the application, a question appears to be not answered at all or to be imperfectly answered, and the insurers issue a policy without any further inquiry, they waive the imperfection of the answer and render the omission to answer more fully immaterial. 6 As aptly noted by the lower court, "if the ailment and operation of Kwong Nam had such an important bearing on the question of whether the defendant would undertake the insurance or not, the court cannot understand why the defendant or its medical examiner did not make any further inquiries on such matters from the Chinese General Hospital or require copies of the hospital records from the appellant before acting on the application for insurance. The fact of the matter is that the defendant was too eager to accept the application and receive the insured's premium. It would be inequitable now to allow the defendant to avoid liability under the circumstances."

Finding no reversible error committed by the trial court, the judgment appealed from is hereby affirmed, with costs against appellant Asian-Crusader life Assurance Corporation. SO ORDERED. G.R. No. 125678 March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents. YNARES-SANTIAGO, J.: 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

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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 Code6 does not apply.1wphi1.nt 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,

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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

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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 (Underscoring 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 (Underscoring 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

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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 (Underscoring 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

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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-67835 October 12, 1987 MALAYAN INSURANCE CO., INC. (MICO), petitioner, vs. GREGORIA CRUZ ARNALDO, in her capacity as the INSURANCE COMMISSIONER, and CORONACION PINCA, respondents.

and forecloses hope for the suddenly somber future. The vanished abode becomes a charred and painful memory. Where once stood a home, there is now, in the sighing wisps of smoke, only a gray desolation. The dying embers leave ashes in the heart. For peace of mind and as a hedge against possible loss, many people now secure fire insurance. This is an aleatory contract. By such insurance, the insured in effect wagers that his house will be burned, with the insurer assuring him against the loss, for a fee. If the house does burn, the insured, while losing his house, wins the wagers. The prize is the recompense to be given by the insurer to make good the loss the insured has sustained. It would be a pity then if, having lost his house, the insured were also to lose the payment he expects to recover for such loss. Sometimes it is his fault that he cannot collect, as where there is a defect imputable to him in the insurance contract. Conversely, the reason may be an unjust refusal of the insurer to acknowledge a just obligation, as has happened many times. In the instant case the private respondent has been sustained by the Insurance Commission in her claim for compensation for her burned property. The petitioner is now before us to dispute the decision, 1 on the ground that there was no valid insurance contract at the time of the loss. The chronology of the relevant antecedent facts is as follows: On June 7, 1981, the petitioner (hereinafter called (MICO) issued to the private respondent, Coronacion Pinca, Fire Insurance Policy No. F-001-17212 on her property for the amount of P14,000.00 effective July 22, 1981, until July 22, 1982.
2

CRUZ, J.: When a person's house is razed, the fire usually burns down the efforts of a lifetime

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On October 15,1981, MICO allegedly cancelled the policy for non-payment, of the premium and sent the corresponding notice to Pinca. 3 On December 24, 1981, payment of the premium for Pinca was received by DomingoAdora, agent of MICO. 4 On January 15, 1982, Adora remitted this payment to MICO,together with other payments. 5 On January 18, 1982, Pinca's property was completely burned. 6 On February 5, 1982, Pinca's payment was returned by MICO to Adora on the ground that her policy had been cancelled earlier. But Adora refused to accept it. 7 In due time, Pinca made the requisite demands for payment, which MICO rejected. She then went to the Insurance Commission. It is because she was ultimately sustained by the public respondent that the petitioner has come to us for relief. From the procedural viewpoint alone, the petition must be rejected. It is stillborn. The records show that notice of the decision of the public respondent dated April 5, 1982, was received by MICO on April 10, 1982. 8 On April 25, 1982, it filed a motion for reconsideration, which was denied on June 4, 1982. 9 Notice of this denial was received by MICO on June 13, 1982, as evidenced by Annex "1" duly authenticated by the Insurance Commission. 10 The instant petition was filed with this Court on July 2, 1982. 11 The position of the petition is that the petition is governed by Section 416 0f the Insurance Code giving it thirty days wthin which to appeal by certiorari to this Court. Alternatively, it also invokes Rule 45 of the

