G.R. No.

L-17436

January 31, 1962

EQUITABLE INSURANCE AND CASUALTY COMPANY, INC., plaintiffappellee, vs.RURAL INSURANCE AND SURETY COMPANY, INC.,
defendant-appellant.
K. V. Faylona and M. R. Nadres for plaintiff-appellee.Gunlao,
Laxamana and Aquino for defendant-appellant.
BARRERA, J.:
On May 26, 1959, plaintiff Equitable Insurance and Casualty
Company, Inc. filed with the Court of First Instance of Manila a
complaint (Civil Case No. 40282) against defendant Rural
Insurance and Surety Company, Inc. alleging, as first cause of
action, that on November 11, 1957, plaintiff and defendant
entered into a reciprocal facultative reinsurance agreement,
wherein they agreed to cede to each other, by way of facultative
reinsurance on policies of insurance or reinsurance issued by their
respective fire insurance departments on risks situated in the
Philippines, subject to the stipulations of the agreement; that
pursuant to said agreement, plaintiff on January 29, 1958,
reinsured for P2,000.00 with defendant as per Reinsurance
Application No. 58/038 and accepted by defendant on the same
date, the stock covered by fire insurance Policy No. 5880 issued
by plaintiff in behalf of Messrs. Jaen Bermers' Cooperative
Marketing Association, Inc.: that on July 4, 1958, the stock insured
and covered by said Policy No. 5880 was burned, and the share of
the loss assumed by defendant as per reinsurance agreement was
computed at P2,024.87 including adjuster's fee, for which plaintiff
sent to defendant for payment by the latter, a statement of
account dated March 12, 1959; that despite repeated demands by
plaintiff, defendant refused and failed to pay the sum of
P2,024.87. On the second cause of action, plaintiff on March 24,
1958 reinsured in the sum of P2,000.00 with defendant as per
Reinsurance Application No. 58/115 and accepted by defendant
on the same date, stock covered by fire insurance Policy No.
6026, issued by plaintiff in behalf of Electric and Lamp Supplies

(Mr. Pedro Casipe); that on October 13, 1958, said stock was
burned and the share of loss assumed by defendant as per
reinsurance agreement with plaintiff was computed at P1,334.80
including adjuster's fee, for which plaintiff likewise sent a
statement of account dated February 4, 1959, to defendant with
the request that the same be paid; that notwithstanding repeated
demands, defendant refused and failed to pay plaintiffs; and that
for defendant's failure to pay its share of the losses assumed by
it, plaintiff has been compelled to institute the present action and
to incur attorney's fees and expenses of litigation amounting to
P500.00. Plaintiff prayed for judgment ordering the defendant to
pay said sums of P2,024.80 and P1,334.80 with legal interest
thereon from the date of the filing of the complaint until fully paid,
P500.00 as attorney's fees, and the costs of the suit.
On June 9, 1959, defendant filed a motion to dismiss said
complaint, on the ground that it states no cause of action, as
pursuant to Article VIII of the Reinsurance Agreement between the
parties, before a court action can be brought, the parties agreed
to submit all disputes to a board of arbitrators. To this motion,
plaintiff duly filed an opposition. On June 16, 1959, the court
denied said motion to dismiss for lack of merit and required
defendant to answer.
On June 20, 1959, defendant flied its answer alleging as
affirmative defenses that paragraph 3, Article III of the Reciprocal
Reinsurance Agreement between the parties is controlled by
Article VIII thereof, that the nature of the agreement is "selfliquidating between the parties" the reinsurer becoming a
reinsured, and the reinsured becoming reinsurer; and that said
agreement has not yet been abrogated, so that plaintiff's liability
to defendant is not yet known, nor the liability of defendant to
plaintiff. Defendant prayed that the complaint be dismissed and
that plaintiff be ordered to pay to it attorney's fees in the sum of
P700.00 and the costs of the suit.1wph1.t
On July 8, 1959, plaintiff filed a motion for judgment on the
pleadings, which was opposed by defendant on July 13. On July
15, 1959, the court issued an order denying said motion.

Instead of going into a formal hearing, the parties on August 12,

1959, submitted the case for decision on the following stipulation
of facts:
1. That the defendant admits the allegations contained in
paragraphs 1, 2, 3, 4 and all other allegations of the complaint,
including the letter of the Assistant Insurance Commissioner,
addressed to Miss Anunciacion Aznar, President of the Rural
Insurance & Surety Co., dated May 4, 1959, which reads as
follows: .
"MADAM:
"We are enclosing herewith copy of the self-explanatory letter of
Mr. S. A. Santos, General Manager of the above-subject company,
dated April 11, 1959, with the request that we be favored with
your comments thereon at an early date.
"Kindly give your preferential attention hereto."
2. That plaintiff admits that the issues and/or dispute subject of
the present complaint were not submitted to a Board of
Arbitrators and umpire, as provided in paragraph VIII of Annex 'A'
to the complaint, but instead the matter was referred to the
Insurance Commissioner as evidenced by the letter of said office
quoted above." (Emphasis supplied.) .
On October 16, 1959, the court rendered a decision the
dispositive part of which reads: .
IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered in
favor of the plaintiff Equitable Insurance & Casualty Co., Inc. and
against the defendant Rural Insurance & Surety Co., Inc., ordering
the latter to pay to the former the sum of P2,024.87, under the
first cause of action, with legal interest from the date of the filing
of the complaint until fully paid; the sum of P1,334.80, under the
second cause of action with legal interest from the date of the
filing of the complaint, until fully paid; plus the further sum of
P500.00 as attorney's fees and the costs of the suit.

From this decision, defendant appealed to the Court of Appeals

which elevated the case to us, no question of fact being involved.
Under his first assignment of error, defendant-appellant insists
that the trial court erred in failing to rule that plaintiff-appellee
has no causes of action against it, the matter not having been
referred to the decision of two arbitrators or umpire, which, it is
claimed, is the condition precedent agreed upon in Article VIII of
the Reinsurance Agreement entered into between the parties, to
wit: .
ARTICLE VIII
In the event of any question arising as to the meaning of, or any
way connected with or relating to this Agreement, whether before
or after its termination, the parties shall endeavor to arrive at a
satisfactory compromise by amicable settlement rather than by
court action. The dispute shall be referred to the decision of two
arbitrators, of whom one shall be appointed in writing by each of
the parties within thirty (30) days after having been required so to
do by the other party in writing, and in case of disagreement
between the arbitrators, to the decision of the umpire to be
appointed by them in writing before entering on the reference.
Each party shall submit its case with all particulars within thirty
days after their appointment. The seat of arbitration shall be in
Manila, Philippines, and the expenses of arbitration shall be borne
in equal proportion by the parties. The decision of the arbitrators
or umpire, as the case may be, shall be final and binding on both
the Company and the Reinsurer. The arbitrators and umpire shall
not be bound by the strict rules of evidence and by judicial
formalities in making the award.
It is contended that this agreement, not being contrary to law,
moral or public policy but, on the other hand, dictated by 'wisdom
and propriety in insurance contracts because losses by fire can
duly be determined by competent men who have technical
knowledge on how to determine losses by fire", non-compliance
therewith is fatal to the claim of plaintiff-appellee.
We find no merit in this contention. Under the abovequoted

provision of the Reinsurance Agreement, it would seem clear that

the requirement of submitting for decision to two arbitrators or an
umpire the matter of losses by fire or the liability of the parties
thereto arises only if and when the same is disputed by one of the
parties. It does not appear in the instant case that appellant did
dispute appellee's claims. Consequently, appellant may not
invoke said provision in avoidance of its liability to appellee. On
this point, the trial court correctly made the following
observations, to which we fully agree and adopt as our own: .
It is true that paragraph (Article VIII) of said Reciprocal Facultative
Reinsurance Agreement required that 'in the event of any
question arising as to the meaning of, or any way connected with
or relating to this Agreement, whether before or after its
termination, the parties shall endeavor to arrive at a satisfactory
compromise by amicable settlement rather than by court action';
and that the dispute should be referred to the decision of two
arbitrators and umpire, as provided, therein. However, in this
particular case, there is absolutely no dispute between the two
parties, because in the stipulation of facts, the defendant has
admitted that plaintiff has paid its liability to the insured as per its
fire insurance policies specified in the two causes of action of the
complaint. Defendant has, likewise, admitted its liability as
reinsurer under the Reciprocal Facultative Reinsurance Agreement
(Annex "A" to the complaint) to pay to the plaintiff its proportional
shares, the amounts of which are not disputed. Indeed, according
to the complaint as admitted by the defendant, statements of
account as to the amounts of its share as reinsurer and, for all
that appears, said defendant has never questioned the
correctness of said amounts. It is, likewise, admitted by the
defendant in the stipulation of facts, that because of its failure to
pay said amounts, the plaintiff, on April 11, 1959, complained to
the Assistant Insurance Commissioner, for official intervention,
but said defendant has continued to ignore plaintiff's demands for
reimbursement under the reinsurance policies.
Moreover, as decided by the Court of Appeals in the case of
Buenaventura Maligad v. United Assurance Co., Inc., 55 O.G.
6041:

If in the course of the settlement of a loss, the action of the

company or its agents amounts to a refusal to pay, the company
will be deemed to have waived the condition precedent with
reference to arbitration and a suit upon the policy will lie. (Chang
v. Assurance Corporation, 8 Phil. 399.) Emphasis supplied.
In the second and last assignment of error, appellant claims that
"the court a quo erred in failing to rule that in a facultative
obligation the right to choose an alternative remedy lies only with
the debtor, who in this case is the herein defendant-appellant",
and in support thereof, cites Article 1206 of the new Civil Code.
We find no connection whatsoever between this article and the
agreement subject of this action, except the word "facultative"
used in both. The term "facultative" is used in reinsurance
contracts, and it is so used in this particular case, merely to
define the right of the reinsurer to accept or not to accept
participation in the risk insured. But once the share is accepted,
as it was in the case at bar, the obligation is absolute and the
liability assumed thereunder can be discharged by one and only
way payment of the share of the losses. There is no alternative
nor substitute prestation.
WHEREFORE, finding no error in the judgment appealed from of
the trial court, the same is hereby affirmed, with costs against the
defendant-appellant. So ordered.
G.R. No. L-36232 December 19, 1974
PIONEER INSURANCE AND SURETY CORPORATION,
petitioner-appellant, vs.OLIVA YAP, represented by her
attorney-in-fact, CHUA SOON POON respondent-appellee.
Eriberto D. Ignacio for petitioner-appellant.
Paculdo, Miranda, Marquez, Sibal & Associates for respondentappellee.

