1

G.R. No. 147839

June 8, 2006

GAISANO CAGAYAN, INC. Petitioner, vs. INSURANCE COMPANY OF NORTH AMERICA, Respondent. DECISION AUSTRIA-MARTINEZ, J.: Before the Court is a petition for review on certiorari of the Decision 1 dated October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for damages of Insurance Company of North America (respondent) against Gaisano Cagayan, Inc. (petitioner); and the CA Resolution dated April 11, 2001 which denied petitioner's motion for reconsideration. The factual background of the case is as follows: Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent fire insurance policies with book debt endorsements. The insurance policies provide for coverage on "book debts in connection with ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured anywhere in the Philippines." 2 The policies defined book debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this Policy."3 The policies also provide for the following conditions: 1. Warranted that the Company shall not be liable for any unpaid account in respect of the merchandise sold and delivered by the Insured which are outstanding at the date of loss for a period in excess of six (6) months from the date of the covering invoice or actual delivery of the merchandise whichever shall first occur. 2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close of every calendar month all amount shown in their books of accounts as unpaid and thus become receivable item from their customers and dealers. x x x4 xxxx

materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their rights against petitioner; that respondent made several demands for payment upon petitioner but these went unheeded. 5 In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable because the property covered by the insurance policies were destroyed due to fortuities event or force majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of contract committed by it since the loss was due to fire which it could not prevent or foresee; that IMC and LSPI never communicated to it that they insured their properties; that it never consented to paying the claim of the insured.6 At the pre-trial conference the parties failed to arrive at an amicable settlement. 7 Thus, trial on the merits ensued. On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that the fire was purely accidental; that the cause of the fire was not attributable to the negligence of the petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that since the sales invoices state that "it is further agreed that merely for purpose of securing the payment of purchase price, the above-described merchandise remains the property of the vendor until the purchase price is fully paid", IMC and LSPI retained ownership of the delivered goods and must bear the loss. Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting aside the decision of the RTC. The dispositive portion of the decision reads: WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay: 1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus legal interest from the time of demand until fully paid; 2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the time of demand until fully paid. With costs against the defendant-appellee. SO ORDERED.10

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by IMC and LSPI. On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and LSPI filed with respondent their claims under their respective fire insurance policies with book debt endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of ready-made clothing

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is not extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the right to go against petitioner; that,

being a fire insurance with book debt endorsements, what was insured was the vendor's interest as a creditor.11 Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April 11, 2001.13 Hence, the present petition for review on certiorari anchored on the following Assignment of Errors: THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE OVER CREDIT. THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF. THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14 Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be over credit since an insurance "on credit" belies not only the nature of fire insurance but the express terms of the policies; that it was not credit that was insured since respondent paid on the occasion of the loss of the insured goods to fire and not because of the non-payment by petitioner of any obligation; that, even if the insurance is deemed as one over credit, there was no loss as the accounts were not yet due since no prior demands were made by IMC and LSPI against petitioner for payment of the debt and such demands came from respondent only after it had already paid IMC and LSPI under the fire insurance policies. 15 As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI assumed the risk of loss when they secured fire insurance policies over the goods. Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment between respondent and its insured nor was its consent or approval ever secured; that this lack of privity forecloses any real interest on the part of respondent in the obligation to pay, limiting its interest to keeping the insured goods safe from fire. For its part, respondent counters that while ownership over the ready- made clothing materials was transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of the readymade clothing materials since it failed to overcome the presumption of liability under Article 1265 16 of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide stringent measures of caution, care and maintenance on its property because electric wires do not usually short circuit unless there are defects in their installation or when there is lack of proper maintenance and supervision of the property; that petitioner is guilty of gross and evident bad faith in refusing to pay respondent's valid claim and should be liable to respondent for contracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the CA is limited to reviewing questions of law which involves no examination of the probative value of the evidence presented by the litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its function to analyze or weigh evidence all over again.19 Accordingly, findings of fact of the appellate court are generally conclusive on the Supreme Court.20 Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved by this Court, such as: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in making its findings the CA went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different conclusion. 21 Exceptions (4), (5), (7), and (11) apply to the present petition. At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA erred in construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and LSPI since such insurance applies to loss of the ready-made clothing materials sold and delivered to petitioner. The Court disagrees with petitioner's stand. It is well-settled that when the words of a contract are plain and readily understood, there is no room for construction.22 In this case, the questioned insurance policies provide coverage for "book debts in connection with ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured anywhere in the Philippines."23 ; and defined book debts as the "unpaid account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered under this Policy." 24 Nowhere is it provided in the questioned insurance policies that the subject of the insurance is the goods sold and delivered to the customers and dealers of the insured. Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to read into it any alleged intention of the parties, the terms are to be understood literally just as they appear on the face of the contract.25 Thus, what were insured against were the accounts of IMC and LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or destruction of the goods delivered. Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the payment of the purchase price the above described merchandise remains the property of the vendor until the purchase price thereof is fully paid."26 The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code: ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery has been made or not, except that: (1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of the contract and the ownership in the goods has been retained by the seller merely to secure performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from the time of such delivery; (Emphasis supplied) xxxx Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered. IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest is not determined by concept of title, but whether insured has substantial economic interest in the property. 28 Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest is requisite to the existence of such an interest, it is sufficient that the insured is so situated with reference to the property that he would be liable to loss should it be injured or destroyed by the peril against which it is insured. 29 Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction.30 Indeed, a vendor or seller retains an insurable interest in the property sold so long as he has any interest therein, in other words, so long as he would suffer by its destruction, as where he has a vendor's lien.31 In this case, the insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the time of the loss covered by the policies. The next question is: Is petitioner liable for the unpaid accounts? Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 1174 32 of the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil Code. Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly, petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation consists in the payment of

money, the failure of the debtor to make the payment even by reason of a fortuitous event shall not relieve him of his liability.33 The rationale for this is that the rule that an obligor should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in nature.34 Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense that the object thereof is designated merely by its class or genus without any particular designation or physical segregation from all others of the same class, the loss or destruction of anything of the same kind even without the debtor's fault and before he has incurred in delay will not have the effect of extinguishing the obligation.35 This rule is based on the principle that the genus of a thing can never perish. Genus nunquan perit.36 An obligation to pay money is generic; therefore, it is not excused by fortuitous loss of any specific property of the debtor.37 Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case. What is relevant here is whether it has been established that petitioner has outstanding accounts with IMC and LSPI. With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show that petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of respondent upon receipt of the insurance proceeds. All these documents have been properly identified, presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the insurance company of the insurance claim.41 Respondent's action against petitioner is squarely sanctioned by Article 2207 of the Civil Code which provides: Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. x x x Petitioner failed to refute respondent's evidence. As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's building on February 25, 1991. Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the amount of P535,613.00 to respondent is DELETED for lack of factual basis. No pronouncement as to costs. SO ORDERED.

HELD: The rationale of a group of insurance policy of mortgagors, otherwise known as the mortgage redemption insurance, is a device for the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such form of contract so that in the event of the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. In a similar vein, ample protection is given to the mortgagor under such a concept so that in the event of death, the mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage indebtedness. In this type of policy insurance, the mortgagee is simply an appointee of the insurance fund. Such loss-payable clause does not make the mortgagee a party to the contract.

GREAT PACIFIC LIFE ASSURANCE COMPANY 316 SCRA 677 (1999)

The insured, being the person with whom the contract was made, is primarily the proper person to bring suit thereon. Subject to some exceptions, insured may thus sue, although the policy is taken wholly or in part for the benefit of another person, such as a mortgagee. And since a policy of insurance upon life or health may pass by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover it whatever the insured might have recovered, the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife. 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.

INSURANCE LAW: Parties in Insurance Contract

FACTS: Great Pacific Life Assurance Corporation (Grepalife) executed a contract of group life insurance with Development Bank of the Philippines (DBP) wherein Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP. One such loan mortgagor is Dr. Wilfredo Leuterio. In an application form, Dr. Leuterio answered questions concerning his test, attesting among others that he does not have any heart conditions and that he is in good health to the best of his knowledge. However, after about a year, Dr. Leuterio died due to massive cerebral hemorrhage. When DBP submitted a death claim to Grepalife, the latter denied the claim, alleging that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death. Allegedly, such non-disclosure constituted concealment that justified the denial of the claim. Hence, the widow of the late Dr. Leuterio filed a complaint against Grepalife for Specific Performance with Damages. Both the trial court and the Court of Appeals found in favor of the widow and ordered Grepalife to pay DBP. ISSUE:

Whether the CA erred in holding Grepalife liable to DBP as beneficiary in a group life insurance contract from a complaint filed by the widow of the decedent/mortgagor DE CASTRO, J.:

The two above-entitled cases were ordered consolidated by the Resolution of this Court 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 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 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 intra-company 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 twenty-year 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 noncompliance 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 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 20year 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, 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, pp- 52-53). 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. Tan v. CA - Rescission of the contract of insurance 174 SCRA 403 Facts: > Tan Lee Siong was issued a policy by Philamlife on Nov. 6, 1973. > On Aprl 26, 1975, Tan died of hepatoma. His beneficiaries then filed a claim with Philamlife for the proceeds of the insurance.

> Philamlife wrote the beneficiaries in Sep. 1975 denying their claim and rescinding the contract on the ground of misrepresentation. The beneficiaries contend that Philamlife can no longer rescind the contract on the ground of misrepresentation as rescission must allegedly be done during the lifetime of the insured within two years and prior to the commencement of the action following the wording of Sec. 48, par. 2. Issue: Whether or not Philamlife can rescind the contract.

This is a petition for review on certiorari of the Court of Appeals' decision affirming the decision of the Insurance Commissioner which dismissed the petitioners' complaint against respondent Philippine American Life Insurance Company for the recovery of the proceeds from their late father's policy. The facts of the case as found by the Court of Appeals are: Petitioners appeal from the Decision of the Insurance Commissioner dismissing herein petitioners' complaint against respondent Philippine American Life Insurance Company for the recovery of the proceeds of Policy No. 1082467 in the amount of P 80,000.00. On September 23,1973, Tan Lee Siong, father of herein petitioners, applied for life insurance in the amount of P 80,000.00 with respondent company. Said application was approved and Policy No. 1082467 was issued effective November 6,1973, with petitioners the beneficiaries thereof (Exhibit A). On April 26,1975, Tan Lee Siong died of hepatoma (Exhibit B). Petitioners then filed with respondent company their claim for the proceeds of the life insurance policy. However, in a letter dated September 11, 1975, respondent company denied petitioners' claim and rescinded the policy by reason of the alleged misrepresentation and concealment of material facts made by the deceased Tan Lee Siong in his application for insurance (Exhibit 3). The premiums paid on the policy were thereupon refunded . Alleging that respondent company's refusal to pay them the proceeds of the policy was unjustified and unreasonable, petitioners filed on November 27, 1975, a complaint against the former with the Office of the Insurance Commissioner, docketed as I.C. Case No. 218. After hearing the evidence of both parties, the Insurance Commissioner rendered judgment on August 9, 1977, dismissing petitioners' complaint. (Rollo, pp. 91-92) The Court of Appeals dismissed ' the petitioners' appeal from the Insurance Commissioner's decision for lack of merit

Held: YES. The phrase during the lifetime found in Sec. 48 simply means that the policy is no longer in force after the insured has died. The key phrase in the second paragraph is for a period of two years.

What is a simpler illustration of the ruling in Tan v. CA? The period to consider in a life insurance poiicy is two years from the date of issue or of the last reinstatement. So if for example the policy was issued/reinstated on Jan 1, 2000, the insurer can still exercise his right to rescind up to Jan. 1, 2003 or two years from the date of issue/reinstatement, REGARDLESS of whether the insured died before or after Jan. 1, 2003.

G.R. No. 48049 June 29, 1989 Hence, this petition. EMILIO TAN, JUANITO TAN, ALBERTO TAN and ARTURO TAN, petitioners, vs. THE COURT OF APPEALS and THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondents. O.F. Santos & P.C. Nolasco for petitioners. Ferry, De la Rosa and Associates for private respondent. B. The conclusion in law of respondent Court that respondent insurer may be allowed to avoid the policy on grounds of concealment by the deceased assured, is contrary to the provisions of the policy contract itself, as well as, of applicable legal provisions and established jurisprudence. The petitioners raise the following issues in their assignment of errors, to wit: A. The conclusion in law of respondent Court that respondent insurer has the right to rescind the policy contract when insured is already dead is not in accordance with existing law and applicable jurisprudence.