Rules of Court. For their part, the public and private respondents insist that the applicable law is B.P. 129, which they say governs not only courts of justice but also quasi-judicial bodies like the Insurance Commission. The period for appeal under this law is also fifteen days, as under Rule 45. The pivotal date is the date the notice of the denial of the motion for reconsideration was received by MICO. MICO avers this was June 18, 1982, and offers in evidence its Annex "B," 12 which is a copy of the Order of June 14, 1982, with a signed rubber-stamped notation on the upper left-hand corner that it was received on June 18, 1982, by its legal department. It does not indicate from whom. At the bottom, significantly, there is another signature under which are the ciphers "6-13-82," for which no explanation has been given. Against this document, the private respodent points in her Annex "1," 13 the authenticated copy of the same Order with a rubber-stamped notation at the bottom thereof indicating that it was received for the Malayan Insurance Co., Inc. by J. Gotladera on "6-13-82." The signature may or may not habe been written by the same person who signed at the bottom of the petitioner's Annex "B." Between the two dates, the court chooses to believe June 13, 1982, not only because the numbers "6-13-82" appear on both annexes but also because it is the date authenticated by the administrative division of the Insurance Commission. Annex "B" is at worst self-serving; at best, it might only indicate that it was received on June 18, 1982, by the legal department of MICO, after it had been received earlier by some other of its personnel on June 13, 1982. Whatever the reason for the delay in

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transmitting it to the legal department need not detain us here. Under Section 416 of the Insurance Code, the period for appeal is thirty days from notice of the decision of the Insurance Commission. The petitioner filed its motion for reconsideration on April 25, 1981, or fifteen days such notice, and the reglementary period began to run again after June 13, 1981, date of its receipt of notice of the denial of the said motion for reconsideration. As the herein petition was filed on July 2, 1981, or nineteen days later, there is no question that it is tardy by four days. Counted from June 13, the fifteen-day period prescribed under Rule 45, assuming it is applicable, would end on June 28, 1982, or also four days from July 2, when the petition was filed. If it was filed under B.P. 129, then, considering that the motion for reconsideration was filed on the fifteenth day after MICO received notice of the decision, only one more day would have remained for it to appeal, to wit, June 14, 1982. That would make the petition eighteen days late by July 2. Indeed, even if the applicable law were still R.A. 5434, governing appeals from administrative bodies, the petition would still be tardy. The law provides for a fixed period of ten days from notice of the denial of a seasonable motion for reconsideration within which to appeal from the decision. Accordingly, that ten-day period, counted from June 13, 1982, would have ended on June 23, 1982, making the petition filed on July 2, 1982, nine days late. Whichever law is applicable, therefore, the petition can and should be dismissed for late filing.

On the merits, it must also fail. MICO's arguments that there was no payment of premium and that the policy had been cancelled before the occurence of the loss are not acceptable. Its contention that the claim was allowed without proof of loss is also untenable. The petitioner relies heavily on Section 77 of the Insurance Code providing that: SEC. 77. An insurer is entitled to payment of the premium as soon as the thing is exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid, except in the case of a life or an industrial life policy whenever the grace period provision applies. The above provision is not applicable because payment of the premium was in fact eventually made in this case. Notably, the premium invoice issued to Pinca at the time of the delivery of the policy on June 7, 1981 was stamped "Payment Received" of the amoung of P930.60 on "12-24-81" by Domingo Adora. 14 This is important because it suggests an understanding between MICO and the insured that such payment could be made later, as agent Adora had assured Pinca. In any event, it is not denied that this payment was actually made by Pinca to Adora, who remitted the same to MICO. The payment was made on December 24, 1981, and the fire occured on January 18, 1982. One wonders: suppose the payment had been made and accepted in, say, August 1981, would the commencement date of the policy have been changed to

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the date of the payment, or would the payment have retroacted to July 22, 1981? If MICO accepted the payment in December 1981 and the insured property had not been burned, would that policy not have expired just the same on July 22, 1982, pursuant to its original terms, and not on December 24, 1982? It would seem from MICO's own theory, that the policy would have become effective only upon payment, if accepted and so would have been valid only from December 24, 1981m but only up to July 22, 1981, according to the original terms. In others words, the policy would have run for only eight months although the premium paid was for one whole year. It is not disputed that the preium was actually paid by Pinca to Adora on December 24, 1981, who received it on behalf of MICO, to which it was remitted on January 15, 1982. What is questioned is the validity of Pinca's payment and of Adora's authority to receive it. MICO's acknowledgment of Adora as its agent defeats its contention that he was not authorized to receive the premium payment on its behalf. It is clearly provided in Section 306 of the Insurance Code that: SEC. 306. xxx xxx xxx Any insurance company which delivers to an insurance agant or insurance broker a policy or contract of insurance shall be demmed to have authorized such agent or broker to receive on its behalf payment of any premium which is due on such policy or contract of insurance at the time of its issuance or delivery or which becomes due thereon.