FERNANDEZ, J.:p

This is an appeal by certiorari from the decision of the Court of

Appeals dated December 16, 1972, in CA-G.R. No. 36669-R,
affirming the judgment of the Court of First Instance of Manila
(Branch VI) in Civil Case No. 54508, which latter court declared
plaintiff Oliva Yap, herein respondent, entitled to recover from
defendant Pioneer Insurance & Surety Corporation, herein
petitioner, the full amount of the damage inquired in Policy No.
4219, which is P25,000.00, plus 12% of said sum from the date of
filing of the complaint until full payment, in addition to the sum of
P6,000.00 for attorney's fees, and costs.
Respondent Oliva Yap was the owner of a store in a two-storey
building located at No. 856 Juan Luna Street, Manila, where in
1962 she sold shopping bags and footwear, such as shoes,
sandals and step-ins. Chua Soon Poon Oliva Yap's son-in-law, was
in charge of the store.
On April 19, 1962, respondent Yap took out Fire Insurance Policy
No. 4216 from petitioner Pioneer Insurance & Surety Corporation
with a face value of P25,000.00 covering her stocks, office
furniture, fixtures and fittings of every kind and description.
Among the conditions in the policy executed by the parties are
the following:
The Insured shall give notice to the Company of any insurance or
insurances already effected, or which may subsequently be
effected, covering any of the property hereby insured, and unless
such notice be given and the particulars of such insurance or
insurances be stated in, or endorsed on this Policy by or on behalf
of the Company before the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited. (emphasis supplied)
It is understood that, except as may be stated on the face of this
policy there is no other insurance on the property hereby covered
and no other insurance is allowed except by the consent of the
Company endorsed hereon. Any false declaration or breach or this
condition will render this policy null and void.
At the time of the insurance on April 19, 1962 of Policy No. 4219
in favor of respondent Yap, an insurance policy for P20,000.00

issued by the Great American Insurance Company covering the

same properties was noted on said policy as co-insurance (Annex
"1-E"). Later, on August 29, 1962, the parties executed Exhibit "1K", as an endorsement on Policy No. 4219, stating:
It is hereby declared and agreed that the co-insurance existing at
present under this policy is as follows: P20,000.00 Northwest
Ins., and not as originally stated. (emphasis supplied)
Except as varied by this endorsement, all other terms and
conditions remain unchanged.
Still later, or on September 26, 1962, respondent Oliva Yap took
out another fire insurance policy for P20,000.00 covering the
same properties, this time from the Federal Insurance Company,
Inc., which new policy was, however, procured without notice to
and the written consent of petitioner Pioneer Insurance & Surety
Corporation and, therefore, was not noted as a co-insurance in
Policy No. 4219.
At dawn on December 19, 1962, a fire broke out in the building
housing respondent Yap's above-mentioned store, and the said
store was burned. Respondent Yap filed an insurance claim, but
the same was denied in petitioner's letter of May 17, 1963
(Exhibit "G"), on the ground of "breach and/or violation of any
and/or all terms and conditions" of Policy No. 4219.
On July 17, 1963, Oliva Yap filed with the Court of First Instance of
Manila the present complaint, asking, among others, for payment
of the face value of her fire insurance policy. In its answer,
petitioner alleged that no property belonging to plaintiff Yap and
covered by the insurance policy was destroyed by the fire; that
Yap's claim was filed out of time; and that Yap took out an
insurance policy from another insurance company without
petitioner's knowledge and/or endorsement, in violation of the
express stipulations in Policy No. 4219, hence, all benefits
accruing from the policy were deemed forfeited.
As already stated at the beginning of this opinion, the trial court
decided for plaintiff Oliva Yap; and its judgment was affirmed in

full by the Court of Appeals.

The vital issue in this appeal is whether or not petitioner should
be absolved from liability on Fire Insurance Policy No. 4219 on
account of any violation by respondent Yap of the co-insurance
clause therein. In resolving this problem, the Court of Appeals
stated in its decision:
5. The plaintiff-appellee has not violated the other insurance
clause (Exhibit 1-F) of the insurance Policy No. 4219 that would
justify the defendant-appellant, as insurer, to avoid its liability
thereunder. It appears on the face of said policy that a coinsurance in the amount of P20,000.00 was secured from the
Great American Insurance and was declared by the plaintiffappellee and recognized by the defendant-appellant. This was
later on substituted for the same amount and secured by the
Federal Insurance Company. Chua Soon Poon on being crossexamined by counsel for the defendant-appellant, declared that
the Great American Insurance policy was cancelled because of the
difference in the premium and the same was changed for that of
the Federal (t.s.n., hearing of December 1, 1964, pp. 35-36).
Contrary to the assertion of the defendant-appellant, the Great
American Insurance policy was not substituted by the Northwest
Insurance policy. As admitted by the defendant-appellant in its
brief (p. 48), the fire insurance policy issued by the Great
American Insurance Company for P20,000.00 (Exhibit 1-E) was
cancelled on August 29, 1962. On the other hand, the fire
insurance policy issued by the Northwest Insurance & Surety
Company for P20,000.00 (Exhibit 1-K) was taken out on July 23,
1962. How then can the Northwest Insurance policy issued on July
23, 1962, be considered as having substituted the Great American
policy which was cancelled only on August 29, 1962? The
defendant-appellant can be considered to have waived the formal
requirement of indorsing the policy of co-insurance since there
was absolutely no showing that it was not aware of said
substitution and preferred to continue the policy (Gonzales La O
vs. Yek Tong Lin Fire and Marine Insurance Co., 55 Phil. 386). Even
assuming that the defendant-appellant did not indorse the Federal
Insurance policy, there is no question that the same was only a
substitution and did not in any way increase the amount of the

declared co-insurance. In other words, there was no increase in

the risk assumed by the defendant-appellant.
We do not agree with the conclusion of the Court of Appeals.
There was a violation by respondent Oliva Yap of the co-insurance
clause contained in Policy No. 4219 that resulted in the avoidance
of petitioner's liability. The insurance policy for P20,000.00 issued
by the Great American Insurance Company covering the same
properties of respondent Yap and duly noted on Policy No. 4219 as
c-insurance, ceased, by agreement of the parties (Exhibit "1-L"),
to be recognized by them as a co-insurance policy. The Court of
Appeals says that the Great American Insurance policy was
substituted by the Federal Insurance policy for the same amount,
and because it was a mere case of substitution, there was no
necessity for its endorsement on Policy No. 4219. This finding, as
well as reasoning, suffers from several flaws. There is no evidence
to establish and prove such a substitution. If anything was
substituted for the Great American Insurance policy, it could only
be the Northwest Insurance policy for the same amount of
P20,000.00. The endorsement (Exhibit "1-K") quoted above shows
the clear intention of the parties to recognize on the date the
endorsement was made (August 29, 1962), the existence of only
one co-insurance, and that is the Northwest Insurance policy,
which according to the stipulation of the parties during the
hearing, was issued on August 20, 1962 (t.s.n., January 12, 1965,
pp. 3-4) and endorsed only on August 20, 1962. The finding of the
Court of Appeals that the Great American Insurance policy was
substituted by the Federal Insurance policy is unsubstantiated by
the evidence of record and indeed contrary to said stipulation and
admission of respondent, and is grounded entirely on speculation,
surmises or conjectures, hence, not binding on the Supreme
Court. 1
The Court of Appeals would consider petitioner to have waived
the formal requirement of endorsing the policy of co-insurance
"since there was absolutely no showing that it was not aware of
said substitution and preferred to continue the policy." The fallacy
of this argument is that, contrary to Section 1, Rule 131 of the
Revised Rules of Court, which requires each party to prove his

own allegations, it would shift to petitioner, respondent's burden

of proving her proposition that petitioner was aware of the alleged
substitution, and with such knowledge preferred to continue the
policy. Respondent Yap cites Gonzales La O vs. Yek Tong Lin Fire
and Marine Insurance Co., Ltd. 2 to justify the assumption but in that
case, unlike here, there was knowledge by the insurer of violations of
the contract, to wit: "If, with the knowledge of the existence of other
insurances which the defendant deemed violations of the contract, it
has preferred to continue the policy, its action amounts to a waiver of
the annulment of the contract ..." A waiver must be express. If it is to
be implied from conduct mainly, said conduct must be clearly
indicative of a clear intent to waive such right. Especially in the case at
bar where petitioner is assumed to have waived a valuable right,
nothing less than a clear, positive waiver, made with full knowledge of
the circumstances, must be required.

By the plain terms of the policy, other insurance without the

consent of petitioner would ipso facto avoid the contract. It
required no affirmative act of election on the part of the company
to make operative the clause avoiding the contract, wherever the
specified conditions should occur. Its obligations ceased, unless,
being informed of the fact, it consented to the additional
insurance.
The validity of a clause in a fire insurance policy to the effect that
the procurement of additional insurance without the consent of
the insurer renders ipso facto the policy void is well-settled:
In Milwaukee Mechanids' Lumber Co., vs. Gibson, 199 Ark. 542,
134 S. W. 2d 521, 522, a substantially identical clause was
sustained and enforced, the court saying: "The rule in this state
and practically all of the states is to the effect that a clause in a
policy to the effect that the procurement of additional insurance
without the consent of the insurer renders the policy void is a
valid provision. The earlier cases of Planters Mutual Insurance Co.,
vs. Green, 72 Ark. 305, 80 S.W. 92, are to the same effect." And
see Vance, Insurance, 2nd Ed., 725. (Reach vs. Arkansas Farmers
Mut. Fire Ins. Co., [Ark. Nov. 14, 1949] 224 S. W. 2d 48, 49.)
2. Where a policy contains a clause providing that the policy shall
be void if insured has or shall procure any other insurance on the

property, the procurement of additional insurance without the

consent of the insurer avoids the policy." (Planters' Mut. Ins. Ass'n
vs. Green [Supreme Court of Arkansas, March 19, 1904] 80 S.W.
151.)
3. The policy provided that it should be void in case of other
insurance "without notice and consent of this company. ..." It also
authorized the company to terminate the contract at any time, at
its option, by giving notice and refunding a ratable proportion of
the premium. Held, that additional insurance, unless consented
to, or unless a waiver was shown, ipso facto avoided the contract,
and the fact that the company had not, after notice of such
insurance, cancelled the policy, did not justify the legal conclusion
that it had elected to allow it to continue in force." (Johnson vs.
American Fire Ins., Co., [Supreme Court of Minnesota, Aug. 12,
1889] 43 N.W., 59)o
The aforecited principles have been applied in this jurisdiction in
General Insurance & Surety Corporation vs. Ng Hua 3. There, the
policy issued by the General Insurance & Surety Corporation in favor of
respondent Ng Hua contained a provision identical with the provisions
in Policy No. 4219 quoted above. 4 This Court, speaking thru Justice
Cesar P. Bengson, in reversing the judgment of the Court of Appeals
and absolving the insurer from liability under the policy, held:

... And considering the terms of the policy which required the
insured to declare other insurances, the statement in question
must be deemed to be a statement (warranty) binding on both
insurer and insured, that there were no other insurance on the
property. ...
The annotation then, must be deemed to be a warranty that the
property was not insured by any other policy. Violation thereof
entitled the insurer to rescind. (Sec. 69, Insurance Act.) Such
misrepresentation is fatal in the light of our views in Santa Ana vs.
Commercial Union Assurance Company, Ltd., 55 Phil. 329. The
materiality of non-disclosure of other insurance policies is not
open to doubt.
Furthermore, even if the annotations were overlooked the

defendant insurer would still be free from liability because there is

no question that the policy issued by General Indemnity has not
been stated in nor endorsed on Policy No. 471 of defendant. And
as stipulated in the above-quoted provisions of such policy "all
benefit under this policy shall be forfeited. (Emphasis supplied)
The obvious purpose of the aforesaid requirement in the policy is
to prevent over-insurance and thus avert the perpetration of
fraud. The public, as well as the insurer, is interested in
preventing the situation in which a fire would be profitable to the
insured. According to Justice Story: "The insured has no right to
complain, for he assents to comply with all the stipulation on his
side, in order to entitle himself to the benefit of the contract,
which, upon reason or principle, he has no right to ask the court
to dispense with the performance of his own part of the
agreement, and yet to bind the other party to obligations, which,
but for those stipulation would not have been entered into." 5
In view of the above conclusion, We deem it unnecessary to
consider the other defenses interposed by petitioner.
WHEREFORE, the appealed judgment of the Court of Appeals is
reversed and set aside, and the petitioner absolved from all
liability under the policy. Costs against private respondent.
SO orDEered.

G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner, vs.COURT OF APPEALS and
COUNTRY BANKERS INSURANCE CORPORATION,
respondents.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision
of the Court of Appeals in CA-G.R. SP No. 31916, entitled "Country
Bankers Insurance Corporation versus Armando Geagonia," reversing
the decision of the Insurance Commission in I.C. Case No. 3340 which
awarded the claim of petitioner Armando Geagonia against private
respondent Country Bankers Insurance Corporation.
1

The petitioner is the owner of Norman's Mart located in the public

market of San Francisco, Agusan del Sur. On 22 December 1989,
he obtained from the private respondent fire insurance policy No.
F-14622 2 for P100,000.00. The period of the policy was from 22
December 1989 to 22 December 1990 and covered the following:
"Stock-in-trade consisting principally of dry goods such as RTW's for
men and women wear and other usual to assured's business."