GUTIERREZ, JR., J.:

C. The inference of respondent Court that respondent insurer was misled in issuing the policy are manifestly mistaken and contrary to admitted evidence. (Rollo, p. 7) The petitioners contend that the respondent company no longer had the right to rescind the contract of insurance as rescission must allegedly be done during the lifetime of the insured within two years and prior to the commencement of action. The contention is without merit. The pertinent section in the Insurance Code provides: Section 48. Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter, such right must be exercised previous to the commencement of an action on the contract. After a policy of life insurance made payable on the death of the insured shall have been in force during the lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable by reason of the fraudulent concealment or misrepresentation of the insured or his agent. According to the petitioners, the Insurance Law was amended and the second paragraph of Section 48 added to prevent the insurance company from exercising a right to rescind after the death of the insured. The so-called "incontestability clause" precludes the insurer from raising the defenses of false representations or concealment of material facts insofar as health and previous diseases are concerned if the insurance has been in force for at least two years during the insured's lifetime. The phrase "during the lifetime" found in Section 48 simply means that the policy is no longer considered in force after the insured has died. The key phrase in the second paragraph of Section 48 is "for a period of two years." As noted by the Court of Appeals, to wit: The policy was issued on November 6,1973 and the insured died on April 26,1975. The policy was thus in force for a period of only one year and five months. Considering that the insured died before the two-year period had lapsed, respondent company is not, therefore, barred from proving that the policy is void ab initio by reason of the insured's fraudulent concealment or misrepresentation. Moreover, respondent company rescinded the contract of insurance and refunded the premiums paid on September 11, 1975, previous to the commencement of this action on November 27,1975. (Rollo, pp. 99-100) xxx xxx xxx

The petitioners contend that there could have been no concealment or misrepresentation by their late father because Tan Lee Siong did not have to buy insurance. He was only pressured by insistent salesmen to do so. The petitioners state: Here then is a case of an assured whose application was submitted because of repeated visits and solicitations by the insurer's agent. Assured did not knock at the door of the insurer to buy insurance. He was the object of solicitations and visits. Assured was a man of means. He could have obtained a bigger insurance, not just P 80,000.00. If his purpose were to misrepresent and to conceal his ailments in anticipation of death during the two-year period, he certainly could have gotten a bigger insurance. He did not. Insurer Philamlife could have presented as witness its Medical Examiner Dr. Urbano Guinto. It was he who accomplished the application, Part II, medical. Philamlife did not. Philamlife could have put to the witness stand its Agent Bienvenido S. Guinto, a relative to Dr. Guinto, Again Philamlife did not. (pp. 138139, Rollo) xxx xxx xxx This Honorable Supreme Court has had occasion to denounce the pressure and practice indulged in by agents in selling insurance. At one time or another most of us have been subjected to that pressure, that practice. This court took judicial cognizance of the whirlwind pressure of insurance selling-especially of the agent's practice of 'supplying the information, preparing and answering the application, submitting the application to their companies, concluding the transactions and otherwise smoothing out all difficulties. We call attention to what this Honorable Court said in Insular Life v. Feliciano, et al., 73 Phil. 201; at page 205: It is of common knowledge that the selling of insurance today is subjected to the whirlwind pressure of modern salesmanship. Insurance companies send detailed instructions to their agents to solicit and procure applications. These agents are to be found all over the length and breadth of the land. They are stimulated to more active efforts by contests and by the keen competition offered by the other rival insurance companies. They supply all the information, prepare and answer the applications, submit the applications to their companies, conclude the transactions, and otherwise smooth out all difficulties.

The agents in short do what the company set them out to do. The Insular Life case was decided some forty years ago when the pressure of insurance salesmanship was not overwhelming as it is now; when the population of this country was less than one-fourth of what it is now; when the insurance companies competing with one another could be counted by the fingers. (pp. 140-142, Rollo) xxx xxx xxx In the face of all the above, it would be unjust if, having been subjected to the whirlwind pressure of insurance salesmanship this Court itself has long denounced, the assured who dies within the two-year period, should stand charged of fraudulent concealment and misrepresentation." (p. 142, Rollo) The legislative answer to the arguments posed by the petitioners is the "incontestability clause" added by the second paragraph of Section 48. The insurer has two years from the date of issuance of the insurance contract or of its last reinstatement within which to contest the policy, whether or not, the insured still lives within such period. After two years, the defenses of concealment or misrepresentation, no matter how patent or well founded, no longer lie. Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid liability. The petitioners' interpretation would give rise to the incongruous situation where the beneficiaries of an insured who dies right after taking out and paying for a life insurance policy, would be allowed to collect on the policy even if the insured fraudulently concealed material facts. The petitioners argue that no evidence was presented to show that the medical terms were explained in a layman's language to the insured. They state that the insurer should have presented its two medical field examiners as witnesses. Moreover, the petitioners allege that the policy intends that the medical examination must be conducted before its issuance otherwise the insurer "waives whatever imperfection by ratification." We agree with the Court of Appeals which ruled: On the other hand, petitioners argue that no evidence was presented by respondent company to show that the questions appearing in Part II of the application for insurance were asked, explained to and understood by the deceased so as to prove concealment on his part. The same is not well taken. The deceased, by affixing his signature on the application form, affirmed the correctness of all the entries and answers appearing therein. It is but to be expected that he, a businessman, would not have affixed his signature on the application form unless he clearly understood its significance. For, the presumption is that a person intends the ordinary consequence of his voluntary act and takes ordinary care of his concerns. [Sec. 5(c) and (d), Rule 131, Rules of Court]. The evidence for respondent company shows that on September 19,1972, the deceased was examined by Dr. Victoriano Lim and was found to be diabetic and hypertensive; that by January, 1973, the deceased was complaining of progressive weight loss and abdominal

pain and was diagnosed to be suffering from hepatoma, (t.s.n. August 23, 1976, pp. 8-10; Exhibit 2). Another physician, Dr. Wenceslao Vitug, testified that the deceased came to see him on December 14, 1973 for consolation and claimed to have been diabetic for five years. (t.s.n., Aug. 23,1976, p. 5; Exhibit 6) Because of the concealment made by the deceased of his consultations and treatments for hypertension, diabetes and liver disorders, respondent company was thus misled into accepting the risk and approving his application as medically standard (Exhibit 5- C) and dispensing with further medical investigation and examination (Exhibit 5-A). For as long as no adverse medical history is revealed in the application form, an applicant for insurance is presumed to be healthy and physically fit and no further medical investigation or examination is conducted by respondent company. (t.s.n., April 8,1976, pp. 6-8). (Rollo, pp. 96-98) There is no strong showing that we should apply the "fine print" or "contract of adhesion" rule in this case. (Sweet Lines, Inc. v. Teves, 83 SCRA 361 [1978]). The petitioners cite: It is a matter of common knowledge that large amounts of money are collected from ignorant persons by companies and associations which adopt high sounding titles and print the amount of benefits they agree to pay in large black-faced type, following such undertakings by fine print conditions which destroy the substance of the promise. All provisions, conditions, or exceptions which in any way tend to work a forfeiture of the policy should be construed most strongly against those for whose benefit they are inserted, and most favorably toward those against whom they are meant to operate. (Trinidad v. Orient Protective Assurance Assn., 67 Phil. 184) There is no showing that the questions in the application form for insurance regarding the insured's medical history are in smaller print than the rest of the printed form or that they are designed in such a way as to conceal from the applicant their importance. If a warning in bold red letters or a boxed warning similar to that required for cigarette advertisements by the Surgeon General of the United States is necessary, that is for Congress or the Insurance Commission to provide as protection against high pressure insurance salesmanship. We are limited in this petition to ascertaining whether or not the respondent Court of Appeals committed reversible error. It is the petitioners' burden to show that the factual findings of the respondent court are not based on substantial evidence or that its conclusions are contrary to applicable law and jurisprudence. They have failed to discharge that burden. WHEREFORE, the petition is hereby DENIED for lack of merit. The questioned decision of the Court of Appeals is AFFIRMED. 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.

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Regulus E. Cabote & Associates for petitioner. Benito P. Fabie for private respondents.

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 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

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 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.

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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 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, 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 sub-paragraph (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 sub-paragraph (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

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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.] 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. L-49699 August 8, 1988

PERLA COMPANIA de SEGUROS, INC., petitioner, vs. HON. CONSTANTE A. ANCHETA, Presiding Judge of the Court of First instance of Camarines Norte, Branch III, ERNESTO A. RAMOS and GOYENA ZENAROSA-RAMOS, for themselves and as Guardian Ad Litem for Minors JOBET, BANJO, DAVID and GRACE all surnamed RAMOS, FERNANDO M. ABCEDE, SR., for himself and Guardian Ad Litem for minor FERNANDO G. ABCEDE, JR., MIGUEL JEREZ MAGO as Guardian Ad Litem for minors ARLEEN R. MAGO, and ANACLETA J. ZENAROSA., respondents. Jose B. Sanez for petitioner. James B. Pajares for private respondents.

CORTES, J.: The instant petition for certiorari and prohibition with preliminary injunction concerns the ability of insurers under the "no fault indemnity" provision of the Insurance Code. * On December 27, 1977, in a collision between the IH Scout in which private respondents were riding and a Superlines bus along the national highway in Sta. Elena, Camarines Norte, private respondents sustained physics injuries in varying degrees of gravity. Thus, they filed with the Court of First Instance of Camarines Norte on February 23,1978 a complaint for damages against Superlines, the bus driver and petitioner, the insurer of the bus [Rollo, pp. 27-39.] The bus was insured with petitioner for the amount of P50,000.00 as and for passenger liability and P50,000.00 as and for third party liability. The vehicle in which private respondents were riding was insured with Malayan Insurance Co. Even before summons could be served, respondent judge issued an order dated March 1, 1978 [Rollo, pp. 4041], the pertinent portion of which stated: The second incident is the prayer for an order of this court for the Insurance Company, Perla Compania de Seguros, Inc., to pay immediately the P5,000.00 under the "no fault clause" as provided for under Section 378 of the Insurance Code, and finding that the requisite documents to be attached in the record, the said Insurance Company is therefore directed to pay the plaintiffs (private respondents herein) within five (5) days from receipt of this order. Petitioner denied in its Answer its alleged liability under the "no fault indemnity" provision [Rollo, p. 44] and likewise moved for the reconsideration of the order. Petitioner held the position that under Sec. 378 of the Insurance Code, the insurer liable to pay the P5,000.00 is the insurer of the vehicle in which private respondents were riding, not petitioner, as the provision states that "[i]n the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from." Respondent judge, however, denied reconsideration. A second motion for reconsideration was filed by petitioner. However, in an order dated January 3, 1979, respondent judge denied the second motion for reconsideration and ordered the issuance of a writ of execution [Rollo, p. 69.] Hence, the instant petition

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praying principally for the annulment and setting aside of respondent judge's orders dated March 1, 1978 and January 3, 1979. The Court issued a temporary restraining order on January 24,1979 [Rollo pp. 73-74.] The sole issue raised in this petition is whether or not petitioner is the insurer liable to indemnify private respondents under Sec. 378 of the Insurance Code. The key to the resolution of the issue is of courts e Sec. 378, which provides: Sec. 378. Any claim for death or injury to any passenger or third party pursuant to the provision of this chapter shall be paid without the necessity of proving fault or negligence of any kind. Provided, That for purposes of this section (i) The indemnity in respect of any one person shall not exceed five thousand pesos; (ii) The following proofs of loss, when submitted under oath, shall be sufficient evidence to substantiate the claim: (a) Police report of accident, and (b) Death certificate and evidence sufficient to establish the proper payee, or (c) Medical report and evidence of medical or hospital disbursement in respect of which refund is claimed; (iii) Claim may be made against one motor vehicle only. In the case of an occupant of a vehicle, claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. In any other case, claim shall lie against the insurer of the directly offending vehicle. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. [Emphasis supplied.] From a reading of the provision, which is couched in straight-forward and unambiguous language, the following rules on claims under the "no fault indemnity" provision, where proof of fault or negligence is not necessary for payment of any claim for death Or injury to a passenger or a third party, are established: 1. A claim may be made against one motor vehicle only. 2. If the victim is an occupant of a vehicle, the claim shall lie against the insurer of the vehicle. in which he is riding, mounting or dismounting from.