And it is a well-known principle under the law of agency that: Payment to an agent having authority to receive or collect payment is equivalent to payment to the principal himself; such payment is complete when the money delivered is into the agent's hands and is a discharge of the indebtedness owing to the principal. 15 There is the petitioner's argument, however, that Adora was not authorized to accept the premium payment because six months had elapsed since the issuance by the policy itself. It is argued that this prohibition was binding upon Pinca, who made the payment to Adora at her own riskl as she was bound to first check his authority to receive it. 16 MICO is taking an inconsistent stand. While contending that acceptance of the premium payment was prohibited by the policy, it at the same time insists that the policy never came into force because the premium had not been paid. One surely, cannot have his cake and eat it too. We do not share MICO's view that there was no existing insurance at the time of the loss sustained by Pinca because her policy never became effective for nonpayment of premium. Payment was in fact made, rendering the policy operative as of June 22, 1981, and removing it from the provisions of Article 77, Thereafter, the policy could be cancelled on any of the supervening grounds enumerated in Article 64 (except "nonpayment of premium") provided the cancellation was made in accordance therewith and with Article 65. Section 64 reads as follows:

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SEC. 64. No policy of insurance other than life shall be cancelled by the insurer except upon prior notice thereof to the insured, and no notice of cancellation shall be effective unless it is based on the occurrence, after the effective date of the policy, of one or more of the following: (a) non-payment of premium; (b) conviction of a crime arising out of acts increasing the hazard insured against; (c) discovery of fraud or material misrepresentation; (d) discovery of willful, or reckless acts or commissions increasing the hazard insured against; (e) physical changes in the property insured which result in the property becoming uninsurable;or (f) a determination by the Commissioner that the continuation of the policy would violate or would place the insurer in violation of this Code. As for the method of cancellation, Section 65 provides as follows: SEC. 65. All notices of cancellation mentioned in the preceding section shall be in writing, mailed or delivered to the named insured at the address shown in the policy, and shall state (a) which of the grounds set forth in section sixty-four is relied upon and

(b) that, upon written request of the named insured, the insurer will furnish the facts on which the cancellation is based. A valid cancellation must, therefore, require concurrence of the following conditions: (1) There must be prior notice of cancellation to the insured; 17 (2) The notice must be based on the occurrence, after the effective date of the policy, of one or more of the grounds mentioned;18 (3) The notice must be (a) in writing, (b) mailed, or delivered to the named insured, (c) at the address shown in the policy; 19 (4) It must state (a) which of the grounds mentioned in Section 64 is relied upon and (b) that upon written request of the insured, the insurer will furnish the facts on which the cancellation is based. 20 MICO's claims it cancelled the policy in question on October 15, 1981, for nonpayment of premium. To support this assertion, it presented one of its employees, who testified that "the original of the endorsement and credit memo" presumably meaning the alleged cancellation "were sent the assured by mail through our mailing section" 21 However, there is no proof that the notice, assuming it complied with the other requisites mentioned above, was actually mailed to and received by Pinca. All MICO's offers to show that the cancellation was communicated to the insured is its employee's testimony that the said cancellation was sent "by mail through our mailing section." without more. The petitioner then says that its "stand is enervated (sic) by the legal presumption of regularity and due performance of duty." 22