The petitioner declared in the policy under the subheading

entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was
the co-insurer for P50,000.00. From 1989 to 1990, the petitioner
had in his inventory stocks amounting to P392,130.50, itemized
as follows:

Zenco Sales, Inc.

F. Legaspi Gen. Merchandise
Cebu Tesing Textiles

P55,698.00
86,432.50
250,000.00 (on credit)

P392,130.50

The policy contained the following condition:

3. The insured shall give notice to the Company of any insurance

or insurances already affected, or which may subsequently be

effected, covering any of the property or properties consisting of
stocks in trade, goods in process and/or inventories only hereby
insured, and unless such notice be given and the particulars of
such insurance or insurances be stated therein or endorsed in this
policy pursuant to Section 50 of the Insurance Code, by or on
behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed forfeited,
provided however, that this condition shall not apply when the
total insurance or insurances in force at the time of the loss or
damage is not more than P200,000.00.
On 27 May 1990, fire of accidental origin broke out at around 7:30
p.m. at the public market of San Francisco, Agusan del Sur. The
petitioner's insured stock-in-trade were completely destroyed
prompting him to file with the private respondent a claim under
the policy. On 28 December 1990, the private respondent denied
the claim because it found that at the time of the loss the
petitioner's stocks-in-trade were likewise covered by fire
insurance policies No. GA-28146 and No. GA-28144, for
P100,000.00 each, issued by the Cebu Branch of the Philippines
First Insurance Co., Inc. (hereinafter PFIC). 3 These policies indicate
that the insured was "Messrs. Discount Mart (Mr. Armando Geagonia,
Prop.)" with a mortgage clause reading:

MORTGAGE: Loss, if any shall be payable to Messrs. Cebu Tesing

Textiles, Cebu City as their interest may appear subject to the
terms of this policy. CO-INSURANCE DECLARED: P100,000.
Phils. First CEB/F 24758. 4
The basis of the private respondent's denial was the petitioner's
alleged violation of Condition 3 of the policy.
The petitioner then filed a complaint

against the private

respondent with the Insurance Commission (Case No. 3340) for the
recovery of P100,000.00 under fire insurance policy No. F-14622 and
for attorney's fees and costs of litigation. He attached as Annex "AM" 6
thereof his letter of 18 January 1991 which asked for the
reconsideration of the denial. He admitted in the said letter that at the
time he obtained the private respondent's fire insurance policy he
5

knew that the two policies issued by the PFIC were already in
existence; however, he had no knowledge of the provision in the
private respondent's policy requiring him to inform it of the prior
policies; this requirement was not mentioned to him by the private
respondent's agent; and had it been mentioned, he would not have
withheld such information. He further asserted that the total of the
amounts claimed under the three policies was below the actual value
of his stocks at the time of loss, which was P1,000,000.00.

In its answer,

the private respondent specifically denied the

allegations in the complaint and set up as its principal defense the
violation of Condition 3 of the policy.
7

In its decision of 21 June 1993,

the Insurance Commission found

that the petitioner did not violate Condition 3 as he had no knowledge
of the existence of the two fire insurance policies obtained from the
PFIC; that it was Cebu Tesing Textiles which procured the PFIC policies
without informing him or securing his consent; and that Cebu Tesing
Textile, as his creditor, had insurable interest on the stocks. These
findings were based on the petitioner's testimony that he came to
know of the PFIC policies only when he filed his claim with the private
respondent and that Cebu Tesing Textile obtained them and paid for
their premiums without informing him thereof. The Insurance
Commission then decreed:
8

WHEREFORE, judgment is hereby rendered ordering the

respondent company to pay complainant the sum of P100,000.00
with legal interest from the time the complaint was filed until fully
satisfied plus the amount of P10,000.00 as attorney's fees. With
costs. The compulsory counterclaim of respondent is hereby
dismissed.
Its motion for the reconsideration of the decision

having been
denied by the Insurance Commission in its resolution of 20 August
1993, 10 the private respondent appealed to the Court of Appeals by
way of a petition for review. The petition was docketed as CA-G.R. SP
No. 31916.

In its decision of 29 December 1993,

the Court of Appeals

reversed the decision of the Insurance Commission because it found
that the petitioner knew of the existence of the two other policies
issued by the PFIC. It said:
11

It is apparent from the face of Fire Policy GA 28146/Fire Policy No.

28144 that the insurance was taken in the name of private
respondent [petitioner herein]. The policy states that "DISCOUNT
MART (MR. ARMANDO GEAGONIA, PROP)" was the assured and
that "TESING TEXTILES" [was] only the mortgagee of the goods.
In addition, the premiums on both policies were paid for by
private respondent, not by the Tesing Textiles which is alleged to
have taken out the other insurance without the knowledge of
private respondent. This is shown by Premium Invoices nos.
46632 and 46630. (Annexes M and N). In both invoices, Tesing
Textiles is indicated to be only the mortgagee of the goods
insured but the party to which they were issued were the
"DISCOUNT MART (MR. ARMANDO GEAGONIA)."
In is clear that it was the private respondent [petitioner herein]
who took out the policies on the same property subject of the
insurance with petitioner. Hence, in failing to disclose the
existence of these insurances private respondent violated
Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the
provisions insurances is belied by his letter to petitioner [of 18
January 1991. The body of the letter reads as follows;]
xxx xxx xxx
Please be informed that I have no knowledge of the provision
requiring me to inform your office about my prior insurance under
FGA-28146 and F-CEB-24758. Your representative did not mention
about said requirement at the time he was convincing me to
insure with you. If he only die or even inquired if I had other
existing policies covering my establishment, I would have told him
so. You will note that at the time he talked to me until I decided to
insure with your company the two policies aforementioned were
already in effect. Therefore I would have no reason to withhold
such information and I would have desisted to part with my hard
earned peso to pay the insurance premiums [if] I know I could not
recover anything.

Sir, I am only an ordinary businessman interested in protecting

my investments. The actual value of my stocks damaged by the
fire was estimated by the Police Department to be P1,000,000.00
(Please see xerox copy of Police Report Annex "A"). My Income
Statement as of December 31, 1989 or five months before the
fire, shows my merchandise inventory was already some
P595,455.75. . . . These will support my claim that the amount
claimed under the three policies are much below the value of my
stocks lost.
xxx xxx xxx
The letter contradicts private respondent's pretension that he did
not know that there were other insurances taken on the stock-intrade and seriously puts in question his credibility.
His motion to reconsider the adverse decision having been
denied, the petitioner filed the instant petition. He contends
therein that the Court of Appeals acted with grave abuse of
discretion amounting to lack or excess of jurisdiction:
A . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE
INSURANCE COMMISSION, A QUASI-JUDICIAL BODY CHARGED
WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE
DECISION IS ACCORDED RESPECT AND EVEN FINALITY BY THE
COURTS;
B . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH
WERE NOT PRESENTED AS EVIDENCE DURING THE HEARING OR
TRIAL; AND
C . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER
HEREIN AGAINST THE PRIVATE RESPONDENT.
The chief issues that crop up from the first and third grounds are
(a) whether the petitioner had prior knowledge of the two
insurance policies issued by the PFIC when he obtained the fire
insurance policy from the private respondent, thereby, for not
disclosing such fact, violating Condition 3 of the policy, and (b) if
he had, whether he is precluded from recovering therefrom.

The second ground, which is based on the Court of Appeals'

reliance on the petitioner's letter of reconsideration of 18 January
1991, is without merit. The petitioner claims that the said letter
was not offered in evidence and thus should not have been
considered in deciding the case. However, as correctly pointed
out by the Court of Appeals, a copy of this letter was attached to
the petitioner's complaint in I.C. Case No. 3440 as Annex "M"
thereof and made integral part of the complaint. 12 It has attained
the status of a judicial admission and since its due execution and
authenticity was not denied by the other party, the petitioner is bound
by it even if it were not introduced as an independent evidence. 13

As to the first issue, the Insurance Commission found that the

petitioner had no knowledge of the previous two policies. The
Court of Appeals disagreed and found otherwise in view of the
explicit admission by the petitioner in his letter to the private
respondent of 18 January 1991, which was quoted in the
challenged decision of the Court of Appeals. These divergent
findings of fact constitute an exception to the general rule that in
petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are
conclusive and binding upon this Court. 14
We agree with the Court of Appeals that the petitioner knew of
the prior policies issued by the PFIC. His letter of 18 January 1991
to the private respondent conclusively proves this knowledge. His
testimony to the contrary before the Insurance Commissioner and
which the latter relied upon cannot prevail over a written
admission made ante litem motam. It was, indeed, incredible that
he did not know about the prior policies since these policies were
not new or original. Policy No. GA-28144 was a renewal of Policy
No. F-24758, while Policy No. GA-28146 had been renewed twice,
the previous policy being F-24792.
Condition 3 of the private respondent's Policy No. F-14622 is a
condition which is not proscribed by law. Its incorporation in the
policy is allowed by Section 75 of the Insurance Code 15 which
provides that "[a] policy may declare that a violation of specified
provisions thereof shall avoid it, otherwise the breach of an immaterial
provision does not avoid the policy." Such a condition is a provision

which invariably appears in fire insurance policies and is intended to

prevent an increase in the moral hazard. It is commonly known as the
additional or "other insurance" clause and has been upheld as valid
and as a warranty that no other insurance exists. Its violation would
thus avoid the policy. 16 However, in order to constitute a violation, the
other insurance must be upon same subject matter, the same interest
therein, and the same risk. 17

As to a mortgaged property, the mortgagor and the mortgagee

have each an independent insurable interest therein and both
interests may be one policy, or each may take out a separate
policy covering his interest, either at the same or at separate
times. 18 The mortgagor's insurable interest covers the full value of the
mortgaged property, even though the mortgage debt is equivalent to
the full value of the property. 19 The mortgagee's insurable interest is to
the extent of the debt, since the property is relied upon as security
thereof, and in insuring he is not insuring the property but his interest
or lien thereon. His insurable interest is prima facie the value
mortgaged and extends only to the amount of the debt, not exceeding
the value of the mortgaged property. 20 Thus, separate insurances
covering different insurable interests may be obtained by the
mortgagor and the mortgagee.