3. In any other case (i.e. if the victim is not an occupant of a vehicle), the claim shall lie against the insurer of the directly offending vehicle. 4. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained. The law is very clear the claim shall lie against the insurer of the vehicle in which the "occupant" ** is riding, and no other. The claimant is not free to choose from which insurer he will claim the "no fault indemnity," as the law, by using the word "shall, makes it mandatory that the claim be made against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from. That said vehicle might not be the one that caused the accident is of no moment since the law itself provides that the party paying the claim under Sec. 378 may recover against the owner of the vehicle responsible for the accident. This is precisely the essence of "no fault indemnity" insurance which was introduced to and made part of our laws in order to provide victims of vehicular accidents or their heirs immediate compensation, although in a limited amount, pending final determination of who is responsible for the accident and liable for the victims'injuries or death. In turn, the "no fault indemnity" provision is part and parcel of the Insurance Code provisions on compulsory motor vehicle ability insurance [Sec. 373-389] and should be read together with the requirement for compulsory passenger and/or third party liability insurance [Sec. 377] which was mandated in order to ensure ready compensation for victims of vehicular accidents. Irrespective of whether or not fault or negligence lies with the driver of the Superlines bus, as private respondents were not occupants of the bus, they cannot claim the "no fault indemnity" provided in Sec. 378 from petitioner. The claim should be made against the insurer of the vehicle they were riding. This is very clear from the law. Undoubtedly, in ordering petitioner to pay private respondents the 'no fault indemnity,' respondent judge gravely abused his discretion in a manner that amounts to lack of jurisdiction. The issuance of the corrective writ of certiorari is therefore warranted. WHEREFORE, the petition is GRANTED and respondent judge's order dated March 1, 1978, requiring petitioner to pay private respondents the amount of P5,000.00 as "no fault indemnity' under Sec. 378 of the Insurance Code, and that of January 3, 1979, denying the second motion for reconsideration and issuing a writ of execution, are ANNULLED and SET ASIDE. The temporary restraining order issued by the Court on January 24, 1979 is made permanent. SO ORDERED. G.R. No. L-28093 January 30, 1971 BASILIA BERDIN VDA. DE CONSUEGRA; JULIANA, PACITA, MARIA LOURDES, JOSE, JR., RODRIGO, LINEDA and LUIS, all surnamed CONSUEGRA, petitioners-appellants, vs. GOVERNMENT SERVICE INSURANCE SYSTEM, COMMISSIONER OF PUBLIC HIGHWAYS, HIGHWAY DISTRICT ENGINEER OF SURIGAO DEL NORTE, COMMISSIONER OF CIVIL SERVICE, and ROSARIO DIAZ, respondentsappellees.

14

Bernardino O. Almeda for petitioners-appellants. Binag and Arevalo, Jr. for respondent-appellee Government Service Insurance System. Office of the Solicitor General for other respondents-appellees.

therein) be declared the legal heirs and exclusive beneficiaries of the retirement insurance of the late Jose Consuegra, and that a writ of preliminary injunction be issued restraining the implementation of the adjudication made by the GSIS. On October 26, 1966, the trial court issued an order requiring therein respondents to file their respective answers, but refrained from issuing the writ of preliminary injunction prayed for. On February 11, 1967, the parties submitted a stipulation of facts, prayed that the same be admitted and approved and that judgment be rendered on the basis of the stipulation of facts. On March 7, 1967, the court below rendered judgment, the pertinent portions of which are quoted hereunder: This Court, in conformity with the foregoing stipulation of facts, likewise is in full accord with the parties with respect to the authority cited by them in support of said stipulation and which is herein-below cited for purposes of this judgment, to wit: "When two women innocently and in good faith are legally united in holy matrimony to the same man, they and their children, born of said wedlock, will be regarded as legitimate children and each family be entitled to one half of the estate. Lao & Lao vs. Dee Tim, 45 Phil. 739; Estrella vs. Laong Masa, Inc., (CA) 39 OG 79; Pisalbon vs. Bejec, 74 Phil. 88. WHEREFORE, in view of the above premises, this Court is of the opinion that the foregoing stipulation of facts is in order and in accordance with law and the same is hereby approved. Judgment, therefore, is hereby rendered declaring the petitioner Basilia Berdin Vda. de Consuegra and her co-petitioners Juliana, Pacita, Maria Lourdes, Jose, Jr., Rodrigo, Lenida and Luis, all surnamed Consuegra, beneficiary and entitled to one-half (1/2) of the retirement benefit in the amount of Six Thousand Three Hundred Four Pesos and FourtySeven Centavos (P6,304.47) due to the deceased Jose Consuegra from the Government Service Insurance System or the amount of P3,152.235 to be divided equally among them in the proportional amount of 1/16 each. Likewise, the respondent Rosario Diaz Vda. de Consuegra is hereby declared beneficiary and entitled to the other half of the retirement benefit of the late Jose Consuegra or the amount of P3,152.235. The case with respect to the Highway District Engineer of Surigao del Norte is hereby ordered dismissed. Hence the present appeal by herein petitioners-appellants, Basilia Berdin and her children. It is the contention of appellants that the lower court erred in not holding that the designated beneficiaries in the life insurance of the late Jose Consuegra are also the exclusive beneficiaries in the retirement insurance of said deceased. In other words, it is the submission of appellants that because the deceased Jose Consuegra failed to designate the beneficiaries in his retirement insurance, the appellants who were the beneficiaries named in the life insurance should automatically be considered the beneficiaries to receive the retirement insurance benefits, to the exclusion of respondent Rosario Diaz. From the arguments adduced by appellants in their brief We gather that it is their stand that the system of life insurance and the system of retirement insurance, that are provided for in Commonwealth Act 186 as amended, are simply complementary to each other, or that one is a part or an extension of the other, such that whoever is named the beneficiary in the life insurance is also the beneficiary in the retirement insurance when no such beneficiary is named in the retirement insurance. The contention of appellants is untenable.

ZALDIVAR, J.: Appeal on purely questions of law from the decision of the Court of First Instance of Surigao del Norte, dated March 7, 1967, in its Special Proceeding No. 1720. The pertinent facts, culled from the stipulation of facts submitted by the parties, are the following: The late Jose Consuegra, at the time of his death, was employed as a shop foreman of the office of the District Engineer in the province of Surigao del Norte. In his lifetime, Consuegra contracted two marriages, the first with herein respondent Rosario Diaz, solemnized in the parish church of San Nicolas de Tolentino, Surigao, Surigao, on July 15, 1937, out of which marriage were born two children, namely, Jose Consuegra, Jr. and Pedro Consuegra, but both predeceased their father; and the second, which was contracted in good faith while the first marriage was subsisting, with herein petitioner Basilia Berdin, on May 1, 1957 in the same parish and municipality, out of which marriage were born seven children, namely, Juliana, Pacita, Maria Lourdes, Jose, Rodrigo, Lenida and Luz, all surnamed Consuegra. Being a member of the Government Service Insurance System (GSIS, for short) when Consuegra died on September 26, 1965, the proceeds of his life insurance under policy No. 601801 were paid by the GSIS to petitioner Basilia Berdin and her children who were the beneficiaries named in the policy. Having been in the service of the government for 22.5028 years, Consuegra was entitled to retirement insurance benefits in the sum of P6,304.47 pursuant to Section 12(c) of Commonwealth Act 186 as amended by Republic Acts 1616 and 3836. Consuegra did not designate any beneficiary who would receive the retirement insurance benefits due to him. Respondent Rosario Diaz, the widow by the first marriage, filed a claim with the GSIS asking that the retirement insurance benefits be paid to her as the only legal heir of Consuegra, considering that the deceased did not designate any beneficiary with respect to his retirement insurance benefits. Petitioner Basilia Berdin and her children, likewise, filed a similar claim with the GSIS, asserting that being the beneficiaries named in the life insurance policy of Consuegra, they are the only ones entitled to receive the retirement insurance benefits due the deceased Consuegra. Resolving the conflicting claims, the GSIS ruled that the legal heirs of the late Jose Consuegra were Rosario Diaz, his widow by his first marriage who is entitled to one-half, or 8/16, of the retirement insurance benefits, on the one hand; and Basilia Berdin, his widow by the second marriage and their seven children, on the other hand, who are entitled to the remaining one-half, or 8/16, each of them to receive an equal share of 1/16. Dissatisfied with the foregoing ruling and apportionment made by the GSIS, Basilia Berdin and her children 1 filed on October 10, 1966 a petition for mandamus with preliminary injunction in the Court of First Instance of Surigao, naming as respondents the GSIS, the Commissioner of Public Highways, the Highway District Engineer of Surigao del Norte, the Commissioner of Civil Service, and Rosario Diaz, praying that they (petitioners

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It should be noted that the law creating the Government Service Insurance System is Commonwealth Act 186 which was enacted by the National Assembly on November 14, 1936. As originally approved, Commonwealth Act 186 provided for the compulsory membership in the Government Service Insurance System of all regularly and permanently appointed officials and employees of the government, considering as automatically insured on life all such officials and employees, and issuing to them the corresponding membership policy under the terms and conditions as provided in the Act.2 Originally, Commonwealth Act 186 provided for life insurance only. Commonwealth Act 186 was amended by Republic Act 660 which was enacted by the Congress of the Philippines on June 16, 1951, and, among others, the amendatory Act provided that aside from the system of life insurance under the Government Service Insurance System there was also established the system of retirement insurance. Thus, We will note in Republic Act 660 that there is a chapter on life insurance and another chapter on retirement insurance. 3 Under the chapter on life insurance are sections 8, 9 and 10 of Commonwealth Act 186, as amended; and under the chapter on retirement insurance are sections 11, 12, 13 and 13-A. On May 31, 1957, Republic Act 1616 was enacted by Congress, amending section 12 of Commonwealth Act 186 as amended by Republic Act 660, by adding thereto two new subsections, designated as subsections (b) and (c). This subsection (c) of section 12 of Commonwealth Act 186, as amended by Republic Acts 660, 1616 and 3096, was again amended by Republic Act 3836 which was enacted on June 22, 1963.lwph1.t The pertinent provisions of subsection (c) of Section 12 of Commonwealth Act 186, as thus amended and reamended, read as follows: (c) Retirement is likewise allowed to a member, regardless of age, who has rendered at least twenty years of service. The benefit shall, in addition to the return of his personal contributions plus interest and the payment of the corresponding employer's premiums described in subsection (a) of Section 5 hereof, without interest, be only a gratuity equivalent to one month's salary for every year of service, based on the highest rate received, but not to exceed twenty-four months; Provided, That the retiring officer or employee has been in the service of the said employer or office for at least four years, immediately preceding his retirement. xxx xxx xxx The gratuity is payable by the employer or office concerned which is hereby authorized to provide the necessary appropriation to pay the same from any unexpended items of appropriations. Elective or appointive officials and employees paid gratuity under this subsection shall be entitled to the commutation of the unused vacation and sick leave, based on the highest rate received, which they may have to their credit at the time of retirement. Jose Consuegra died on September 26, 1965, and so at the time of his death he had acquired rights under the above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as finally amended by Rep. Act 3836 on June 22, 1963. When Consuegra died on September 26, 1965, he had to his credit 22.5028 years of service in the government, and pursuant to the above-quoted provisions of subsection (c) of Section 12 of Com. Act 186, as amended, on the basis of the highest rate of salary received by him which was P282.83 per month, he was entitled to receive retirement insurance benefits in the amount of P6,304.47. This is the retirement benefits that are the subject of dispute between the appellants, on the one hand, and the appellee Rosario

Diaz, on the other, in the present case. The question posed is: to whom should this retirement insurance benefits of Jose Consuegra be paid, because he did not, or failed to, designate the beneficiary of his retirement insurance? If Consuegra had 22.5028 years of service in the government when he died on September 26, 1965, it follows that he started in the government service sometime during the early part of 1943, or before 1943. In 1943 Com. Act 186 was not yet amended, and the only benefits then provided for in said Com. Act 186 were those that proceed from a life insurance. Upon entering the government service Consuegra became a compulsory member of the GSIS, being automatically insured on his life, pursuant to the provisions of Com. Act 186 which was in force at the time. During 1943 the operation of the Government Service Insurance System was suspended because of the war, and the operation was resumed sometime in 1946. When Consuegra designated his beneficiaries in his life insurance he could not have intended those beneficiaries of his life insurance as also the beneficiaries of his retirement insurance because the provisions on retirement insurance under the GSIS came about only when Com. Act 186 was amended by Rep. Act 660 on June 16, 1951. Hence, it cannot be said that because herein appellants were designated beneficiaries in Consuegra's life insurance they automatically became the beneficiaries also of his retirement insurance. Rep. Act 660 added to Com. Act 186 provisions regarding retirement insurance, which are Sections 11, 12, and 13 of Com. Act 186, as amended. Subsection (b) of Section 11 of Com. Act 186, as amended by Rep. Act 660, provides as follows: (b) Survivors benefit. Upon death before he becomes eligible for retirement, his beneficiaries as recorded in the application for retirement annuity filed with the System shall be paid his own premiums with interest of three per centum per annum, compounded monthly. If on his death he is eligible for retirement, then the automatic retirement annuity or the annuity chosen by him previously shall be paid accordingly. The above-quoted provisions of subsection (b) of Section 11 of Commonwealth Act 186, as amended by Rep. Act 660, clearly indicate that there is need for the employee to file an application for retirement insurance benefits when he becomes a member of the GSIS, and he should state in his application the beneficiary of his retirement insurance. Hence, the beneficiary named in the life insurance does not automatically become the beneficiary in the retirement insurance unless the same beneficiary in the life insurance is so designated in the application for retirement insurance. Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, provides for a life insurance fund and for a retirement insurance fund. There was no such provision in Com. Act 186 before it was amended by Rep. Act 660. Thus, subsections (a) and (b) of Section 24 of Commonwealth Act 186, as amended by Rep. Act 660, partly read as follows: (a) Life insurance fund. This shall consist of all premiums for life insurance benefit and/or earnings and savings therefrom. It shall meet death claims as they may arise or such equities as any member may be entitled to, under the conditions of his policy, and shall maintain the required reserves to the end of guaranteeing the fulfillment of the life insurance contracts issued by the System ... (b) Retirement insurance fund. This shall consist of all contributions for retirement insurance benefit and of earnings and savings therefrom. It shall meet annuity payments