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(not realizing perhaps that "enervated" means "debilitated" not "strengthened"). On the other hand, there is the flat denial of Pinca, who says she never received the claimed cancellation and who, of course, did not have to prove such denial Considering the strict language of Section 64 that no insurance policy shall be cancelled except upon prior notice, it behooved MICO's to make sure that the cancellation was actually sent to and received by the insured. The presumption cited is unavailing against the positive duty enjoined by Section 64 upon MICO and the flat denial made by the private respondent that she had received notice of the claimed cancellation. It stands to reason that if Pinca had really received the said notice, she would not have made payment on the original policy on December 24, 1981. Instead, she would have asked for a new insurance, effective on that date and until one year later, and so taken advantage of the extended period. The Court finds that if she did pay on that date, it was because she honestly believed that the policy issued on June 7, 1981, was still in effect and she was willing to make her payment retroact to July 22, 1981, its stipulated commencement date. After all, agent Adora was very accomodating and had earlier told her "to call him up any time" she was ready with her payment on the policy earlier issued. She was obviously only reciprocating in kind when she paid her premium for the period beginning July 22, 1981, and not December 24, 1981. MICO's suggests that Pinca knew the policy had already been cancelled and that when she paid the premium on December 24, 1981, her purpose was "to renew it." As this could not be done by the agent alone under the terms of the original policy, the renewal thereof did not legally bind MICO.

which had not ratified it. To support this argument, MICO's cites the following exchange: Q: Now, Madam Witness, on December 25th you made the alleged payment. Now, my question is that, did it not come to your mind that after the lapse of six (6) months, your policy was cancelled? A: I have thought of that but the agent told me to call him up at anytime. Q: So if you thought that your policy was already intended to revive cancelled policy? A: Misleading, Your Honor. Hearing Officer: The testimony of witness is that, she thought of that. Q: I will revise the question. Now, Mrs. Witness, you stated that you thought the policy was cancelled. Now, when you made the payment of December 24, 1981, your intention was to revive the policy if

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it was already cancelled? A: Yes, to renew it.


23

in the fire that razed the commercial district of Lao-ang, Samar, on January 18, 1982. 27 There is nothing in the Insurance Code that makes the participation of an adjuster in the assessment of the loss imperative or indespensable, as MICO suggests. Section 325, which it cites, simply speaks of the licensing and duties of adjusters. We see in this cases an obvious design to evade or at least delay the discharge of a just obligation through efforts bordering on bad faith if not plain duplicity, We note that the motion for reconsideration was filed on the fifteenth day from notice of the decision of the Insurance Commission and that there was a feeble attempt to show that the notice of denial of the said motion was not received on June 13, 1982, to further hinder the proceedings and justify the filing of the petition with this Court fourteen days after June 18, 1982. We also look askance at the alleged cancellation, of which the insured and MICO's agent himself had no knowledge, and the curious fact that although Pinca's payment was remitted to MICO's by its agent on January 15, 1982, MICO sought to return it to Adora only on February 5, 1982, after it presumably had learned of the occurrence of the loss insured against on January 18, 1982. These circumstances make the motives of the petitioner highly suspect, to say the least, and cast serious doubts upon its candor and bona fides. WHEREFORE, the petition is DENIED. The decision of the Insurance Commission dated April 10, 1981, and its Order of June 4, 1981, are AFFIRMED in full, with costs against the petitioner. This decision is immediately executory. SO ORDERED.

A close study of the above transcript will show that Pinca meant to renew the policy if it had really been already cancelled but not if it was stffl effective. It was all conditional. As it has not been shown that there was a valid cancellation of the policy, there was consequently no need to renew it but to pay the premium thereon. Payment was thus legally made on the original transaction and it could be, and was, validly received on behalf of the insurer by its agent Adora. Adora. incidentally, had not been informed of the cancellation either and saw no reason not to accept the said payment. The last point raised by the petitioner should not pose much difficulty. The valuation fixed in fire insurance policy is conclusive in case of total loss in the absence of fraud, 24 which is not shown here. Loss and its amount may be determined on the basis of such proof as may be offered by the insured, which need not be of such persuasiveness as is required in judicial proceedings. 25 If, as in this case, the insured files notice and preliminary proof of loss and the insurer fails to specify to the former all the defects thereof and without unnecessary delay, all objections to notice and proof of loss are deemed waived under Section 90 of the Insurance Code. The certification 26 issued by the Integrated National Police, Lao-ang, Samar, as to the extent of Pinca's loss should be considered sufficient. Notably,MICO submitted no evidence to the contrary nor did it even question the extent of the loss in its answer before the Insurance Commission. It is also worth observing that Pinca's property was not the only building bumed

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