A mortgagor may, however, take out insurance for the benefit of

the mortgagee, which is the usual practice. The mortgagee may
be made the beneficial payee in several ways. He may become
the assignee of the policy with the consent of the insurer; or the
mere pledgee without such consent; or the original policy may
contain a mortgage clause; or a rider making the policy payable
to the mortgagee "as his interest may appear" may be attached;
or a "standard mortgage clause," containing a collateral
independent contract between the mortgagee and insurer, may
be attached; or the policy, though by its terms payable absolutely
to the mortgagor, may have been procured by a mortgagor under
a contract duty to insure for the mortgagee's benefit, in which
case the mortgagee acquires an equitable lien upon the proceeds.
21

In the policy obtained by the mortgagor with loss payable clause

in favor of the mortgagee as his interest may appear, the
mortgagee is only a beneficiary under the contract, and

recognized as such by the insurer but not made a party to the

contract himself. Hence, any act of the mortgagor which defeats
his right will also defeat the right of the mortgagee. 22 This kind of
policy covers only such interest as the mortgagee has at the issuing of
the policy. 23

On the other hand, a mortgagee may also procure a policy as a

contracting party in accordance with the terms of an agreement
by which the mortgagor is to pay the premiums upon such
insurance. 24 It has been noted, however, that although the mortgagee
is himself the insured, as where he applies for a policy, fully informs
the authorized agent of his interest, pays the premiums, and obtains
on the assurance that it insures him, the policy is in fact in the form
used to insure a mortgagor with loss payable clause. 25

The fire insurance policies issued by the PFIC name the petitioner
as the assured and contain a mortgage clause which reads:
Loss, if any, shall be payable to MESSRS. TESING TEXTILES, Cebu
City as their interest may appear subject to the terms of this
policy.
This is clearly a simple loss payable clause, not a standard
mortgage clause.
It must, however, be underscored that unlike the "other
insurance" clauses involved in General Insurance and Surety
Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27
which read:

The insured shall give notice to the company of any insurance or

insurances already effected, or which may subsequently be
effected covering any of the property hereby insured, and unless
such notice be given and the particulars of such insurance or
insurances be stated in or endorsed on this Policy by or on behalf
of the Company before the occurrence of any loss or damage, all
benefits under this Policy shall be forfeited.
or in the 1930 case of Santa Ana vs. Commercial Union Assurance
Co. 28 which provided "that any outstanding insurance upon the whole
or a portion of the objects thereby assured must be declared by the

insured in writing and he must cause the company to add or insert it in

the policy, without which such policy shall be null and void, and the
insured will not be entitled to indemnity in case of loss," Condition 3 in
the private respondent's policy No. F-14622 does not absolutely
declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in
force at the time of the loss or damage is not more than P200,000.00."

It is a cardinal rule on insurance that a policy or insurance

contract is to be interpreted liberally in favor of the insured and
strictly against the company, the reason being, undoubtedly, to
afford the greatest protection which the insured was endeavoring
to secure when he applied for insurance. It is also a cardinal
principle of law that forfeitures are not favored and that any
construction which would result in the forfeiture of the policy
benefits for the person claiming thereunder, will be avoided, if it is
possible to construe the policy in a manner which would permit
recovery, as, for example, by finding a waiver for such forfeiture.
Stated differently, provisions, conditions or exceptions in policies
which tend to work a forfeiture of insurance policies should be
construed most strictly against those for whose benefits they are
inserted, and most favorably toward those against whom they are
intended to operate. 30 The reason for this is that, except for riders
which may later be inserted, the insured sees the contract already in
its final form and has had no voice in the selection or arrangement of
the words employed therein. On the other hand, the language of the
contract was carefully chosen and deliberated upon by experts and
legal advisers who had acted exclusively in the interest of the insurers
and the technical language employed therein is rarely understood by
ordinary laymen. 31
29

With these principles in mind, we are of the opinion that Condition

3 of the subject policy is not totally free from ambiguity and must,
perforce, be meticulously analyzed. Such analysis leads us to
conclude that (a) the prohibition applies only to double insurance,
and (b) the nullity of the policy shall only be to the extent
exceeding P200,000.00 of the total policies obtained.
The first conclusion is supported by the portion of the condition
referring to other insurance "covering any of the property or
properties consisting of stocks in trade, goods in process and/or

inventories only hereby insured," and the portion regarding the

insured's declaration on the subheading CO-INSURANCE that the
co-insurer is Mercantile Insurance Co., Inc. in the sum of
P50,000.00. A double insurance exists where the same person is
insured by several insurers separately in respect of the same
subject and interest. As earlier stated, the insurable interests of a
mortgagor and a mortgagee on the mortgaged property are
distinct and separate. Since the two policies of the PFIC do not
cover the same interest as that covered by the policy of the
private respondent, no double insurance exists. The nondisclosure then of the former policies was not fatal to the
petitioner's right to recover on the private respondent's policy.
Furthermore, by stating within Condition 3 itself that such
condition shall not apply if the total insurance in force at the time
of loss does not exceed P200,000.00, the private respondent was
amenable to assume a co-insurer's liability up to a loss not
exceeding P200,000.00. What it had in mind was to discourage
over-insurance. Indeed, the rationale behind the incorporation of
"other insurance" clause in fire policies is to prevent overinsurance and thus avert the perpetration of fraud. When a
property owner obtains insurance policies from two or more
insurers in a total amount that exceeds the property's value, the
insured may have an inducement to destroy the property for the
purpose of collecting the insurance. The public as well as the
insurer is interested in preventing a situation in which a fire would
be profitable to the insured. 32
WHEREFORE, the instant petition is hereby GRANTED. The
decision of the Court of Appeals in CA-G.R. SP No. 31916 is SET
ASIDE and the decision of the Insurance Commission in Case No.
3340 is REINSTATED.
Costs against private respondent Country Bankers Insurance
Corporation.
SO ORDERED.

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.THE HON. COURT OF APPEALS, BORDER MACHINERY &
HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M.
MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner, vs.COURT OF APPEALS, PIONEER
INSURANCE AND SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO
and MODESTO CERVANTES and CONSTANCIO MAGLANA,
respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision
of the Court of Appeals in CA-G.R. CV No. 66195 which modified
the decision of the then Court of First Instance of Manila in Civil
Case No. 66135. The plaintiffs complaint (petitioner in G.R. No.
84197) against all defendants (respondents in G.R. No. 84197)
was dismissed but in all other respects the trial court's decision
was affirmed.
The dispositive portion of the trial court's decision reads as
follows:
WHEREFORE, judgment is rendered against defendant Jacob S.

Lim requiring Lim to pay plaintiff the amount of P311,056.02, with

interest at the rate of 12% per annum compounded monthly; plus
15% of the amount awarded to plaintiff as attorney's fees from
July 2,1966, until full payment is made; plus P70,000.00 moral
and exemplary damages.
It is found in the records that the cross party plaintiffs incurred
additional
miscellaneous
expenses
aside
from
Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
Lim is further required to pay cross party plaintiff, Bormaheco, the
Cervanteses one-half and Maglana the other half, the amount of
Pl84,878.74 with interest from the filing of the cross-complaints
until the amount is fully paid; plus moral and exemplary damages
in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and
exemplary damages in the amount of P50,000.00 for each of the
two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and
the Cervanteses, and another P20,000.00 to Constancio B.
Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses and
Constancio B. Maglana, is dismissed. Instead, plaintiff is required
to indemnify the defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.
Furthermore, the plaintiff is required to pay Constancio B.
Maglana the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for
this action was filed in good faith. The fact that the properties of
the Bormaheco and the Cervanteses were attached and that they
were required to file a counterbond in order to dissolve the
attachment, is not an act of bad faith. When a man tries to

protect his rights, he should not be saddled with moral or

exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that
ordered it, in the exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment
prayed for by the plaintiff Pioneer. If an insurance company would
be liable for damages in performing an act which is clearly within
its power and which is the reason for its being, then nobody would
engage in the insurance business. No further claim or counterclaim for or against anybody is declared by this Court. (Rollo - G.R.
No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged
in the airline business as owner-operator of Southern Air Lines
(SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA)
and Lim entered into and executed a sales contract (Exhibit A) for
the sale and purchase of two (2) DC-3A Type aircrafts and one (1)
set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with
Registry No. PIC-718, arrived in Manila on June 7,1965 while the
other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation
(Pioneer, petitioner in G.R. No. 84197) as surety executed and
issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
behalf of its principal, Lim, for the balance price of the aircrafts
and spare parts.
It appears that Border Machinery and Heavy Equipment Company,
Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses)
and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above
aircrafts and spare parts. The funds were supposed to be their
contributions to a new corporation proposed by Lim to expand his
airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed

by Maglana and the other jointly signed by Lim for SAL,

Bormaheco and the Cervanteses. The indemnity agreements
stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs,
damages, taxes, penalties, charges and expenses of whatever
kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse
and make good to Pioneer, its successors and assigns, all sums
and amounts of money which it or its representatives should or
may pay or cause to be paid or become liable to pay on them of
whatever kind and nature.
On June 10, 1965, Lim doing business under the name and style
of SAL executed in favor of Pioneer as deed of chattel mortgage
as security for the latter's suretyship in favor of the former. It was
stipulated therein that Lim transfer and convey to the surety the
two aircrafts. The deed (Exhibit D) was duly registered with the
Office of the Register of Deeds of the City of Manila and with the
Civil Aeronautics Administration pursuant to the Chattel Mortgage
Law and the Civil Aeronautics Law (Republic Act No. 776),
respectively.
Lim defaulted on his subsequent installment payments prompting
JDA to request payments from the surety. Pioneer paid a total sum
of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the
said chattel mortgage before the Sheriff of Davao City. The
Cervanteses and Maglana, however, filed a third party claim
alleging that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure
with an application for a writ of preliminary attachment against
Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed
cross-claims against Lim alleging that they were not privies to the
contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the

sums of money they advanced to Lim for the purchase of the

aircrafts in question.
After trial on the merits, a decision was rendered holding Lim
liable to pay Pioneer but dismissed Pioneer's complaint against all
other defendants.
As stated earlier, the appellate court modified the trial court's
decision in that the plaintiffs complaint against all the defendants
was dismissed. In all other respects the trial court's decision was
affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate
court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand
to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer
to recover the amount from defendants, hence, it instituted the
action is utterly devoid of merit. Plaintiff did not even present any

evidence that it is the attorney-in-fact of the reinsurance

company, authorized to institute an action for and in behalf of the
latter. To qualify a person to be a real party in interest in whose
name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol.
I, Comments on the Rules of Court, 1979 ed., p. 155). It has been
held that the real party in interest is the party who would be
benefited or injured by the judgment or the party entitled to the
avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil.
125, 131). By real party in interest is meant a present substantial
interest as distinguished from a mere expectancy or a future,
contingent, subordinate or consequential interest (Garcia v. David,
67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600,
385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of
Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid
by the reinsurer the sum of P295,000.00 the bulk of
defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to
foreclose extra-judicially one of the subject airplanes and its spare
engine, realizing the total amount of P37,050.00 from the sale of
the mortgaged chattels. Adding the sum of P37,050.00, to the
proceeds of the reinsurance amounting to P295,000.00, it is
patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA
totals to only P298,666.28. To allow plaintiff Pioneer to recover
from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by
the reinsurance company of the amount plaintiff has paid to JDA
as surety of defendant Lim vis-a-vis defendant Lim's liability to
JDA. Well settled is the rule that no person should unjustly enrich
himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent
court based its finding that petitioner was paid by its reinsurer in

the aforesaid amount, as this matter has never been raised by

any of the parties herein both in their answers in the court below
and in their respective briefs with respondent court; (Rollo, p. 11)
(2) even assuming hypothetically that it was paid by its reinsurer,
still none of the respondents had any interest in the matter since
the reinsurance is strictly between the petitioner and the reinsurer pursuant to section 91 of the Insurance Code; (3) pursuant
to the indemnity agreements, the petitioner is entitled to recover
from respondents Bormaheco and Maglana; and (4) the principle
of unjust enrichment is not applicable considering that whatever
amount he would recover from the co-indemnitor will be paid to
the reinsurer.
The records belie the petitioner's contention that the issue on the
reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that
two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect
to so much of its obligations to JDA as has been paid with
reinsurance money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the
amount it has realized from the sale of the mortgaged properties?
(Record on Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following
findings:
It appearing that Pioneer reinsured its risk of liability under the
surety bond it had executed in favor of JDA, collected the
proceeds of such reinsurance in the sum of P295,000, and paid
with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on this score it no longer has
any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance

(sic), that is suing defendants for the amount paid to it by the
reinsurers, notwithstanding that the cause of action pertains to
the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the
case.. . . . Pioneer Insurance & Surety Corporation is representing
the reinsurers to recover the amount.' In other words, insofar as
the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the
reinsurers for any amount. Lastly, and most important of all,
Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an
action brought by an attorney-in-fact in his own name instead of
that of the principal will not prosper, and this is so even where the
name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in
interest.' This provision is mandatory. The real party in interest is
the party who would be benefitted or injured by the judgment or
is the party entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not
a real party in interest, that there is no law permitting an action to
be brought by an attorney-in-fact. Arroyo v. Granada and Gentero,
18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep.
12; Filipinos Industrial Corporation v. San Diego G.R. No. L22347,1968, 23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the
uninsured portion of what it paid to JDA is the difference between
the two amounts, or P3,666.28. This is the amount for which
Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount
realized from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine, or a

total of P37,050.00, Pioneer is still overpaid by P33,383.72.