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

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Castro, Fernando, Teehankee, Barredo, Villamor and Makasiar, JJ., concur. Mayer Steel Pipe vs. CA 273 SCRA 432 (1997)

INSURANCE LAW: Contract of Insurance

FACTS: Hong Kong Government Supplies Department contracted Mayer Steel Pipe Corporation to manufacture and supply various steel pipes and fittings. Prior to the shipping, Mayer insured these pipes and fittings against all risks with South Sea Surety and Insurance Co., Inc. and Charter Insurance Corp., with Industrial Inspection Inc. appointed as third-party inspector. After examining the pipes and fittings, Industrial Inspection certified that they are in good order condition. However, when the goods reached Hong Kong, it was discovered that a substantial portion thereof was damaged. The trial court found in favor of the insured. However, when the case was elevated to the CA, it set aside the decision of the trial court and dismissed the complaint on the ground of prescription. It held that the action was barred under Sec. 3(6) of the Carriage of Goods by Sea Act (COGSA) since it was filed only on April 17, 1986, more than two years from the time the goods were unloaded from the vessel. ISSUE:

Whether or not the action is barred by prescription

HELD: Sec. 3(6) of the COGSA states that the carrier and the ship shall be discharged from all liability for loss or damage to the goods if no suit is filed within one year after delivery of the goods or the date when they should have been delivered. Under this provision, only the carriers liability is extinguished if no suit is brought within one year. But the liability of the insurer is not extinguished because the insurers liability is based not on the contract of carriage but on the contract of insurance. An insurance contract is a contract whereby one party, for a consideration known as the premium, agrees to

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indemnify another for loss or damage which he may suffer from a specified peril. An all risks insurance p olicy covers all kinds of loss other than those due to willful and fraudulent act of the insured. Thus, when private respondents issued the all risks policies to Mayer, they bound themselves to indemnify the latter in case of loss or damage to the goods insured. Such obligation prescribes in ten years, in accordance with Article 1144 of the New Civil Code. G.R. No. 124050 June 19, 1997 MAYER STEEL PIPE CORPORATION and HONGKONG GOVERNMENT SUPPLIES DEPARTMENT, petitioners, vs. COURT OF APPEALS, SOUTH SEA SURETY AND INSURANCE CO., INC. and the CHARTER INSURANCE CORPORATION, respondents.

On April 17, 1986, petitioners filed an action against private respondents to recover the sum of HK$299,345.30. For their defense, private respondents averred that they have no obligation to pay the amount claimed by petitioners because the damage to the goods is due to factory defects which are not covered by the insurance policies. The trial court ruled in favor of petitioners. It found that the damage to the goods is not due to manufacturing defects. It also noted that the insurance contracts executed by petitioner Mayer and private respondents are "all risks" policies which insure against all causes of conceivable loss or damage. The only exceptions are those excluded in the policy, or those sustained due to fraud or intentional misconduct on the part of the insured. The dispositive portion of the decision states: WHEREFORE, judgment is hereby rendered ordering the defendants jointly and severally, to pay the plaintiffs the following: 1. the sum equivalent in Philippine currency of HK$299,345.30, with legal rate of interest as of the filing of the complaint;

PUNO, J.: 2. P100,000.00 as and for attorney's fees; and This is a petition for review on certiorari to annul and set aside the Decision of respondent Court of Appeals dated December 14, 1995 1 and its Resolution dated February 22, 1996 2 in CA-G.R. CV No. 45805 entitled Mayer Steel Pipe Corporation and Hongkong Government Supplies Department v . South Sea Surety Insurance Co., Inc. and The Charter Insurance Corporation. 3 In 1983, petitioner Hongkong Government Supplies Department (Hongkong) contracted petitioner Mayer Steel Pipe Corporation (Mayer) to manufacture and supply various steel pipes and fittings. From August to October, 1983, Mayer shipped the pipes and fittings to Hongkong as evidenced by Invoice Nos. MSPC-1014, MSPC-1015, MSPC-1025, MSPC-1020, MSPC-1017 and MSPC-1022. 4 Prior to the shipping, petitioner Mayer insured the pipes and fittings against all risks with private respondents South Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp. (Charter). The pipes and fittings covered by Invoice Nos. MSPC-1014, 1015 and 1025 with a total amount of US$212,772.09 were insured with respondent South Sea, while those covered by Invoice Nos. 1020, 1017 and 1022 with a total amount of US$149,470.00 were insured with respondent Charter. Petitioners Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as third-party inspector to examine whether the pipes and fittings are manufactured in accordance with the specifications in the contract. Industrial Inspection certified all the pipes and fittings to be in good order condition before they were loaded in the vessel. Nonetheless, when the goods reached Hongkong, it was discovered that a substantial portion thereof was damaged. Petitioners filed a claim against private respondents for indemnity under the insurance contract. Respondent Charter paid petitioner Hongkong the amount of HK$64,904.75. Petitioners demanded payment of the balance of HK$299,345.30 representing the cost of repair of the damaged pipes. Private respondents refused to pay because the insurance surveyor's report allegedly showed that the damage is a factory defect. 3. costs of suit. SO ORDERED. 5 Private respondents elevated the case to respondent Court of Appeals. Respondent court affirmed the finding of the trial court that the damage is not due to factory defect and that it was covered by the "all risks" insurance policies issued by private respondents to petitioner Mayer. However, it set aside the decision of the trial court and dismissed the complaint on the ground of prescription. It held that the action is barred under Section 3(6) of the Carriage of Goods by Sea Act since it was filed only on April 17, 1986, more than two years from the time the goods were unloaded from the vessel. Section 3(6) of the Carriage of Goods by Sea Act provides that "the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered." Respondent court ruled that this provision applies not only to the carrier but also to the insurer, citing Filipino Merchants Insurance Co., Inc. v. Alejandro. 6 Hence this petition with the following assignments of error: 1. The respondent Court of Appeals erred in holding that petitioners' cause of action had already prescribed on the mistaken application of the Carriage of Goods by Sea Act and the doctrine of Filipino Merchants Co., Inc. v. Alejandro (145 SCRA 42); and 2. The respondent Court of Appeals committed an error in dismissing the complaint. 7

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The petition is impressed with merit. Respondent court erred in applying Section 3(6) of the Carriage of Goods by Sea Act. Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be discharged from all liability for loss or damage to the goods if no suit is filed within one year after delivery of the goods or the date when they should have been delivered. Under this provision, only the carrier's liability is extinguished if no suit is brought within one year. But the liability of the insurer is not extinguished because the insurer's liability is based not on the contract of carriage but on the contract of insurance. A close reading of the law reveals that the Carriage of Goods by Sea Act governs the relationship between the carrier on the one hand and the shipper, the consignee and/or the insurer on the other hand. It defines the obligations of the carrier under the contract of carriage. It does not, however, affect the relationship between the shipper and the insurer. The latter case is governed by the Insurance Code. Our ruling in Filipino Merchants Insurance Co., Inc. v. Alejandro 8 and the other cases 9 cited therein does not support respondent court's view that the insurer's liability prescribes after one year if no action for indemnity is filed against the carrier or the insurer. In that case, the shipper filed a complaint against the insurer for recovery of a sum of money as indemnity for the loss and damage sustained by the insured goods. The insurer, in turn, filed a third-party complaint against the carrier for reimbursement of the amount it paid to the shipper. The insurer filed the third-party complaint on January 9, 1978, more than one year after delivery of the goods on December 17, 1977. The court held that the insurer was already barred from filing a claim against the carrier because under the Carriage of Goods by Sea Act, the suit against the carrier must be filed within one year after delivery of the goods or the date when the goods should have been delivered. The court said that "the coverage of the Act includes the insurer of the goods." 10 The Filipino Merchants case is different from the case at bar. In Filipino Merchants, it was the insurer which filed a claim against the carrier for reimbursement of the amount it paid to the shipper. In the case at bar, it was the shipper which filed a claim against the insurer. The basis of the shipper's claim is the "all risks" insurance policies issued by private respondents to petitioner Mayer. The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the shipper, the consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of the Carriage of Goods by Sea Act applies to the insurer, it meant that the insurer, like the shipper, may no longer file a claim against the carrier beyond the one-year period provided in the law. But it does not mean that the shipper may no longer file a claim against the insurer because the basis of the insurer's liability is the insurance contract. An insurance contract is a contract whereby one party, for a consideration known as the premium, agrees to indemnify another for loss or damage which he may suffer from a specified peril. 11 An "all risks" insurance policy covers all kinds of loss other than those due to willful and fraudulent act of the insured. 12 Thus, when private respondents issued the "all risks" policies to petitioner Mayer, they bound themselves to indemnify the latter in case of loss or damage to the goods insured. Such obligation prescribes in ten years, in accordance with Article 1144 of the New Civil Code. 13 IN VIEW WHEREOF, the petition is GRANTED. The Decision of respondent Court of Appeals dated December 14, 1995 and its Resolution dated February 22, 1996 are hereby SET ASIDE and the Decision of the Regional Trial Court is hereby REINSTATED. No costs. SO ORDERED.

G.R. No. 151890

June 20, 2006

PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner, vs. TRANS-ASIA SHIPPING LINES, INC., Respondent. x- - - - - - - - - - - - - - - - - - - - - - - - - x G.R. No. 151991 June 20, 2006

TRANS-ASIA SHIPPING LINES, INC., petitioner, vs. PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent. DECISION CHICO-NAZARIO, J: This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner Prudential Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia Shipping Lines, Inc. (TRANSASIA) in G.R. No. 151991, assailing the Decision1 dated 6 November 2001 of the Court of Appeals in CA G.R. CV No. 68278, which reversed the Judgment2 dated 6 June 2000 of the Regional Trial Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The 29 January 2002 Resolution3 of the Court of Appeals, denying PRUDENTIALs Motion for Reconsideration and TRANS-ASIAs Partial Motion for Reconsideration of the 6 November 2001 Decision, is likewise sought to be annulled and set aside. The Facts The material antecedents as found by the court a quo and adopted by the appellate court are as follows: Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and machinery arising from perils, inter alia, of fire and explosion for the sum of P40 Million, beginning [from] the period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine Policy No. MH93/1363 (Exhibits "A" to "A-11"). On October 25, 1993, while the policy was in force, a fire broke out while [M/V Asia Korea was] undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff [TRANS-ASIA] filed its notice of claim for damage sustained by the vessel. This is evidenced by a letter/formal claim of even date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its right to subsequently notify defendant [PRUDENTIAL] as to the full amount of the claim upon final survey and determination by average adjuster Richard Hogg International (Phil.) of the damage sustained by reason of fire. An adjusters report on the fire in question was submitted by Richard Hogg International together with the U-Marine Surveyor Report (Exhibits "4" to "4-115"). On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust receipt", a portion of which read (sic):

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"Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without interest under Policy No. MH 93/1353 [sic], repayable only in the event and to the extent that any net recovery is made by Trans-Asia Shipping Corporation, from any person or persons, corporation or corporations, or other parties, on account of loss by any casualty for which they may be liable occasioned by the 25 October 1993: Fire on Board." (Exhibit "4") In a letter dated 21 April 1997 defendant *PRUDENTIAL+ denied plaintiffs claim (Exhibit "5"). The letter reads: "After a careful review and evaluation of your claim arising from the above-captioned incident, it has been ascertained that you are in breach of policy conditions, among them "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED". Accordingly, we regret to advise that your claim is not compensable and hereby DENIED." This was followed by defendants letter dated 21 July 1997 requesting the return or payment of the P3,000,000.00 within a period of ten (10) days from receipt of the letter (Exhibit "6"). 4 Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint5 for Sum of Money against PRUDENTIAL with the RTC of Cebu City, docketed as Civil Case No. CEB-20709, wherein TRANS-ASIA sought the amount of P8,395,072.26 from PRUDENTIAL, alleging that the same represents the balance of the indemnity due upon the insurance policy in the total amount of P11,395,072.26. TRANS-ASIA similarly sought interest at 42% per annum citing Section 2436 of Presidential Decreee No. 1460, otherwise known as the "Insurance Code," as amended. In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and interposed the defense that TRANS-ASIA breached insurance policy conditions, in particular: "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED." PRUDENTIAL further alleged that it acted as facts and law require and incurred no liability to TRANS-ASIA; that TRANS-ASIA has no cause of action; and, that its claim has been effectively waived and/or abandoned, or it is estopped from pursuing the same. By way of a counterclaim, PRUDENTIAL sought a refund of P3,000,000.00, which it allegedly advanced to TRANS-ASIA by way of a loan without interest and without prejudice to the final evaluation of the claim, including the amounts of P500,000.00, for survey fees and P200,000.00, representing attorneys fees. The Ruling of the Trial Court On 6 June 2000, the court a quo rendered Judgment8 finding for (therein defendant) PRUDENTIAL. It ruled that a determination of the parties liabilities hinged on whether TRANS-ASIA violated and breached the policy conditions on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It interpreted the provision to mean that TRANS-ASIA is required to maintain the vessel at a certain class at all times pertinent during the life of the policy. According to the court a quo, TRANS-ASIA failed to prove compliance of the terms of the warranty, the violation thereof entitled PRUDENTIAL, the insured party, to rescind the contract. 9 Further, citing Section 10710 of the Insurance Code, the court a quo ratiocinated that the concealment made by TRANS-ASIA that the vessel was not adequately maintained to preserve its class was a material concealment sufficient to avoid the policy and, thus, entitled the injured party to rescind the contract. The court a quo found merit in PRUDENTIALs contention that there was nothing in the adjustment of the particular a verage

submitted by the adjuster that would show that TRANS-ASIA was not in breach of the policy. Ruling on the denominated loan and trust receipt, the court a quo said that in substance and in form, the same is a receipt for a loan. It held that if TRANS-ASIA intended to receive the amount of P3,000,000.00 as advance payment, it should have so clearly stated as such. The court a quo did not award PRUDENTIALs claim for P500,000.00, representing expert survey fees on the ground of lack of sufficient basis in support thereof. Neither did it award attorneys fees on the rationalization that the instant case does not fall under the exceptions stated in Article 2208 11 of the Civil Code. However, the court a quo granted PRUDENTIALs counterclaim stating that there is factual and legal basis for TRANS -ASIA to return the amount of P3,000,000.00 by way of loan without interest. The decretal portion of the Judgment of the RTC reads: WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure to prove a cause of action. On defendants counterclaim, plaintiff is directed to return the sum of P3,000,000.00 representing the loan extended to it by the defendant, within a period of ten (10) days from and after this judgment shall have become final and executory.12 The Ruling of the Court of Appeals On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001, reversed the 6 June 2000 Judgment of the RTC. On the issue of TRANS-ASIAs alleged breach of warranty of the policy condition CLASSED AND CLASS MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the party asserting the non-compensability of the loss had the burden of proof to show that TRANS-ASIA breached the warranty, which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of certification to the effect that TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its sole basis for reaching the conclusion that the warranty was breached. The Court of Appeals opined that the lack of a certification does not necessarily mean that the warranty was breached by TRANS-ASIA. Instead, the Court of Appeals considered PRUDENTIALs admission that at the time the insurance contract was entered into between the parties, the vessel was properly classed by Bureau Veritas, a classification society recognized by the industry. The Court of Appeals similarly gave weight to the fact that it was the responsibility of Richards Hogg International (Phils.) Inc., the average adjuster hired by PRUDENTIAL, to secure a copy of such certification to support its conclusion that mere absence of a certification does not warrant denial of TRANS-ASIAs claim under the insurance policy. In the same token, the Court of Appeals found the subject warranty allegedly breached by TRANS-ASIA to be a rider which, while contained in the policy, was inserted by PRUDENTIAL without the intervention of TRANSASIA. As such, it partakes of a nature of a contract dadhesion which should be construed against PRUDENTIAL, the party which drafted the contract. Likewise, according to the Court of Appeals, PRUDENTIALs renewal of the insurance policy from noon of 1 July 1994 to noon of 1 July 1995, and then again, until noon of 1 July 1996 must be deemed a waiver by PRUDENTIAL of any breach of warranty committed by TRANS-ASIA.

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Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the transaction between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a loan. The Court of Appeals concluded that TRANS-ASIA has no obligation to pay back the amount of P3,000.000.00 to PRUDENTIAL based on its finding that the aforesaid amount was PRUDENTIALs partial payment to TRANS-ASIAs claim under the policy. Finally, the Court of Appeals denied TRANS-ASIAs prayer for attorneys fees, but held TRANS-ASIA entitled to double interest on the policy for the duration of the delay of payment of the unpaid balance, citing Section 24413 of the Insurance Code. Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise: WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is ALLOWED and the Judgment appealed from REVERSED. The P3,000,000.00 initially paid by appellee Prudential Guarantee Assurance Incorporated to appellant Trans-Asia and covered by a "Loan and Trust Receipt" dated 29 May 1995 is HELD to be in partial settlement of the loss suffered by appellant and covered by Marine Policy No. MH93/1363 issued by appellee. Further, appellee is hereby ORDERED to pay appellant the additional amount of P8,395,072.26 representing the balance of the loss suffered by the latter as recommended by the average adjuster Richard Hogg International (Philippines) in its Report, with double interest starting from the time Richard Hoggs Survey Report was completed, or on 13 August 1996, until the same is fully paid. All other claims and counterclaims are hereby DISMISSED. All costs against appellee.14 Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for Reconsideration and Partial Motion for Reconsideration thereon, respectively, which motions were denied by the Court of Appeals in the Resolution dated 29 January 2002. The Issues Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R. No. 151890, relying on the following grounds, viz: I. THE AWARD IS GROSSLY UNCONSCIONABLE. II. THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO VIOLATION BY TRANS-ASIA OF A MATERIAL WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY. III.

THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER HAD THE BURDEN OF PROVING THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL WARRANTY. IV. THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE EMBODIED IN THE INSURANCE POLICY CONTRACT WAS A MERE RIDER. V. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS OF THE POLICY CONSTITUTED A WAIVER ON THE PART OF PRUDENTIAL OF THE BREACH OF THE WARRANTY BY TRANS-ASIA. VI. THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST RECEIPT" EXECUTED BY TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS CONSTITUTING PARTIAL PAYMENT THEREOF. VII. THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY PRUDENTIAL OF THE FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE PART OF PRUDENTIAL OF ANY VIOLATION BY TRANSASIA OF THE WARRANTY. VIII. THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN FINDING THAT PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND IN ORDERING PRUDENTIAL TO PAY TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13 AUGUST 1996, UNTIL [THE] SAME IS FULLY PAID.15 Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for Review docketed as G.R. No. 151991, raising the following grounds for the allowance of the petition, to wit: I. THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ATTORNEYS FEES TO PETITIONER TRANSASIA ON THE GROUND THAT SUCH CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO BAD FAITH ON THE PART OF RESPONDENT PRUDENTIAL IN DENYING HEREIN PETITIONER TRANS-ASIAS INSURANCE CLAIM. II.

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THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06 NOVEMBER 2001 SHOULD BE CONSTRUED TO MEAN DOUBLE INTEREST BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT THE RATE OF 24% PER ANNUM.16 In our Resolution of 2 December 2002, we granted TRANS-ASIAs Motion for Consolidation17 of G.R. Nos. 151890 and 151991;18 hence, the instant consolidated petitions. In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA arising from the subject insurance contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL arising from the transaction between the parties as evidenced by a document denominated as "Loan and Trust Receipt," dated 29 May 1995; and (3) the amount of interest to be imposed on the liability, if any, of either or both parties. Ruling of the Court Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not questions of fact, may be raised.19 This rule may be disregarded only when the findings of fact of the Court of Appeals are contrary to the findings and conclusions of the trial court, or are not supported by the evidence on record.20 In the case at bar, we find an incongruence between the findings of fact of the Court of Appeals and the court a quo, thus, in our determination of the issues, we are constrained to assess the evidence adduced by the parties to make appropriate findings of facts as are necessary. I. A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy condition on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as contained in the subject insurance contract. In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an express and material warranty in the subject insurance contract, i.e., Marine Insurance Policy No. MH93/1363, specifically Warranty Clause No. 5 thereof, which stipulates that the insured vessel, "M/V ASIA KOREA" is required to be CLASSED AND CLASS MAINTAINED. According to PRUDENTIAL, on 25 October 1993, or at the time of the occurrence of the fire, "M/V ASIA KOREA" was in violation of the warranty as it was not CLASSED AND CLASS MAINTAINED. PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the recovery of TRANS-ASIA under the policy, the violation of which entitled PRUDENTIAL to rescind the contract under Sec. 7421 of the Insurance Code. The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDE NTIALs Senior Manager of the Marine and Aviation Division, Lucio Fernandez. The pertinent portions of his testimony on direct examination is reproduced hereunder, viz: ATTY. LIM Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action was taken?

A It was eventually determined that there was a breach of the policy condition, and basically there is a breach of policy warranty condition and on that basis the claim was denied. Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as Exhibits "1", "1-A" series, please point to the warranty in the policy which you said was breached or violated by the plaintiff which constituted your basis for denying the claim as you testified. A Warranted Vessel Classed and Class Maintained. ATTY. LIM Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the policy below the printed words: "Clauses, Endorsements, Special Conditions and Warranties," below this are several typewritten clauses and the witness pointed out in particular the clause reading: "Warranted Vessel Classed and Class Maintained." COURT Q Will you explain that particular phrase? A Yes, a warranty is a condition that has to be complied with by the insured. When we say a class warranty, it must be entered in the classification society. COURT Slowly. WITNESS (continued) A A classification society is an organization which sets certain standards for a vessel to maintain in order to maintain their membership in the classification society. So, if they failed to meet that standard, they are considered not members of that class, and thus breaching the warranty, that requires them to maintain membership or to maintain their class on that classification society. And it is not sufficient that the member of this classification society at the time of a loss, their membership must be continuous for the whole length of the policy such that during the effectivity of the policy, their classification is suspended, and then thereafter, they get reinstated, that again still a breach of the warranty that they maintained their class (sic). Our maintaining team membership in the classification society thereby maintaining the standards of the vessel (sic). ATTY. LIM Q Can you mention some classification societies that you know?

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A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification Society, The Philippine Registration of Ships Society, China Classification, NKK and Company Classification Society, and many others, we have among others, there are over 20 worldwide. 22 At the outset, it must be emphasized that the party which alleges a fact as a matter of defense has the burden of proving it. PRUDENTIAL, as the party which asserted the claim that TRANS-ASIA breached the warranty in the policy, has the burden of evidence to establish the same. Hence, on the part of PRUDENTIAL lies the initiative to show proof in support of its defense; otherwise, failing to establish the same, it remains selfserving. Clearly, if no evidence on the alleged breach of TRANS-ASIA of the subject warranty is shown, a fortiori, TRANS-ASIA would be successful in claiming on the policy. It follows that PRUDENTIAL bears the burden of evidence to establish the fact of breach. In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof to show proof of loss, and the coverage thereof, in the subject insurance policy. However, in the course of trial in a civil case, once plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence shifts to defendant to controvert plaintiffs prima facie case, otherwise, a verdict must be returned in favor of plaintiff.23 TRANSASIA was able to establish proof of loss and the coverage of the loss, i.e., 25 October 1993: Fire on Board. Thereafter, the burden of evidence shifted to PRUDENTIAL to counter TRANS-ASIAs case, and to prove its special and affirmative defense that TRANS-ASIA was in violation of the particular condition on CLASSED AND CLASS MAINTAINED. We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in discharging the burden of evidence that TRANS-ASIA breached the subject policy condition on CLASSED AND CLASS MAINTAINED. Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio Fernandez, made a categorical admission that at the time of the procurement of the insurance contract in July 1993, TRANS-ASIAs vessel, "M/V Asia Korea" was properly classed by Bureau Veritas, thus: Q Kindly examine the records particularly the policy, please tell us if you know whether M/V Asia Korea was classed at the time (sic) policy was procured perthe (sic) insurance was procured that Exhibit "1" on 1st July 1993 (sic). WITNESS A I recall that they were classed. ATTY. LIM Q With what classification society? A I believe with Bureau Veritas.24 As found by the Court of Appeals and as supported by the records, Bureau Veritas is a classification society recognized in the marine industry. As it is undisputed that TRANS-ASIA was properly classed at the time the

contract of insurance was entered into, thus, it becomes incumbent upon PRUDENTIAL to show evidence that the status of TRANS-ASIA as being properly CLASSED by Bureau Veritas had shifted in violation of the warranty. Unfortunately, PRUDENTIAL failed to support the allegation. We are in accord with the ruling of the Court of Appeals that the lack of a certification in PRUDENTIALs records to the effect that TRANS-ASIAs "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED at the time of the occurrence of the fire cannot be tantamount to the conclusion that TRANS-ASIA in fact breached the warranty contained in the policy. With more reason must we sustain the findings of the Court of Appeals on the ground that as admitted by PRUDENTIAL, it was likewise the responsibility of the average adjuster, Richards Hogg International (Phils.), Inc., to secure a copy of such certification, and the alleged breach of TRANS-ASIA cannot be gleaned from the average adjusters survey report, or adjustment of particular average per "M/V Asia Korea" of the 25 October 1993 fire on board. We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that, "the violation of a material warranty, or other material provision of a policy on the part of either party thereto, entitles the other to rescind." It is generally accepted that "[a] warranty is a statement or promise set forth in the policy, or by reference incorporated therein, the untruth or non-fulfillment of which in any respect, and without reference to whether the insurer was in fact prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer."25 However, it is similarly indubitable that for the breach of a warranty to avoid a policy, the same must be duly shown by the party alleging the same. We cannot sustain an allegation that is unfounded. Consequently, PRUDENTIAL, not having shown that TRANS-ASIA breached the warranty condition, CLASSED AND CLASS MAINTAINED, it remains that TRANS-ASIA must be allowed to recover its rightful claims on the policy. B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the same. The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA breached the warranty provision on CLASSED AND CLASS MAINTAINED, underscored that PRUDENTIAL can be deemed to have made a valid waiver of TRANS-ASIAs breach of warranty as alleged, ratiocinating, thus: Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2) consecutive years, from noon of 01 July 1994 to noon of 01 July 1995, and then again until noon of 01 July 1996. This renewal is deemed a waiver of any breach of warranty.26 PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal policies are deemed a waiver of TRANS-ASIAs alleged breach, averring herein that the subsequent policies, designated as MH94/1595 and MH95/1788 show that they were issued only on 1 July 1994 and 3 July 1995, respectively, prior to the time it made a request to TRANS-ASIA that it be furnished a copy of the certification specifying that the insured vessel "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED. PRUDENTIAL posits that it came to know of the breach by TRANS-ASIA of the subject warranty clause only on 21 April 1997. On even date, PRUDENTIAL sent TRANS-ASIA a letter of denial, advising the latter that their claim is not compensable. In fine, PRUDENTIAL would have this Court believe that the issuance of the renewal policies cannot be a waiver because they were issued without knowledge of the alleged breach of warranty committed by TRANS-ASIA.27