Therefore, Pioneer has no more claim against defendants. (Record
on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not
disputed in the appellate court. Considering this admitted
payment, the only issue that cropped up was the effect of
payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the
reinsurance contract as this is strictly between the petitioner as
insured and the reinsuring company pursuant to Section 91
(should be Section 98) of the Insurance Code has no basis.
In general a reinsurer, on payment of a loss acquires the same
rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time
Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are
in general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
GA. 380, 7 Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to
wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss, the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or
injury.
Interpreting the aforesaid provision, we ruled in the case of Phil.
Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which
we subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the

indemnity from the insurer, it is provided in said article that the
insurer is deemed subrogated to the rights of the insured against
the wrongdoer and if the amount paid by the insurer does not
fully cover the loss, then the aggrieved party is the one entitled to
recover the deficiency. Evidently, under this legal provision, the
real party in interest with regard to the portion of the indemnity
paid is the insurer and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and
not as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error
in dismissing the petitioner's complaint as against the
respondents for the reason that the petitioner was not the real
party in interest in the complaint and, therefore, has no cause of
action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the
counter indemnitors should not have been dismissed on the
premise that the evidence on record shows that it is entitled to
recover from the counter indemnitors. It does not, however, cite
any grounds except its allegation that respondent "Maglanas
defense and evidence are certainly incredible" (p. 12, Rollo) to
back up its contention.
On the other hand, we find the trial court's findings on the matter
replete with evidence to substantiate its finding that the counterindemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the
spare parts involved, agreed to issue the bond provided that the
same would be mortgaged to it, but this was not possible because

the planes were still in Japan and could not be mortgaged here in
the Philippines. As soon as the aircrafts were brought to the
Philippines, they would be mortgaged to Pioneer Insurance to
cover the bond, and this indemnity agreement would be
cancelled.
The following is averred under oath by Pioneer in the original
complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the
claim sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage
there is no other security for the claim sought to be enforced by
this action, which necessarily means that the indemnity
agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has
any further action against the defendants as indemnitors to
recover any unpaid balance of the price. The indemnity
agreement was ipso jure extinguished upon the foreclosure of the
chattel mortgage. These defendants, as indemnitors, would be
entitled to be subrogated to the right of Pioneer should they make
payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.
Independently of the preceding proposition Pioneer's election of
the remedy of foreclosure precludes any further action to recover
any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were
as provided in Article 1484 of the New Civil Code, known as the
Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel

mortgage both by extrajudicial foreclosure and the instant suit.
Such being the case, as provided by the aforementioned
provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid balance and any agreement to
the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance
Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the
application of the provision be validly opposed on the ground that
these defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates
of the obligations of Lim, or SAL extinguish the original obligations
thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due
and payable on the 26th day x x x of each succeeding three
months and the last of which shall be due and payable 26th May
1967.
However, at the trial of this case, Pioneer produced a
memorandum executed by SAL or Lim and JDA, modifying the
maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and
payable 4 September 1965, the remainder of which ... shall be
due and payable on the 4th day ... of each succeeding months
and the last of which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory

notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of
the last installment being July 15, 1967.
These restructuring of the obligations with regard to their
maturity dates, effected twice, were done without the knowledge,
much less, would have it believed that these defendants Maglana
(sic). Pioneer's official Numeriano Carbonel would have it believed
that these defendants and defendant Maglana knew of and
consented to the modification of the obligations. But if that were
so, there would have been the corresponding documents in the
form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of
this was the extinguishment of the obligations and of the surety
bond secured by the indemnity agreement which was thereby
also extinguished. Applicable by analogy are the rulings of the
Supreme Court in the case of Kabankalan Sugar Co. v. Pacheco,
55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon
David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty
The mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension time referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause
of action to recover from these defendants, as supposed
indemnitors, what it has paid to JDA. By virtue of an express
stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on
every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from

these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after
the obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the
instant case against them and the attachment and garnishment
of their properties. The instant action is clearly unfounded insofar
as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is
not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors
whose agreement was to do business through the corporate
vehicle but who failed to incorporate the entity in which they had
chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents
these fundamental questions which we believe were resolved
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a
result of the failure of respondents Bormaheco, Spouses
Cervantes, Constancio Maglana and petitioner Lim to incorporate,
a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses
and/or gains of the venture in proportion to their contribution. The
petitioner, therefore, questions the appellate court's findings
ordering him to reimburse certain amounts given by the

respondents to the petitioner as their contributions to the

intended corporation, to wit:
However, defendant Lim should be held liable to pay his codefendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of
the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the
Cervanteses and the other one-half to defendant Maglana. It is
established in the records that defendant Lim had duly received
the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of
the subject airplanes and spare parts (Exhibit 58). In addition, the
cross-party plaintiffs incurred additional expenses, hence, the
total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of
the stockholders in a defectively incorporated association should
be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Cannon
v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name
occupy the position of partners inter se (Lynch v. Perryman, 119 P.
229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons
associate themselves together under articles to purchase
property to carry on a business, and their organization is so
defective as to come short of creating a corporation within the
statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by
the company will be recognized (Smith v. Schoodoc Pond Packing
Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So,
where certain persons associated themselves as a corporation for
the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to
pay a third the difference in the proportionate value of the land
conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an

action between them for an accounting, and its capital stock was
treated as partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However,
such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist
(London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461,
472, 29 L.Ed. 688), and it should be implied only when necessary
to do justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed corporation which is
never legally formed does not become a partner with other
subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v.
Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the
former liable to contribute for payment of debts illegally
contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23).
(Corpus Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was
declared non-suited for his failure to appear during the pretrial
despite notification. In his answer, the petitioner denied having
received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court,
however, found through Exhibit 58, that the petitioner received
the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of
the subject airplanes and spare parts. The record shows that
defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru
the Cervanteses.
It is therefore clear that the petitioner never had the intention to
form a corporation with the respondents despite his
representations to them. This gives credence to the cross-claims
of the respondents to the effect that they were induced and lured
by the petitioner to make contributions to a proposed corporation
which was never formed because the petitioner reneged on their

agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary
certificates of public convenience and necessity as well as the
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in
an undertaking sometime on or about August 9,1965, promised to
incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account. Since then
up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana.
(Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in
their answer, counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant
Lim. Down payments were advanced by defendants Bormaheco
and the Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants, defendant Lim
in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal
capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and
misrepresentation of the other, Jacob Lim, when the herein
plaintiff chattel mortgage (sic) allegedly executed by defendant
Lim, thereby forcing them to file an adverse claim in the form of
third party claim. Notwithstanding repeated oral demands made
by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to
an aggregate sum of P 178,997.14 as evidenced by a statement

of accounts, the latter ignored, omitted and refused to comply

with them. (Record on Appeal, pp. 341-342).
Applying therefore the principles of law earlier cited to the facts of
the case, necessarily, no de facto partnership was created among
the parties which would entitle the petitioner to a reimbursement
of the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf
of his other would-be incorporators in transacting the sale of the
airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned
decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

IVOR ROBERT DAYTON GIBSON, petitioner, vs.HON. PEDRO

A. REVILLA, in his official capacity as Presiding Judge of
Branch XIII, Court of First Instance of Rizal, and LEPANTO
CONSOLIDATED MINING COMPANY, respondents.
Quasha, Asperilla, Ancheta, Valmonte, Pe;a & Marcos for
petitioner.
Sycip, Salazar, Feliciano, Hernandez & Castillo for respondents.

GUERRERO, J.:

1wph1.t

This is a petition for review

seeking to set aside the Order of the

Court of First Instance of Rizal Branch XIII, presided by respondent
Judge Pedro A. Revilla, in Civil Case No. 20046 entitled "Lepanto
Consolidated Mining Company versus Malayan Insurance Company,
Inc." denying the motion of the petitioner Ivor Robert Dayton Gibson
for leave to intervene in said case, and to order the respondent Judge
to admit him as intervenor therein.
1

The antecedent facts of this case are as follows:

Lepanto Consolidated Mining Company (hereinafter referred to as

Lepanto) filed on September 27, 1974 in the Court of First
Instance of Rizal, Branch XIII a complaint with a plea for
preliminary mandatory injunction against Malayan Insurance
Company, Inc., (hereinafter referred to as Malayan), docketed as
Civil Case No. 20046 seeking the following relief:
t.hqw

(a) upon the firing of this complaint, a writ of preliminary

mandatory injunction be issued directing defendant to advance to
plaintiff an interest-free loan of P1,831,695.75; and
(b) upon trial on the merits

t.hqw

(i) an accounting or average adjustments be made for the

liquidation of the general average losses, damages and expenses
arising from the marine accidents subject of this action and the
determination of the contributions due from subject cargoes
under the Policy;
(ii) defendant be ordered to pay plaintiff the amounts under item
(i) above, with interest thereon at the rate of 12% per annum,
from February 20, 1972 as to the cargo's contribution relative to
the 'Hermonsa' and from March 27, 1972 as to the cargo's
contribution relative to the 'General Aguinaldo;'
(iii) the amount of P1,831,695.75 as interest-free loan due plaintiff
from defendant be declared repayable upon and only to the
extent of any corresponding recovery from the owners of the
'Hermosa' and 'General Aguinaldo; ...
Lepanto also sought payment of interest on delayed loan
amounts, exemplary damages of at least P500,000.00, attorney's
fees and other litigation expenses, and other cumulative and/or
alternative reliefs as may be lawful, just or equitable in the
premises.
The civil suit thus instituted by Lepanto against Malayan was
founded on the fact that on Sept. 9, 1971, Malayan issued Marine
Open Policy No. LIDC-MOP-001/71 covering an shipments of
copper, gold and silver concentrates in bulk from Poro, San

Fernando, La Union to Tacoma, Washington or to other places in

the United States which Lepanto may make on and after August 1,
1971 and until the cancellation of the policy upon thirty (30) days'
written notice. Thereafter, Malayan obtained reinsurance abroad
through Sedgwick, Collins & Co., Limited, a London insurance
brokerage. The Memorandum of Insurance issued by Sedgwick to
Malayan on September 24, 1971 listed three groups of
underwriters or re-insurers and their reinsurance interest are as
follows:
t.hqw

Lloyds 62.808%Companies
2.487%100.000%

(I.L.U.)

34.705%Other

Companies

At the top of the list of underwriting members of Lloyds is

Syndicate No. 448, assuming 2.48% of the risk assumed by the
reinsurer, which syndicate number petitioner Ivor Robert Dayton
Gibson claims to be himself.
In November, 1971, a cargo of concentrates was shipped by
Lepanto on the M/V Hermosa at Poro, San Fernando, La Union
destined for Tacoma, Washington. During the sea voyage, while
the vessel was in the Northern Pacific Ocean south of Japan on or
about Nov. 11, 1971, it encountered heavy weather and rough
seas which caused it to roll, pitch and vibrate heavily so that
certain shifting boards in the vessel broke and part of the cargo
shifted transversely, thereby causing a list. The vessel deviated to
Moji, Japan and after the shifting boards were repaired and/or
replaced, it proceeded on its trip to Tacoma, but about the end of
the month, the ship once again met with strong winds, monsoon
rains, severe winter and very rough seas and it roiled, pitched and
vibrated heavily so other shifting boards broke and part of the
cargo also shifted causing a heavier list. The captain of the boat,
fearing that the vessel might sink, sailed to Osaka and unloaded
the cargo. Expenses were incurred by Lepanto relative to the
cargo while in Japan but eventually the cargo was transhipped to
Tacoma via another vessel.
Also in November, 1971, another cargo of concentrates was
shipped by Lepanto on board the MIV General Aguinaldo at Poro,
San Fernando, La Union and destined for Tacoma, Washington.

Similarly, during the sea voyage on or about November 30, 1971

in the Northern Pacific Ocean southeast of Japan, it met with
heavy weather and rough seas, causing it to pitch, roll and vibrate
heavily so that certain shifting boards in the vessel broke and part
of the cargo shifted transversely which caused the listing of the
vessel The captain, fearing also that the vessel The captain,
fearing also that the vessel might sink, sailed for Miyako, Japan,
unloaded the cargo and expenses were incurred relative to the
cargo while in Japan. Thereafter, the cargo was transhipped to
Tacoma on board another vessel.
Lepanto notified Malayan and another insurer, Commercial Union
in London in November and December, 1971 of the accidents.
Formal claims under the open policy were also filed by Lepanto
with Malayan in March and July, 1972 upon the conclusion of the
voyages and the determination of the shortweight.
The claims were denied by Malayan tentatively at first claiming
that it needed time to determine whether or not the marine
accidents resulted from the inherent vice or nature of the cargo
and finally Malayan rejected Lepanto's insurance claim for the
reason that the cargoes were inherently vicious on loading and
such condition caused the listing of the vessel.
Hence, the complaint filed by Lepanto against Malayan in Civil
Case No. 20046 for the interest-free loan to Lepanto as stipulated
in the policy computed at P1,831,695.75.
Malayan filed a motion to dismiss the case on three grounds: 1.
that the instant case has been brought in the name of other than
the real party in interest; 2. that the complaint states no cause of
action; and 3. that the claim set forth in the complaint has been
extinguished.
On December 4, 1974, Malayan's motion to dismiss was denied.
On January 17, 1975, Malayan filed its Answers incorporating as
part of its special and affirmative defenses the following
allegations:
t.hqw

(5) Defendant acted in good faith in rejecting plaintiff's insurance

claims, not only because of the circumstances and reasons set

forth in the preceding sub-paragraphs (1) to (4) which defendant
had been reasonably led to believe by reports of reputed experts
and/or by legal advice as justifying rejection, but also because, as
plaintiff had been repeatedly told, it is under constraint, on one
hand, by customs of the insurance trade to adhere to the
decisions of the lead insurers, and on another hand, by its
contract with its reinsurer which among others, prohibit
settlement of the reinsured claims without the reinsurer's assent.
On January 27, 1975, Lepanto filed its reply. On January 30, 1975,
the Court denied Lepanto's motion for mandatory preliminary
injunction "without prejudice to reconsider the said motion after
the pre-trial of this case shall have been concluded." On March
19, 1975, the first pre-trial conference was held and on March 25,
1975, the parties filed their Stipulation of Facts and Issues, which
Stipulations was approved en toto in the trial court's order of April
1, 1975.
Subsequently, pre-trial conferences were held on April 3, 1975,
May 21, 1975, and June 19, 1975 when Lepanto concluded its
evidence. Defendant through counsel reserved its right to make a
formal offer of its evidence at the continuation of the hearing
scheduled on July 16, 1975.
Then on June 25, 1975, petitioner Ivor Robert Dayton Gibson filed
a motion to intervene as defendant, which motion is as follows:
t.hqw

MOTION TO INTERVENE
COMES NOW Ivor Robert Dayton Gibson, Reinsurer in the aboveentitled case, through undersigned counsel, and to this Honorable
Court respectfully & Heges that:
1. Movant is of legal age, a British citizen, with address at Lloyd's
Lime Street, London, EC 3;
2. Movant is the leading re-insurer of the risks and liabilities
assumed by defendant Malayan Insurance Co., Inc. in a contract
of marine insurance involving two (2) separate shipments of

copper' concentrates aboard the MV "Hermosa" and the MV

"General Aguinaldo" shipped by Lepanto Consolidated Mining Co.,
Inc. to American Smelting & Refining Co. from Poro Point, San
Fernando, La Union, to Tacoma, Washington for which defendant
issued Policy No. LIDC-MOP-001/71 dated September 9, 1971, in
the amount of 20% of the declared value of each shipment but
not to exceed US $2,000,000 per shipment.
3. Prior to these two shipments and after defendant Malayan
contracted with Lepanto to insure these two (2) copper
concentrates shipments against risks of loss and damage,
defendant Malayan in turn, re-insured its liabilities for losses and
damages in accordance with the terms of their reinsurance
contract.
4. After the defendant Malayan filed Answer to this suit, movant
was informed that defendant made express reservations "to file in
due time a third-party complaint against the lead insurers and/or
its reinsurers" (par. XVIII, Answer).
5. Movant has a legal interest in the subject matter of litigation in
that he stands to be held liable to pay on its re-insurance contract
should judgment be rendered requiring the defendant to pay the
claim of the plaintiff.
6. To avoid multiplicity of suits and allow all parties who have any
relation to the cause of action, whether legally or in equity, to
ventilate expeditiously every issue relevant to the suit, it is
respectfully submitted that movant be allowed to intervene as a
defendant in the interest of justice.
7. By the very nature of a contract of reinsurance and considering
that the reinsurer is obliged "to pay as may be paid thereon"
(referring to the original policies), although this is subject to other
stipulations and conditions of the re-insurance contract, it will
serve better the ends of justice if a full disclosure of all pertinent
facts and issues is made with the participation of the movant at
this trial where his interests have been and are already inevitably
at stake.

Counsel for the movant submitted the foregoing motion for the
consideration and resolution of the Court on June 30, 1975. The
motion to intervene was opposed by Lepanto on the following
grounds: 1. Movant Ivor Robert Dayton Gibson has no legal
interest in the matter in litigation or in the success of either
plaintiff or defendant; 2. Movant is estopped by his laches from
intervening in this action; 3. The intervention is intended for delay
and if allowed, win unduly delay the proceedings between plaintiff
and defendant; and 4. The rights, if any, of movant are not
prejudiced by the present suit and win be fully protected in a
separate action against him and his co-insurers by defendant
herein.
Replying to Lepanto's opposition, movant Ivor Robert Dayton
Gibson contended that 1. Contrary to oppositors contention,
movant Gibson has a legal interest in the matter in litigation
because a contract of reinsurance between the defendant
Malayan Insurance Company, Inc. and the movant herein is a
contract of indemnity against liability, and not merely against
damage, and therefore, movant has a direct and immediate
interest in the success of defendant Malayan Insurance Company,
Inc.; 2. Neither estoppel nor laches applies to the movant since
the motion to intervene was filed seasonably on June 25, 1975
during the period of introduction of evidence by defendant
Malayan; 3. The intervention is not intended for delay; movant is
merely asserting a legal right or interest in the pending case with
the request for opportunity to appear and be joined so that he
could protect or assert such right or interest; and 4. The filing of
an independent and separate suit proposed by the plaintiff is
condemned by the basic and fundamental principles against
multiplicity of suits.
On July 26, 1975, Lepanto filed a Rejoinder to the movant's "Reply
to Opposition." On July 28, 1975, Malayan made a manifestation
that it had no objection to the "Motion to Intervene" of Ivor Robert
Dayton Gibson and on July 31, 1975, movant made a SurRejoinder to Lepanto's Rejoinder.
On August 18, 1975, the Court a quo resolved to deny the Motion
for Intervention in the following:
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ORDER
Ivor Robert Dayton Gibson, thru counsel, has presented before
this Court a motion to intervene on June 25, 1975. In his motion,
he alleges that he is a British citizen with address at Lloyd's Lime
Street, London, EC3; that he is the leading re-insurer of the risks
and liabilities assumed by defendant Malayan Insurance
Company, Inc. in the contract of marine insurance involving the
shipments subject of the instant suit. He further contends that he
has a legal interest in the subject matter of litigation for he stands
liable on his reinsurances contract should judgment be rendered
against the defendant and that this intervention would avoid a
multiplicity of suits. Plaintiff vigorously opposed the motion
contending that movant Ivor Robert Dayton Gibson has no legal
interest in the matter in litigation or in the success of either
parties in this suit; that he is estopped by laches; that the
intervention is intended for delay and will unduly delay the
proceedings between plaintiff and defendant; and that movant
will not be prejudiced by the present suit and can be fully
protected in any separate action which defendant may file against
him and his co-insurers.
Considering the grounds of the opposition, the Court believes that
the third and fourth grounds raised in the opposition appear
highly meritorious. Since movant Ivor Robert Dayton Gibson
appears to be only one of several re-insurers of the risks and
liabilities assumed by Malayan Insurance Company, Inc., it is
highly probable that other re-insurers may likewise intervene. This
would definitely disrupt the trial between plaintiff and defendant,
the principal protagonists in this suit. To allow the intervention
would certainly unduly delay the proceedings between plaintiff
and defendant especially at this stage where plaintiff had already
rested its case. It would also compound the issues as more parties
and more matters will have to be litigated. At any rate, Ivor
Robert Dayton Gibson may protect whatever interest he has in a
separate action.
IN VIEW OF ALL THE FOREGOING, the Court resolves to deny the
motion for intervention.

SO ORDERED.
Pasig, Rizal, August 18, 1975.

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(SGD) PEDRO A. REVILLAJ u d g e

Not satisfied with the denial of his Motion to Intervene, petitioner
now comes before Us seeking to set aside the order of denial and
to order the respondent Judge to admit him as intervenor. By
resolution of this Court dated November 17, 1975, the petition
was denied due course for lack of merit, but upon petitioner's
motion for reconsideration, the petition was allowed in the
Resolution of February 18, 1976, treating it as a special civil
action.
The principal issue is whether the lower court committed
reversible error in refusing the intervention of petitioner Ivor
Robert Dayton Gibson in the suit between Lepanto and Malayan.
We lay down the law on Intervention as found in Sec. 2, Rule 12 of
the Rules of Court:
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Section 2. Intervention. A person may, before or during a trial,

be permitted by the court, in its discretion, to intervene in an
action, if he has legal interest in the matter in litigation, or in the
success of either of the parties or an interest against both, or
when he is so situated as to be adversely affected by a
distribution or other disposition of property in the custody of the
court or of an officer thereof.
(a) Motion for intervention. A person desiring to intervene shall
file a motion for leave of court with notice upon all the parties to
the action.
(b) Discretion of court. In allowing or disallowing a motion for
intervention, the court, in the exercise of discretion, shall consider
whether or not the intervention will unduly delay or prejudice the
adjudication of the rights of the original parties and whether or
not the intervenor's rights may be fully protected in a separate
proceeding.