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We are not impressed. We do not find that the Court of Appeals was in error when it held that PRUDENTIAL, in renewing TRANS-ASIAs insurance policy for two consecutive years after the loss covered by Policy No. MH93/1363, was considered to have waived TRANS-ASIAs breach of the subject warranty, if any. Breach of a warranty or of a condition renders the contract defeasible at the option of the insurer; but if he so elects, he may waive his privilege and power to rescind by the mere expression of an intention so to do. In that event his liability under the policy continues as before.28 There can be no clearer intention of the waiver of the alleged breach than the renewal of the policy insurance granted by PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788, issued in the years 1994 and 1995, respectively. To our mind, the argument is made even more credulous by PRUDE NTIALs lack of proof to support its allegation that the renewals of the policies were taken only after a request was made to TRANS-ASIA to furnish them a copy of the certificate attesting that "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED. Notwithstanding PRUDENTIALs claim that no certification was issued to that effect, it renewed the policy, thereby, evidencing an intention to waive TRANS-ASIAs alleged breach. Clearly, by granting the renewal policies twice and successively after the loss, the intent was to benefit the insured, TRANS-ASIA, as well as to waive compliance of the warranty. The foregoing finding renders a determination of whether the subject warranty is a rider, moot, as raised by the PRUDENTIAL in its assignment of errors. Whether it is a rider will not effectively alter the result for the reasons that: (1) PRUDENTIAL was not able to discharge the burden of evidence to show that TRANS-ASIA committed a breach, thereof; and (2) assuming arguendo the commission of a breach by TRANS-ASIA, the same was shown to have been waived by PRUDENTIAL. II. A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction between the parties evidenced by a document denominated as "Loan and Trust Receipt," dated 29 May 1995 constituted partial payment on the policy. It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00. The same was evidenced by a transaction receipt denominated as a "Loan and Trust Receipt," dated 29 May 1995, reproduced hereunder: LOAN AND TRUST RECEIPT Claim File No. MH-93-025 P3,000,000.00 Check No. PCIB066755 May 29, 1995

As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND ASSURANCE INC. whatever recovery we may make and deliver to it all documents necessary to prove our interest in said property. We also hereby agree to promptly prosecute suit against such persons, corporation or corporations through whose negligence the aforesaid loss was caused or who may otherwise be responsible therefore, with all due diligence, in our own name, but at the expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC. TRANS-ASIA SHIPPING CORPORATION29 PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties evidenced a loan of P3,000,000.00 which it granted to TRANS-ASIA, and not an advance payment on the policy or a partial payment for the loss. It further submits that it is a customary practice for insurance companies in this country to extend loans gratuitously as part of good business dealing with their assured, in order to afford their assured the chance to continue business without embarrassment while awaiting outcome of the settlement of their claims.30 According to PRUDENTIAL, the "Trust and Loan Agreement" did not subrogate to it whatever rights and/or actions TRANS-ASIA may have against third persons, and it cannot by no means be taken that by virtue thereof, PRUDENTIAL was granted irrevocable power of attorney by TRANS-ASIA, as the sole power to prosecute lies solely with the latter. The Court of Appeals held that the real character of the transaction between the parties as evidenced by the "Loan and Trust Receipt" is that of an advance payment by PRUDENTIAL of TRANS-ASIAs claim on the insurance, thus: The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance Law Act No. 2427 of the Philippine Legislature during the American Regime. The Insurance Act was lifted verbatim from the law of California, except Chapter V thereof, which was taken largely from the insurance law of New York. Therefore, ruling case law in that jurisdiction is to Us persuasive in interpreting provisions of our own Insurance Code. In addition, the application of the adopted statute should correspond in fundamental points with the application in its country of origin x x x. xxxx Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan Receipt that the money was intended as a loan does not detract from its real character as payment of claim, thus: "The receipt of money by the insured employers from a surety company for losses on account of forgery of drafts by an employee where no provision or repayment of the money was made except upon condition that it be recovered from other parties and neither interest nor security for the asserted debts was provided for, the money constituted the payment of a liability and not a mere loan, notwithstanding recitals in the written receipt that the money was intended as a mere loan." What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that appellant is obligated to hand over to appellee "whatever recovery (Trans Asia) may make and deliver to (Prudential) all documents necessary to prove its interest in the said property." For all intents and purposes therefore, the money receipted is payment under the policy, with Prudential having the right of subrogation to whatever net

Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS THREE MILLION ONLY (P3,000,000.00) as a loan without interest, under Policy No. MH93/1353, repayable only in the event and to the extent that any net recovery is made by TRANS ASIA SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993: Fire on Board.

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recovery Trans-Asia may obtain from third parties resulting from the fire. In the law on insurance, subrogation is an equitable assignment to the insurer of all remedies which the insured may have against third person whose negligence or wrongful act caused the loss covered by the insurance policy, which is created as the legal effect of payment by the insurer as an assignee in equity. The loss in the first instance is that of the insured but after reimbursement or compensation, it becomes the loss of the insurer. It has been referred to as the doctrine of substitution and rests on the principle that substantial justice should be attained regardless of form, that is, its basis is the doing of complete, essential, and perfect justice between all the parties without regard to form.31 We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences that the real nature of the transaction between the parties was that the amount of P3,000,000.00 was not intended as a loan whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but rather, the same was a partial payment or an advance on the policy of the claims due to TRANS-ASIA. First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by PRUDENTIAL, subrogating the former to the extent of "any net recovery made by TRANS ASIA SHIPPING CORP., from any person or persons, corporation or corporations, or other parties, on account of loss by any casualty for which they may be liable, occasioned by the 25 October 1993: Fire on Board." 32 Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to "promptly prosecute suit against such persons, corporation or corporations through whose negligence the aforesaid loss was caused or who may otherwise be responsible therefore, with all due diligence" in its name, the prosecution of the claims against such third persons are to be carried on "at the expense of and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC."33 The clear import of the phrase "at the expense of and under the exclusive direction and control" as used in the "Loan and Trust Receipt" grants solely to PRUDENTIAL the power to prosecute, even as the same is carried in the name of TRANS-ASIA, thereby making TRANS-ASIA merely an agent of PRUDENTIAL, the principal, in the prosecution of the suit against parties who may have occasioned the loss. Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay PRUDENTIAL is highly speculative and contingent, i.e., only in the event and to the extent that any net recovery is made by TRANSASIA from any person on account of loss occasioned by the fire of 25 October 1993. The transaction, therefore, was made to benefit TRANS-ASIA, such that, if no recovery from third parties is made, PRUDENTIAL cannot be repaid the amount. Verily, we do not think that this is constitutive of a loan.34 The liberality in the tenor of the "Loan and Trust Receipt" in favor of TRANS-ASIA leads to the conclusion that the amount of P3,000,000.00 was a form of an advance payment on TRANS-ASIAs claim on MH93/1353. III. A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing the balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363. Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid claims covered by Marine Policy No. MH93/1363, or a total amount of P8,395,072.26.

B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorneys fees equivalent to 10% of P8,395,072.26. The Court of Appeals denied the grant of attorneys fees. It held that attorneys fees cannot be awarded absent a showing of bad faith on the part of PRUDENTIAL in rejecting TRANS-ASIAs claim, notwithstanding that the rejection was erroneous. According to the Court of Appeals, attorneys fees can be awarded only in the cases enumerated in Article 2208 of the Civil Code which finds no application in the instant case. We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorneys fees and other expenses incurred by the insured after a finding by the Insurance Commissioner or the Court, as the case may be, of an unreasonable denial or withholding of the payment of the claims due. Moreover, the law imposes an interest of twice the ceiling prescribed by the Monetary Board on the amount of the claim due the insured from the date following the time prescribed in Section 24235 or in Section 243,36 as the case may be, until the claim is fully satisfied. Finally, Section 244 considers the failure to pay the claims within the time prescribed in Sections 242 or 243, when applicable, as prima facie evidence of unreasonable delay in payment. To the mind of this Court, Section 244 does not require a showing of bad faith in order that attorneys fees be granted. As earlier stated, under Section 244, a prima facie evidence of unreasonable delay in payment of the claim is created by failure of the insurer to pay the claim within the time fixed in both Sections 242 and 243 of the Insurance Code. As established in Section 244, by reason of the delay and the consequent filing of the suit by the insured, the insurers shall be adjudged to pay damages which shall consist of attorneys fees and other expenses incurred by the insured.37 Section 244 reads: In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the insurance company shall be adjudged to pay damages which shall consist of attorneys fees and other expenses incurred by the insured person by reason of such unreasonable denial or withholding of payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim due the insured, from the date following the time prescribed in section two hundred forty-two or in section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided, That the failure to pay any such claim within the time prescribed in said sections shall be considered prima facie evidence of unreasonable delay in payment. Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay or refusal in the payment of the insurance claims. In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records show that there was an unreasonable delay by PRUDENTIAL in the payment of the unpaid balance of P8,395,072.26 to TRANSASIA. On 26 October 1993, a day after the occurrence of the fire in "M/V Asia Korea", TRANS-ASIA filed its notice of claim. On 13 August 1996, the adjuster, Richards Hogg International (Phils.), Inc., completed its survey report recommending the amount of P11,395,072.26 as the total indemnity due to TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in a letter39 addressed to TRANS-ASIA denied the latters claim for the amount of P8,395,072.26 representing the balance of the total indemnity. On 21 July 1997, PRUDENTIAL sent a second

25

letter40 to TRANS-ASIA seeking a return of the amount of P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained to file a complaint for sum of money against PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing the balance of the proceeds of the insurance claim. As can be gleaned from the foregoing, there was an unreasonable delay on the part of PRUDENTIAL to pay TRANS-ASIA, as in fact, it refuted the latters right to the insurance claims, from the time proof of loss was shown and the ascertainment of the loss was made by the insurance adjuster. Evidently, PRUDENTIALs unreasonable delay in satisfying TRANS-ASIAs unpaid claims compelled the latter to file a suit for collection. Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as attorneys fees to TRANS-ASIA is reasonable under the circumstances, or otherwise stated, ten percent (10%) of P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v. Court of Appeals,41 where a finding of an unreasonable delay under Section 244 of the Insurance Code was made by this Court, we grant an award of attorneys fees equivalent to ten percent (10%) of the total proceeds. We find no reason to deviate from this judicial precedent in the case at bar. C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees) shall be imposed double interest in accordance with Section 244 of the Insurance Code. Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling prescribed by the Monetary Board due the insured, from the date following the time prescribed in Section 242 or in Section 243, as the case may be, until the claim is fully satisfied. In the case at bar, we find Section 243 to be applicable as what is involved herein is a marine insurance, clearly, a policy other than life insurance. Section 243 is hereunder reproduced: SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any policy other than life insurance policy, shall be paid within thirty days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration; but if such ascertainment is not had or made within sixty days after such receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days after such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein will entitle the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the ground that the claim is fraudulent. As specified, the assured is entitled to interest on the proceeds for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board except when the failure or refusal of the insurer to pay was founded on the ground that the claim is fraudulent. D. The term "double interest" as used in the Decision of the Court of Appeals must be interpreted to mean 24% per annum. PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of TRANS-ASIA in the assailed Decision of 6 November 2001. It is PRUDENTIALs stance that the award is extortionate and grossly unsconscionable. In support thereto, PRUDENTIAL makes a reference to TRANS-ASIAs prayer in the Complaint