(c) Complaint or answer in intervention. The intervention shall

be made by complaint filed and served in a regular form, and may
be answered as if it were an original complaint; but where
intervenor unites with the defendant in resisting the claims of the
plaintiff, the intervention may be made in the form of an answer
to the complaint,
(d) Time. Unless a different period is fixed by the court, the
complaint or answer in intervention shall be filed within ten (10)
days from notice of the order permitting such intervention.
According to pertinent jurisprudence, the term "intervention"
refers to the proceeding by which one not originally a party to an
action is permitted, on his own application, to appear therein and
join one of the original parties in maintaining the action or
defense, or to assert a claim or defense against some or all of the
parties to the proceeding as originally instituted. Such a third
party may, upon the discretion of the court, become a party to a
pending proceedings between others for the protection of some
rights or interest alleged by him to be affected by such
proceedings. 2
Intervention is not a matter of absolute right but may be
permitted by the court when the applicant shows facts which
satisfy the requirements of the statute authorizing intervention. 3
Under our rules of Court, what qualifies a person to intervene is his
possession of a legal interest in the matter in litigation, or in the
success of either of the parties, or an interest against both; or when he
is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or an officer thereof.
4
As regards the legal interest as qualifying factor, tills Court has ruled
that such interest must be of a direct and immediate character so that
the intervenor wig either gain or lose by the direct legal operation of
the judgment. The interest must be actual and material, a concern
which is more than mere curiosity, or academic or sentimental desire;
it must not be indirect and contingent, indirect and remote,
conjectural, consequential or collateral. 5 However, notwithstanding the
presence of a legal interest, permission to intervene is subject to the
sound discretion of the court, the exercise of which is limited by
considering I 'whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties and

whether or not the intervenor's rights may be fully protected in a

separate proceeding. 6 Once judicial discretion is exercised, the action
of the court cannot be reviewed or controlled by mandamus however
erroneous it may be, except only when there is an arbitrary or
capricious exercise of discretion, in which case, the fault is correctible
by mandamus if there be no other adequate and speedy remedy. 7

As may be noted in the questioned Order, respondent Judge

denied the Motion to Intervene on the last two grounds of
Lepanto's Opposition, namely: "3. The intervention is intended for
delay and if allowed, will unduly delay the proceedings between
plaintiff and defendant; and 4. The rights, if any, of movant are
not prejudiced by the present suit and will be fully protected in a
separate action against him and his co-insurers by defendant
herein.
Respondent Judge, reasoning out his Order, ruled that "(s)ince
movant Ivor Robert Dayton Gibson appears to be only one of
several co-insurers of the risks and liabilities assumed by Malayan
Insurance Company, Inc., it is highly probable that other reinsurers may likewise intervene. This would definitely disrupt the
trial between plaintiff and defendant, the principal protagonists in
this suit. To allow the intervention would certainly unduly delay
the proceedings between plaintiff and defendant especially at this
stage where plaintiff had already rested its case. It would also
compound the issues as more parties and more matters will have
to be litigated. At any rate, Ivor Robert Dayton Gibson may
protect whatever interest he has in a separate action."
In his petition, petitioner submits that the respondent Judge, in
refusing to permit/allow him to intervene in Civil Case No. 20046,
incorrectly interpreted and/or appreciated the purpose/intent of
the pertinent rules of procedure that govern intervention of
parties in a given action and that the respondent Judge erred: (1)
In concluding that to allow the intervention of herein petitioner
"would definitely disrupt the trial" and "would certainly unduly
delay the proceedings," when such apprehension appears to be
clearly immaterial in determining when intervention is proper or
not; (2) In viewing the alleged availability of another recourse on
the part of herein petitioner to protect his interest, i.e. separate

action, as an added justification to deny his intervention, despite

the fact that the applicable rule of procedure in this regard
(Section 2, Rule 12) does not preclude intervention even if
another separate action is appropriate and for available; and (3)
In its obvious disregard of the very rule (Section 2, Rule 12)
precisely designed to apply on cases where intervention is sought,
thereby departing from the accepted and usual procedure under
the premises.
After carefully considering the arguments of both the petitioner
and Lepanto, the facts and circumstances obtaining in the case at
bar and applying Rule 12, Sec. 2 of the Rules of Court and the
doctrines enunciated by the Supreme Court on the matter, We
rule that the respondent Judge committed no error of law in
denying petitioner's Motion to Intervene. And neither has he
abused his discretion in his denial of petitioner's Motion for
Intervention.
It is quite crystal clear that the questioned Order of the
respondent Court was based strictly and squarely on Section 2(b)
of Rule 12 which specifically directs the Court in allowing or
disallowing a motion for intervention in the exercise of discretion
to consider whether or not the intervention will unduly delay or
prejudice the adjudication of the rights of the original parties and
whether or not the intervenor's rights may be fully protected in a
separate proceeding. The Court a quo has specifically and
correctly complied with the Rule's mandate and We cannot fault
the respondent Judge therefore.
We reject the contention of the petitioner that the question
regarding delay in the adjudication of the rights of the original
contending parties, while recognized as factors in allowing or
disallowing intervention, should assume a secondary role to the
primary and imperative requirement that the legal interest of the
would-be intervenor in the matter under litigation must be clearly
shown and that once the legal interest of the would be intervenor
is clearly shown, the fact that his intervention may work to delay
a little the main conflict between the parties should not by itself
justify the denial of intervention.

Petitioner's contention is untenable. The first paragraph of Section

2, Rule 12 prescribes the time to intervene and also who may
intervene, that is, one who has legal interest in the matter in
litigation, or in the success of either of the parties or an interest
against both or when he is so situated as to be adversely affected
by a distribution or other disposition of property in the custody of
the court or of an officer thereof Paragraph (b) of the same
section directs what matter are to be considered in exercising
discretion to snow or disallow a motion for intervention, which are
whether or not the intervention will unduly delay or prejudice the
adjudication of the rights of the original parties and whether or
not the intervenor's rights may be fully protected in a separate
proceeding. Clearly, for the Court to permit intervention, it must
be shown that movant is possession of legal interest in the matter
in litigation or otherwise qualified under the first paragraph of
Section 2, and the Court must also consider the matters
mentioned in paragraph (b) thereof. The latter are not and should
not be taken as secondary to the former for both must concur
since they are equally important, requisite and necessary for
consideration in the exercise of discretion by the Court to allow or
disallow intervention. We cannot invest nor render primary or
secondary importance to either of these requirements for the law
does not make any distinction. Each case must be decided
according to its facts and merits, subject to the discretion of the
Court.
From the particular facts and circumstances of the case at bar, We
are satisfied that the respondent Judge has not abused his
discretion in denying petitioner's Motion to Intervene. We agree
with the holding of the respondent Court that since movant Ivor
Robert Dayton Gibson appears to be only one of several reinsurers of the risks and liabilities assumed by Malayan Insurance
Company, Inc., it is highly probable that other re- insurers may
likewise intervene. The record shows that aside from the
petitioner there are sixty-three (63) other syndicate members of
Lloyds, the twenty-six (26) companies in the " I.L.U. " group
holding a 34.705 % reinsurance interest and the two (2) "Other
Companies" holding the balance of the reinsurances, as listed in
Annex "A", Sur-Rejoinder to Lepanto's Rejoinder, pp. 136-138,

Records. The high probability that these other re-insurers like the
petitioner herein may likewise intervene if the latter's motion is
granted is not an arbitrary assumption of the Court. Considering
petitioner's assertion that he will have the opportunity to show,
among others, that the losses and damages purportedly
sustained by Lepanto occurred not from the perils of the seas but
from perils of the ships; that Lepanto is not the real party in
interest; that it has no cause of action; and, neither has it
complied with its obligations under the policy which makes the
filing of the complaint premature (p. 118, Records, Reply to
Opposition) if petitioner is allowed to intervene, We hold that
there is good and sufficient basis for the Court a quo to declare
that. the trial between Lepanto and Malayan would be definitely
disrupted and would certainly unduly delay the proceedings
between the parties especially at the stage where Lepanto had
already rested its case and that the issues would also be
compounded as more parties and more matters will have to be
litigated. In other words, the Court's discretion is justified and
reasonable.
We also hold that respondent Judge committed no reversible error
in further sustaining the fourth ground of Lepanto's Opposition to
the Motion to Intervene that the rights, if any, of petitioner are not
prejudiced by the present suit and win be fully protected in a
separate action against him and his co-insurers by Malayan.
Petitioner contends that this rights would not be fully protected in
a separate proceeding because "(a) decision in favor of Lepanto,
declaring Malayan liable on its insurance policies would
necessarily and injuriously affect the interests of petitioner,
(which) interest as a re-insurer of Malayan's risk is not only
inchoate but material, direct and immediate and for such interest
to be in any manner prejudiced without first giving petitioner a
chance to be heard would be violative of due process. Upon the
other hand, a decision in favor of Malayan, recognizing it as not
liable under its insurance policies, could subject petitioner to the
danger of having to admit that Malayan had not breached its
insurance contract with the entity (Lloyds) of which petitioner is
the leading syndicate member." (Petitioner's Memorandum p. 230,
Records). Petitioner also asserts that "by the very nature of a

contract of reinsurance and considering that the re-insurer is

obliged 'to pay as may be paid thereon' (referring to the original
policies), although this is subject to other stipulations and
conditions of the reinsurance contract, it will serve better the
ends of justice if a full disclosure of all pertinent facts and issues
is made with the participation of the movant at this trial where his
interests have been and are already inevitably at stake." (Petition,
p. 18, Records).
On the contrary, Lepanto insists that petitioner win have his day
in court and his rights can be fully protected in a separate
proceeding. According to Lepanto, if it loses the case against
Malayan, petitioner cannot possibly be liable to Malayan for
indemnity on the reinsurances. If Lepanto wins, then petitioner,
the sixty-three (63) other syndicate members of Lloyds, the
twenty-six (26) companies in the "I.L.U." group holding a 34.705%
reinsurance interest and the two (2) "Other Companies" holding
the balance of the reinsurances are free either to pay Malayan or
to resist Malayan and thus force Malayan to sue in whatever
country most of them, qualitatively and not quantitatively, may
be served with summons.
Petitioner's contention that he has to pay once Malayan is finally
adjudged to pay Lepanto because of the very nature of a contract
of reinsurance and considering that the re-insurer is obliged 'to
pay as may be paid thereon' (referring to the original policies),
although this is subject to other stipulations and conditions of the
reinsurance contract, is without merit. The general rule in the law
of reinsurance is that the re-insurer is entitled to avail itself of
every defense which the re-insured (which is Malayan) might urge
in an action by the person originally insured (which is Lepanto).
Specifically, the rule is stated thus
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Sec. 1238. In an action on a contract of reinsurance, as a

general rule the reinsurer is entitled to avail itself of every
defense which the reinsured might urge in an action by the
person originally insured; ...
The same rule is stated otherwise in 44 An-L Jur. 2d, Sec. 1862, p.
793, as follows:
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Moreover, where an action is brought against the reinsurer by the

reinsured, the former may assert any defense that the latter
might have made in an action on the policy of original insurance.
(Eagle Ins. Co. vs. Lafayette, Ins. Co., 9 Ind. 443)
As to the effect of the clause "to pay as may be paid thereon"
contained in petitioner's re-insurance contract, Arnould, on the
Law of Marine Insurance and Average, 13th Ed., Vol. 1, Section
327, p. 315, states the rule, thus:
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It has been decided that this clause does not preclude the
reinsurer from insisting upon proper proof that a loss strictly
within the terms of the original policy has taken place.
This clause does not enable the original underwriter to recover
from his re-insurer to an extent beyond the subscription of the
latter.
It is significant and revealing that petitioner himself admits in his
Memorandum, p. 231, Records, that "(o)f course, petitioner, if
finally sued in London, (he) could avail himself of remedies
available to him." He adds that "such a procedure, if not entirely
time-consuming, would actually beg the issue on hand. Petitioner
believes that his defenses on the claims ventilated in the court a
quo can be appreciated only here; elsewhere in view of the
peculiar circumstances surrounding Lepanto's claims the basic
issue win be obfuscated and perhaps even obliterated by
arguments on procedural niceties." However, such a procedural
problem is no legal ground to compel allowance of and insist on
his intervention.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition is hereby
dismiss. No costs.
SO ORDERED.

ARTEX DEVELOPMENT CO., INC., plaintiff-appellee, vs.

WELLINGTON INSURANCE CO., INC., defendant-appellant.

Norberto J. Quisumbing for plaintiff-appellee.

William R. Veto for defendant-appellant.

TEEHANKEE, J.:
In this appeal from the decision of the court of first instance of
Rizal at Caloocan city, the Court reiterates the establish doctrine
that a third party not privy to a contract that contains no
stipulations pour autrui in its favor may not sue enforcement of
the contract.
Hence, in this case where the lower court ordered defendant
insurer to pay plaintiff-insured the balance of the insured property
loss of P3,624,683.43 and its ascertained business interruption
loss of P1,748,460.00 with interest and attorney's fees, the Court
affirms the correctness of the lower court's ruling that it is no
defense for the insurer as against insured that the insurer had
obtained reinsurance from other companies to cover its liability.
Defendant-appellant's lone assignment of error that lower court
should have ruled instead "that plaintiff-appellant cause of action
(as insured) should have been directed against the reinsurers and
not against defendant-appellant" is manifestly untenable since
there is no privity of contract between the insured and the
reinsurers. Plaintiff-appellee insured can only move for
enforcement of its insurance contract with its insurer, the
defendant-appellant.
Unless there is a specific grant in, or assignment of, reinsurance
contract in favor of the insured or a manifest intention of the
contracting parties to the insurance contrary to grant such benefit
or favor to the insured, not being privy to the reinsurance
contract, has no cause of action against the reinsurer. It is
expressly provided in section 91 the Insurance Act 1 that "(T)he
original insured has no interest in a contract of insurance."

The lower court's judgment of April 2, 1968 was rendered the

basis of the parties' stipulation of facts and there is dispute as to

the property and business interruption loss of the insured as thus
determined nor as to the partial payment made by defendantinsurer that have greatly reduced the amount still due and owing
under the judgment under appeal.
Briefly, the trial court found that from the evidence and
stipulation of facts presented, it appears that the defendant,
Wellington Insurance Co., Inc. insured for P24,346,509.00 the
buildings, stocks and machinery of plaintiff Artex Development
Co., Inc., against loss or damage by fire or lighting (Exh. A) upon
payment by plaintiff of the corresponding premiums; that on
August 2, 1963, said properties were insured for an additional
sum of P833,034.00 (Exh. A-1) that on May 12, 1963 defendant
insured plaintiff against business interruption (use and
occupancy) for P5,200,000.00 (Exh. B); that on September 22,
1963, the buildings, stocks and machineries of plaintiff's spinning
department were burned; that notice of the loss and damage was
given the defendant, and the loss was referred to the H. H. Bayne
Adjustment Co. and the Allied Adjustment Co.; that as per report
of the adjusters, the total property loss of the plaintiff was the
sum of P10,106,554.40 and the total business interruption loss
was P3,000,000.00; that defendant has paid to the plaintiff the
sum of P6,481,870.07 of the property loss suffered by plaintiff and
P1,864,134.08 on its business interruption loss, leaving a balance
of P3,624,683.43 and P1,748,460.00, respectively." 2
On May 29, 1969, counsel for plaintiff-appellee filed a
manifestation dated April 10, 1969, bearing the conformity of
plaintiff itself under the signature of its president, Domingo G.
Castillo, as follows:
MANIFESTATION
Plaintiff-appellee, through counsel, respectfully manifests that, in
view of the Deeds of Discharge dated 10 April 1969 and Collateral
Agreement dated 10 April 1969, hereto attached as Annexes "A"
and "B", the only remaining liability subject of litigation shall be
that proportion of the loss reinsured with or through Alexander
and Alexander, Inc. of New York, U.S.A., namely, P397,813.00

the rest having been paid and settled per the said deeds Annexes
"A" and "B".
Quezon City for Manila, 10 April 1969.
(Signed) NORBERTO J. QUISUMBING Counsel for Plaintiff-Appellant
P.O. Box No. 226, Manila.
CONFORME:
ARTEX DEVELOPMENT CO., INC.
By: (Signed) DOMINGO G. CASTILLO President 3
The amended documents recited further that:
1. Artex hereby acknowledges receipt of the sum of
P3,600,000.00 in Philippine currency paid by Minet on behalf itself
and Willington and Minet & Co. in full and final settlement of all
any claims Artex may have against Willington, Minet and Minet
Co. in respect of the losses resulting from the said fire of 22nd
September 1963 the Policies of Insurance and the Contracts
Reinsurance specified in the said Deeds of Discharge and
discharge Willington, Minet and Minet & Co. jointly and severally
from all actions, proceedings, claims, demands, costs and
expenses in respect thereof including the said judgment obtained
in the Court of First Instance of Rizal and additionally Artex waives
in favor of Minet and Minet & Co. Artex's right of recourse against
them under Article 1177 of the Civil Code of the Philippines. 4
Upon the parties' joint motion dated May 22, 1969 for temporary
suspension of the proceedings by virtue of such payment, the
Court per its resolution of June 30, 1969 resolve to suspend the
proceedings until July 30, 1969. 5 The Court also noted defendantappellant's manifestation dated June 18, 1969, to the effect that "the
statement in plaintiff-appellee' Manifestation that the only remaining
amount of its claimant subject of litigation is the proportion of the loss
reinsured wit Alexander and Alexander, Inc. of New York, U.S.A. in the
amount of P397,813.00 because the reinsurers of defendant-appellant
made additional partial payments, is true and correct but without
prejudice to the legal question presented in defendant-appellant's

brief." 6

Thereafter, plaintiff-appellee filed on August 8, 1969 its brief, and

prayed for affirmance of the appealed judgment with
modification, as follows:
In the light of the foregoing discussion, the lower court did not
commit any error in its appealed decision, which must accordingly
be sustained and affirmed. It is however respectfully prayed that
the same be modified as to the amount of liability adjudged
against defendant appellant in favor of plaintiff-appellee, in
accordance with their Collateral Agreement executed by them on
April 10, 1969 (Annex "B", of manifestation of the same date, filed
in this Court on 29 May 1969), which should now be fixed at
P397,813.00, plus of course 12% interest per annum thereof for
late payment until 10 April 1969, attorney's fees of 15% of the
recovery, expenses of litigation and costs of suit, already
adjudged by the lower court, no writ of execution to issue
however on any adjudged liability until after three (3) years from
10 April 1969, pursuant to the same 'Collateral Agreement of the
parties.
On the sole issue of law raised by defendant-appellant in its brief,
the Court finds, as above indicated, that no single clause in the
reinsurance contracts has been cited by defendant-insurer that
would justify its claim that they contained a stipulation pour
autrui in favor of plaintiff-insured, and whereby "plaintiff-appellee
is deemed to have agreed to look solely to the reinsurers for
indemnity in case of loss." 7
Article 1311 of our Civil Code expresses the universal rule that
"Contracts take effect only between the parties, their assigns and
heirs" (with the heir being "not liable beyond the value of the
property he received from the decedent,") and provides for the
exception of stipulations pour autrui or in favor of a third person
not a party to the contract, in this wise:
If a contract should contain some stipulation in favor of a third
person, he may demand its fulfillment provided he communicated
his acceptance to the obligor before its revocation. A mere

incidental benefit or interest of a person is not sufficient. The

contracting parties must have clearly and deliberately conferred
favor upon a third person. (Art. 1311, Civil Code, second
paragraph)
The Court has a since the early case of Uy Tam vs. Leonard 8 that
the "intent of the contracting parties to benefit third party by means of
such stipulations pour autrui must clearly expressed, and hence, a
clause in a contractor's executed solely in favor of the City of Manila
and condition pay for all labor and materials cannot be construed
stipulation pour autrui available to materialmen who supplied certain
materials to the contractor for use in the performance of the latter's
contract with the city.

In Bonifacio Bros, Inc. vs. Mora

the Court reiterated same

established doctrine, holding that the clause in a motor vehicle
insurance policy authorizing the owner of damaged vehicle to contract
for its repair does not mean that the repairman may collect the cost of
the repair directly the insurer, there being no clause "from which we
can infer that there is an obligation on the part of the insurance
company to pay the cost of repairs directly to them,' and that the
mortgagee of the car (expressly named in the insure policy as
beneficiary of any loss payable thereunder) had better right than the
repairman to the insurance proceeds.
9

Plaintiff-insured, not being a party or privy to defendant insurer's

reinsurance contracts, therefore, could not directly demand
enforcement of such insurance contracts. Defendant-appellant's
contention that the insured should be deemed have agreed to
look solely to the reinsurers for indemnity case of loss, since it
was evident that with its mere P500,000. paid-up capital stock, it
had to secure reinsurance coverage the over P24-million fire
insurance coverage of the policy issued by it to plaintiff-insured, is
manifestly untenable.
Assuming that plaintiff-insured could avail of the reinsurance
contracts and directly sue the reinsurers for payment of the loss,
still such assumption would not in any way affect or cancel out
defendant-insurer's direct contractual liability to plaintiff-insured
under the insurance policy to indemnify plaintiff for the property
losses. Plaintiff's right as insured to sue defendant as insurer

directly and solely would thereby not be affected or curtailed in

any way, without prejudice to defendant in turn filing a third party
complaint or separate suit against its reinsurers: Thus, in Naga
Development Corp. vs. Court of Appeals 10 the Court held that the
contractor remain liable to the supplier for materials delivered,
notwithstanding arrangements made on its GSIS loan for the GSIS to
issue treasury warrants on account of such loan, directly in favor of the
supplier, since "such an arrangement obviously cannot destroy or
modify the direct legal responsibility of the (contractor) to the
(supplier) to pay for what the latter gave and rendered to the former."

On April 4, 1973, plaintiff-appellee filed a manifestation informing

the Court that in Republic of the Philippines vs. Wellington
Insurance Co., Inc., docketed as Civil Case No. 88046 of the court
of first instance of Manila, an order was issued on September 18,
1972 for the 'Liquidation of said insurance company, herein
defendant-appellant; that the Insurance Commissioner was
designated receiver and as such issued on November 4, 1972 an
order for the filing of claims against said defendant; that
accordingly plaintiff filed its verified statement of claim wherein it
asked the Insurance Commissioner "to move to dismiss the
above-entitled appeal as filed only for delay."
Requested by the Court to file their comments, defendant through
counsel admitted the fact of liquidation proceedings but denied
any dilatory motive in its appeal, stating that "although it does
not raise any issue of fact in (this) appeal, yet the question of law
raised (herein) is of first impression in this jurisdiction" and of
"utmost importance" to insurance companies taking out
reinsurance policies.
The Insurance Commissioner, in her manifestation of May 18,
1973, confirmed the fact of her taking over "title to all property,
contracts, rights of action and all of the records of the (defendant)
insurance company" as liquidator pursuant to section 175-B of the
Insurance claiming the sole right-now to officially represent and
act for defendant company and asserting "exclusive jurisdiction
determine this claim" even as against this Court according to her,
should be deemed to have "ceased to jurisdiction over the subject
of this pending action," but at the same time not moving to

dismiss the appeal, as suggest plaintiff, and instead manifesting

that "the Insurance Commissioner is absolutely without any
knowledge information sufficient to form a belief as to the truth
veracity of Plaintiff Appellee's imputation to Defendant-Appellant
that the latter had filed the above-entitled a only for delay." 11
Since the claim at bar of plaintiff against defendant merely for the
balance of a proven undisputed claim (as amount) long tried
and decided as per the trial court judgment of April 2, 1968
before the liquidation order issued only last year on September
18, 1972 the Court has herein resolved and disposed of the
sole issue of law raised in the appeal. Plaintiff's judgment claim as
now judiciary determined will have to be satisfied in compliance
with requirements of the Insurance Act governing distribution
assets, priorities of payments of proven claims, etc., insurance
companies under liquidation and with prior authorization of the
court in the liquidation proceeding pending in the Manila court of
first instance.
ACCORDINGLY, as prayed for by plaintiff-appellee in brief, the
judgment of the lower court is affirmed, with the modification that
the remaining liability of defendant appellant to plaintiff-appellee
in accordance with the "collateral agreement" of April 10, 1969 is
fixed at P397,813.00 with twelve (12%) percent interest per
annum until 10 April 1969, attorney's fees of fifteen (15%)
percent of the recovery, and cost of suit.

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