filed with the court a quo wherein the latter sought, "interest double the prevailing rate of interest of 21% per annum now obtaining in the banking business or plus 42% per annum pursuant to Article 243 of the Insurance Code x x x."42 The contention fails to persuade. It is settled that an award of double interest is lawful and justified under Sections 243 and 244 of the Insurance Code.43 In Finman General Assurance Corporation v. Court of Appeals,44 this Court held that the payment of 24% interest per annum is authorized by the Insurance Code. 45 There is no gainsaying that the term "double interest" as used in Sections 243 and 244 can only be interpreted to mean twice 12% per annum or 24% per annum interest, thus: The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve per centum per annum (12%) as prescribed by the Monetary Board in C.B. Circular No. 416, pursuant to P.D. No. 116, amending the Usury Law; so that when Sections 242, 243 and 244 of the Insurance Code provide that the insurer shall be liable to pay interest "twice the ceiling prescribed by the Monetary Board", it means twice 12% per annum or 24% per annum interest on the proceeds of the insurance.46 E. The payment of double interest should be counted from 13 September 1996. The Court of Appeals, in imposing double interest for the duration of the delay of the payment of the unpaid balance due TRANS-ASIA, computed the same from 13 August 1996 until such time when the amount is fully paid. Although not raised by the parties, we find the computation of the duration of the delay made by the appellate court to be patently erroneous. To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the delay at the rate of twice the ceiling prescribed by the Monetary Board. Significantly, Section 243 mandates the payment of any loss or damage for which an insurer may be liable, under any policy other than life insurance policy, within thirty days after proof of loss is received by the insurer and ascertainment of the loss or damage is made either by agreement between the insured and the insurer or by arbitration. It is clear that under Section 243, the insurer has until the 30th day after proof of loss and ascertainment of the loss or damage to pay its liability under the insurance, and only after such time can the insurer be held to be in delay, thereby necessitating the imposition of double interest. In the case at bar, it was not disputed that the survey report on the ascertainment of the loss was completed by the adjuster, Richard Hoggs International (Phils.), Inc. on 13 August 1996. PRUDENTIAL had thirty days from 13 August 1996 within which to pay its liability to TRANS-ASIA under the insurance policy, or until 13 September 1996. Therefore, the double interest can begin to run from 13 September 1996 only. IV. A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged in section III herein, computed from the time of finality of judgment until the full satisfaction thereof in conformity with this Courts ruling in Eastern Shipping Lines, Inc. v. Court of Appeals. This Court in Eastern Shipping Lines, Inc. v. Court of Appeals, 47 inscribed the rule of thumb48 in the application of interest to be imposed on obligations, regardless of their source. Eastern emphasized beyond cavil that

26

when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest, regardless of whether the obligation involves a loan or forbearance of money, shall be 12% per annum from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance49 of credit. We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the finality of judgment until the full satisfaction thereof must be imposed on the total amount of liability adjudged to PRUDENTIAL. It is clear that the interim period from the finality of judgment until the satisfaction of the same is deemed equivalent to a forbearance of credit, hence, the imposition of the aforesaid interest. Fallo WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R. No. 151991 is GRANTED, thus, we award the grant of attorneys fees and make a clarification that the term "double interest" as used in the 6 November 2001 Decision of the Court of Appeals in CA GR CV No. 68278 should be construed to mean interest at the rate of 24% per annum, with a further clarification, that the same should be computed from 13 September 1996 until fully paid. The Decision and Resolution of the Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001 and 29 January 2002, respectively, are, thus, MODIFIED in the following manner, to wit: 1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26, representing the balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363; 2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of attorneys fees equivalent to 10% of the amount of P8,395,072.26; 3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorneys fees) shall be imposed double interest at the rate of 24% per annum to be computed from 13 September 1996 until fully paid; and 4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged as abovestated in paragraphs (1), (2), and (3) herein, computed from the time of finality of judgment until the full satisfaction thereof. No costs. SO ORDERED.

ASIAN TERMINALS, INC., Petitioner, vs. DAEHAN FIRE AND MARINE INSURANCE CO., LTD., Respondent. DECISION NACHURA, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court, assailing the Court of Appeals (CA) September 14, 2005 Decision1 and December 20, 2005 Resolution2 in CA-G.R. CV No. 83647. The assailed Decision reversed and set aside the Regional Trial Court (RTC)3 August 4, 2004 Decision4 in Civil Case No. 01101309, while the assailed resolution denied petitioner Asian Terminals, Inc.s motion for reconsideration. The case stemmed from the following facts: On July 8, 2000, Doosan Corporation (Doosan) shipped twenty-six (26) boxes of printed aluminum sheets on board the vessel Heung-A Dragon owned by Dongnama Shipping Co., Ltd. (Dongnama). 5 The shipment was covered by Bill of Lading No. DNALHMBUMN0100106 and consigned to Access International, with address at No. 9 Parada St., San Juan, Metro Manila. Doosan insured the subject shipment with respondent Daehan Fire and Marine Insurance Co., Ltd. under an "all-risk" marine cargo insurance policy,7 payable to its settling agent in the Philippines, the Smith Bell & Co., Inc. (Smith Bell). On July 12, 2000, the vessel arrived in Manila and the containerized van was discharged and unloaded in apparent good condition, as no survey and exceptions were noted in the Equipment Interchange Receipt (EIR) issued by petitioner.8 The container van was stored in the Container Yard of the Port. On July 18, 2000, Access International requested9 from petitioner and the licensed Customs Broker, Victoria Reyes Lazo (V. Reyes Lazo), a joint survey of the shipment at the place of storage in the Container Yard, but no such inspection was conducted. On July 19, 2000, V. Reyes Lazo withdrew, and petitioner released, the shipment and delivered it to Access Internationals warehouse in Binondo, Manila.10 While the shipment was at Access Internationals warehouse, the latter, together with its surveyor, Lloyds Agency, conducted an inspection and noted that only twelve (12) boxes were accounted for, while fourteen (14) boxes were missing.11 Access International thus filed a claim against petitioner and V. Reyes Lazo for the missing shipment amounting to $34,993.28.12 For failure to collect its claim, Access International sought indemnification from respondent in the amount of $45,742.81. 13 On November 8, 2000, respondent paid the amount of the claim and Access International accordingly executed a Subrogation Receipt in favor of the former.14 On July 10, 2001, respondent, represented by Smith Bell, instituted the present case against Dongnama, Uniship, Inc. (Uni-ship), petitioner, and V. Reyes Lazo before the RTC.15 Respondent alleged that the losses, shortages and short deliveries sustained by the shipment were caused by the joint fault and negligence of Dongnama, petitioner and V. Reyes Lazo.

G.R. No. 171194

February 4, 2010

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Dongnama and Uni-ship filed a Motion to Dismiss16 on the grounds that Daehan lacked legal capacity to sue and that the complaint stated no cause of action. The trial court, however, denied the motion in an Order dated August 31, 2001.17 Thereafter, Dongnama and Uni-ship filed their Answer with Counterclaim and Cross-Claim Ad Cautelam denying any liability for the damages/losses sustained by the shipment, pointing out that it was on a "Full Container Load," "Said to Contain," and "Shippers Load and Count" bases, under which they had no means of verifying the contents of the containers. They also alleged that the container van was properly discharged from the vessel with seals intact and no exceptions noted. Moreover, they claimed that the losses occurred while the subject shipment was in the custody, possession or control of the shipper, its trucker, the arrastre operator, or their representatives, or due to the consignees own negligence. They further questioned the absence of notice of loss within the three (3)-day period provided under the Carriage of Goods by Sea Act. Finally, they averred that their liability, if there be any, should only be limited to US$500.00 per package or customary freight unit. 18 For its part, petitioner denied liability, claiming that it exercised due diligence in handling and storing the subject container van. It, likewise, assailed the timeliness of the complaint, having been filed beyond the fifteen (15)-day period under its Contract for Cargo Handling Services with the Philippine Ports Authority (PPA). If at all, petitioner added, its liability should only be limited to P5,000.00.19 In her Answer, V. Reyes Lazo questioned respondents capacity to sue in Philippine courts. She accused respondent of engaging in a fishing expedition since the latter could not determine with clarity the party at fault.20 On December 2, 2002, in their Joint Motion to Dismiss,21 respondent, on one hand, and Dongnama and Uniship, on the other, prayed that the complaint be dismissed against the latter, alleging that they could not be held liable based on the EIR. The motion was granted on December 9, 2002.22 Consequently, the case proceeded as against petitioner and V. Reyes Lazo. As no amicable settlement was reached during the pretrial, trial on the merits ensued. On August 4, 2004, the RTC dismissed the complaint for insufficiency of evidence. 23 It found the complaint fatally flawed, having been signed by a person who had no authority from complainant (respondent herein) corporation to act for and on behalf of the latter.24 The RTC, likewise, held that respondent failed to prove that the loss/damage of the subject cargoes was due to the fault or negligence of petitioner or V. Reyes Lazo. It added that the cargoes were damaged when they were already in Access Internationals possession, considering that an inspection was conducted in the latters warehouse.25 On appeal, the CA reversed and set aside the RTC decision. The dispositive portion of the CA decision reads: WHEREFORE, premises considered, the present appeal is hereby GRANTED. The appealed Decision dated August 4, 2004 of the Regional Trial Court of Manila, Branch 21 in Civil Case No. 01-101309 is hereby REVERSED and SET ASIDE. A new judgment is hereby entered ordering the defendants-appellees Asian Terminals, Inc. and V. Reyes Lazo to pay, jointly and severally, the plaintiff-appellant Daehan Fire & Marine

Insurance Co., Ltd. the sums of P2,295,374.20 with interest at the legal rate (6% per annum) from the date of the filing of the complaint and P229,537.42 by way of attorneys fees. No pronouncement as to costs. SO ORDERED.26 Applying the principle of substantial compliance, the CA recognized the validity of respondents complaint after the submission, albeit late, of the board resolution, indicating the authority of the signatory to represent the corporation.27 Pursuant to the Management Contract between petitioner and the PPA, the former may not disclaim responsibility for the shortage of the subject cargoes while the container van remained in its custody for seven (7) days, despite the withdrawal of the subject shipment by the brokers representative without any complaint. Applying E. Razon, Inc. v. Court of Appeals, 28 the CA refused to impose the P5,000.00 limitation, considering that petitioner was aware of the value of the subject goods shown in the pertinent shipping documents.29 The CA added that petitioner could not disclaim any liability, having refused or ignored Access Internationals request for a joint survey at the time when the goods were still in the possession and custody of the former.30 Lastly, V. Reyes Lazo was also made liable jointly and severally with petitioner in negligently withdrawing the container van from the premises of the pier, notwithstanding Access Internationa ls request for a joint survey.31 Aggrieved, petitioner comes before us in this petition for review on certiorari, raising the following issues: 1. WHETHER OR NOT PETITIONER ATI IS LIABLE FOR THE LOSS TO THE SUBJECT SHIPMENT NOTWITHSTANDING THE ACKNOWLEDGMENT BY THE CONSIGNEES BROKER/REPRESENTATIVE IN THE EQUIPMENT INTERCHANGE RECEIPT THAT THE SHIPMENT WAS RECEIVED IN GOOD ORDER AND WITHOUT EXCEPTION. 2. WHAT IS THE EXTENT OF PETITIONER ATIS LIABILITY, IF ANY?32 Simply put, we are tasked to determine the propriety of making petitioner, as arrastre operator, liable for the loss of the subject shipment, and if so, the extent of its liability. Petitioner denies liability for the loss of the subject shipment, considering that the consignees representative signified receipt of the goods in good order without exception. This being the case, respondent, as subrogee, is bound by such acknowledgment. As to the extent of its liability, if there be any, petitioner insists that it be limited to P5,000.00 per package, as provided for in its Management Contract with the PPA. 33 We do not agree with petitioner. Respondent, as insurer, was subrogated to the rights of the consignee, pursuant to the subrogation receipt executed by the latter in favor of the former. The relationship, therefore, between the consignee and the arrastre operator must be examined. This relationship is akin to that existing between the consignee and/or the owner of the shipped goods and the common carrier, or that between a depositor and a warehouseman.34 In the performance of its obligations, an arrastre operator should observe the same degree of diligence as that required of a common carrier and a warehouseman. Being the custodian of the goods discharged from a

28

vessel, an arrastre operators duty is to take good care of the goods and to turn them over to the party entitled to their possession.35 The loss of 14 out of 26 boxes of printed aluminum sheets is undisputed. It is, likewise, settled that Dongnama (the shipping company) and Uni-ship were absolved from liability because respondent realized that they had no liability based on the EIR issued by Dongnama. This resulted in the withdrawal of the complaint against them. What remained was the complaint against petitioner as the arrastre operator and V. Reyes Lazo as the customs broker. Records show that the subject shipment was discharged from the vessel and placed under the custody of petitioner for a period of seven (7) days. Thereafter, the same was withdrawn from the container yard by the customs broker, then delivered to the consignee. It was after such delivery that the loss of 14 boxes was discovered. Hence, the complaint against both the arrastre operator and the customs broker. In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance with the obligation to deliver the goods to the appropriate party devolves upon the arrastre operator. Since the safekeeping of the goods is its responsibility, it must prove that the losses were not due to its negligence or to that of its employees.36 To prove the exercise of diligence in handling the subject cargoes, petitioner must do more than merely show the possibility that some other party could be responsible for the loss or the damage. It must prove that it exercised due care in the handling thereof.37 Petitioner failed to do this. Instead, it insists that it be exonerated from liability, because the customs brokers representative received the subject shipment in good order and condition without exception. The appellate courts conclusion on this matter is instructive: ATI may not disclaim responsibility for the shortage/pilferage of fourteen (14) boxes of printed aluminum sheet while the container van remained in its custody for seven (7) days (at the Container Yard) simply because the alleged representative of the customs broker had withdrawn the shipment from its premises and signed the EIR without any complaint. The signature of the person/broker representative merely signifies that said person thereby frees the ATI from any liability for loss or damage to the cargo so withdrawn while the same was in the custody of such representative to whom the cargo was released. It does not foreclose any remedy or right of the consignee to prove that any loss or damage to the subject shipment occurred while the same was under the custody, control and possession of the arrastre operator.38 Clearly, petitioner cannot be excused from culpability simply because another person could be responsible for the loss. This is especially true in the instant case because, while the subject shipment was in petitioners custody, Access International requested39 that a joint survey be conducted at the place of storage. And as correctly observed by the CA: There is no dispute that it was the customs broker who in behalf of the consignee took delivery of the subject shipment from the arrastre operator. However, the trial court apparently disregarded documentary evidence showing that the consignee made a written request on both the appellees ATI and V. Reyes Lazo for a joint survey of the container van on July 18, 2000 while the same was still in the possession, control and custody of the arrastre operator at the Container Yard of the pier. Both ATI and Lazo merely denied being aware of the letters (Exhibits "M" and "N"). The fact remains that the consignee complained of short-delivery and while inspection of the cargo was made only at its warehouse after delivery by the customs broker, the arrastre ATI together with said broker both refused or ignored the written request for a joint survey at the premises of the arrastre. Instead of complying with the consignees demand, the broker withdrew and the arrastre released

the shipment the very next day, July 19, 2000 without even acting upon the consignees request for a joint survey.40 Moreover, it was shown in the Survey Report prepared by Access Internationals surveyor that petitioner was remiss in its obligations to handle the goods with due care and to ensure that they reach the proper party in good order as to quality and quantity. Specifically, the Survey Report states: DELIVERY On July 19, 2000, V. Reyes-Lazo (Licensed Customs Broker) effected delivery of the 1 x 20 Van Container from the Container Yard of said port to the Consignees designated warehouse at No. 622 Asuncion Street, Binondo, Manila. Prior to withdrawal from the said port, the Brokers representative noticed that the padlock secured to the doors of the Van Container was forcibly pulled-out resulting to its breakage. He then immediately informed the Arrastre Contractors (ATI) and requested that Van Container be opened and inventory of its contents be made as he suspected the contents might have been pilfered. However, his request was denied averring that stripping of "FCL Van Containers" are not allowed inside the Customs Zone. As all efforts exerted proved futile, he instead bought new padlock and secured same to the Van. He then informed the Consignee about the incident upon delivery of the Container at the Consignees designated warehouse, who immediately requested for survey.41 Considering that both petitioner and V. Reyes Lazo were negligent in the performance of their duties in the handling, storage and delivery of the subject shipment to the consignee, resulting in the loss of 14 boxes of printed aluminum sheets, both shall be solidarily liable for such loss. As to the extent of petitioners liability, we cannot sustain its contention that it be limited to P5,000.00 per package. Petitioners responsibility and liability for losses and damages are set forth in Section 7.01 of the Management Contract drawn between the PPA and the Marina Port Services, Inc., petitioners predecessor -ininterest, to wit: CLAIMS AND LIABILITY FOR LOSSES AND DAMAGES Section 7.01. Responsibility and Liability for Losses and Damages; Exceptions. The CONTRACTOR shall, at its own expense, handle all merchandise in all work undertaken by it, hereunder, diligently and in a skillful, workman-like and efficient manner. The CONTRACTOR shall be solely responsible as an independent contractor, and hereby agrees to accept liability and to pay to the shipping company, consignees, consignors or other interested party or parties for the loss, damage or non-delivery of cargoes in its custody and control to the extent of the actual invoice value of each package which in no case shall be more than FIVE THOUSAND PESOS (P5,000.00) each, unless the value of the cargo shipment is otherwise specified or manifested or communicated in writing together with the declared Bill of Lading value and supported by a certified packing list to the CONTRACTOR by the interested party or parties before the discharge or loading unto vessel of the goods. This amount of Five Thousand Pesos (P5,000.00) per package may be reviewed and adjusted by the AUTHORITY from time to time. The CONTRACTOR shall not be responsible for the condition or the contents of

29

any package received, nor for the weight nor for any loss, injury or damage to the said cargo before or while the goods are being received or remains in the piers, sheds, warehouses or facility, if the loss, injury or damage is caused by force majeure or other causes beyond the CONTRACTORS control or capacity to prevent or remedy; PROVIDED that a formal claim together with the necessary copies of Bill of Lading, Invoice, Certified Packing List and Computation arrived at covering the loss, injury or damage or non-delivery of such goods shall have been filed with the CONTRACTOR within fifteen (15) days from day of issuance by the CONTRACTOR of a certificate of non-delivery; PROVIDED, however, that if said CONTRACTOR fails to issue such certification within fifteen (15) days from receipt of a written request by the shipper/consignee or his duly authorized representative or any interested party, said certification shall be deemed to have been issued, and thereafter, the fifteen (15) day period within which to file the claim commences; PROVIDED, finally, that the request for certification of loss shall be made within thirty (30) days from the date of delivery of the package to the consignee. xxxx The CONTRACTOR shall be solely responsible for any and all injury or damage that may arise on account of the negligence or carelessness of the CONTRACTOR, its agent or employees in the performance of the undertaking under the Contract. Further, the CONTRACTOR hereby agrees to hold free the AUTHORITY, at all times, from any claim that may be instituted by its employee by reason of the provisions of the Labor Code, as amended.42 As clearly stated above, such limitation does not apply if the value of the cargo shipment is communicated to the arrastre operator before the discharge of the cargoes.1avvph!1 It is undisputed that Access International, upon arrival of the shipment, declared the same for taxation purposes, as well as for the assessment of arrastre charges and other fees. For the purpose, the invoice, packing list and other shipping documents were presented to the Bureau of Customs as well as to petitioner for the proper assessment of the arrastre charges and other fees. Such manifestation satisfies the condition of declaration of the actual invoices of the value of the goods before their arrival, to overcome the limitation on the liability of the arrastre operator.43 Then, the arrastre operator, by reason of the payment to it of a commensurate charge based on the higher declared value of the merchandise, could and should take extraordinary care of the special or valuable cargo.44 What would, indeed, be unfair and arbitrary is to hold the arrastre operator liable for the full value of the merchandise after the consignee has paid the arrastre charges only on a basis much lower than the true value of the goods.45 What is essential is knowledge beforehand of the extent of the risk to be undertaken by the arrastre operator, as determined by the value of the property committed to its care. This defines its responsibility for loss of or damage to such cargo and ascertains the compensation commensurate to such risk assumed. Having been duly informed of the actual invoice value of the merchandise under its custody and having received payment of arrastre charges based thereon, petitioner cannot therefore insist on a limitation of its liability under the contract to less than the value of each lost cargo.46 The stipulation requiring the consignee to inform the arrastre operator and to give advance notice of the actual invoice value of the goods to be put in its custody is adopted for the purpose of determining its liability, that it may obtain compensation commensurate to the risk it assumes, not for the purpose of determining the degree of care or diligence it must exercise as a depositary or warehouseman. 47

WHEREFORE, premises considered, the petition is hereby DENIED for lack of merit. The Court of Appeals September 14, 2005 Decision and December 20, 2005 Resolution in CA-G.R. CV No. 83647 are AFFIRMED. 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.:

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Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question: Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).1 The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services. Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.2 During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to about P76,000.00. After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day. On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 9053795. 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, 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;

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(3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and (4) of any person upon whose life any estate or interest vested in him depends. In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity.9 Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondents husband to sign an express authorization for any person, organization or entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination.10 Specifically, the Health Care Agreement signed by respondents husband states: We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed Members and that the acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as stated in the space for Home Office Endorsement.11 (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 w ho was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue. 14 Thus, (A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud. 15 (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 noncompliance with his obligation.19 Being a contract of adhesion, the terms of an insurance contract are to be

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construed strictly against the party which prepared the contract the insurer.20 By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.21 This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider. 22 Anent the incontestability of the membership of respondents husband, we quote with approval the following findings of the trial court: (U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no longer lie.23 Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the attending physicians.24 WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED. SO ORDERED. nsurance Law Representation Concealment Rescission of an Insurance Contract In 1988, Ernani Trinos applied for a health care insurance under the Philamcare Health Systems. He was asked if he was ever treated for high blood, heart trouble, diabetes, cancer, liver disease, asthma, or peptic ulcer; he answered no. His application was approved and it was effective for one year. His coverage was subsequently renewed twice for one year each. While the coverage was still in force in 1990, Ernani suffered a heart attack for which he was hospitalized. The cost of the hospitalization amounted to P76,000.00. Julita Trinos, wife of Ernani, filed a claim before Philamcare for them to pay the hospitalization cost. Philamcare refused to pay as it alleged that Ernani failed to disclose the fact that he was diabetic, hypertensive, and asthmatic. Julita ended up paying the hospital expenses. Ernani eventually died. In July 1990, Julita sued Philamcare for damages. Philamcare alleged that the health coverage is not an insurance contract; that the concealment made by Ernani voided the agreement. ISSUE: Whether or not Philamcare can avoid the health coverage agreement.

HELD: No. The health coverage agreement entered upon by Ernani with Philamcare is a non-life insurance contract and is covered by the Insurance Law. It is primarily a contract of indemnity. 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. There is no concealment on the part of Ernani. He answered the question with good faith. He was not a medical doctor hence his statement in answering the question asked of him when he was applying is an opinion rather than a fact. Answers made in good faith will not void the policy. Further, Philamcare, in believing there was concealment, should have taken the necessary steps to void the health coverage agreement prior to the filing of the suit by Julita. Philamcare never gave notice to Julita of the fact that they are voiding the agreement. Therefore, Philamcare should pay the expenses paid by Julita.

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Insurance Case Digest: Gaisano Cagayan, Inc. v. Insurance Company of North America (2006) G.R. No. 147839 June 8, 2006

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

Lessons Applicable: Existing Interest (Insurance) Laws Applicable: Article 1504,Article 1263, Article 2207 of the Civil Code, Section 13 of Insurance Code

FACTS:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. while Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co IMC and LSPI separately obtained from Insurance Company of North America fire insurance policies for their book debt endorsements related to their ready-made clothing materials which have been sold or delivered to various customers and dealers of the Insured anywhere in the Philippines which are unpaid 45 days after the time of the loss February 25, 1991: Gaisano Superstore Complex in Cagayan de Oro City, owned by Gaisano Cagayan, Inc., containing the ready-made clothing materials sold and delivered by IMC and LSPI was consumed by fire. February 4, 1992: Insurance Company of North America filed a complaint for damages against Gaisano Cagayan, Inc. alleges that IMC and LSPI filed their claims under their respective fire insurance policies which it paid thus it was subrogated to their rights o Gaisano Cagayan, Inc: not be held liable because it was destroyed due to fortuities event or force majeure RTC: IMC and LSPI retained ownership of the delivered goods until fully paid, it must bear the loss (res perit domino) CA: Reversed - sales invoices is an exception under Article 1504 (1) of the Civil Code to res perit domino

ISSUE: W/N Insurance Company of North America can claim against Gaisano Cagayan for the debt that was isnured HELD: YES. petition is partly GRANTED. order to pay P535,613 is DELETED

insurance policy is clear that the subject of the insurance is the book debts and NOT goods sold and delivered to the customers and dealers of the insured ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the buyer's risk whether actual delivery has been made or not, except that:

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's interest is not determined by concept of title, but whether insured has substantial economic interest in the property Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an insurable interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the expectancy arises. Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction. o it is sufficient that the insured is so situated with reference to the property that he would be liable to loss should it be injured or destroyed by the peril against which it is insured o an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or possession of, the subject o matter of the insurance, and neither the title nor a beneficial interest is requisite to the existence of such an interest insurance in this case is not for loss of goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire - obligation is pecuniary in nature o obligor should be held exempt from liability when the loss occurs thru a fortuitous event only holds true when the obligation consists in the delivery of a determinate thing and there is no stipulation holding him liable even in case of fortuitous event Article 1263 of the Civil Code in an obligation to deliver a generic thing, the loss or destruction of anything of the same kind does not extinguish the obligation (Genus nunquan perit) The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount paid to settle the insurance claim Art. 2207. If the plaintiff's property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. As to LSPI, no subrogation receipt was offered in evidence. o Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery of the amount of P535,613

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