Insurance Doctrines

2.

INTERPRETATION OF INSURANCE CONTRACT;

CONTRACT OF ADHESION
1. MALAYAN INSURANCE
CORPORATION, petitioner, vs. THE HON.
COURT OF APPEALS and TKC MARKETING
CORPORATION, respondents.
It has been held that a strained interpretation which is
unnatural and forced, as to lead to an absurd conclusion
or to render the policy nonsensical, should, by all
means, be avoided. Likewise, it must be borne in mind
that such contracts are invariably prepared by the
companies and must be accepted by the insured
in the form in which they are written. Any
construction of a marine policy rendering it void
should be avoided. Such policies will, therefore,
be construed strictly against the company in
order to avoid a forfeiture, unless no other result
is possible from the language used.
If a marine insurance company desires to limit or restrict
the operation of the general provisions of its contract by
special proviso, exception, or exemption, it should
express such limitation in clear and unmistakable
language. Obviously, the deletion of the F.C. & S. Clause
and the consequent incorporation of subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo) gave rise
to ambiguity. If the risk of arrest occasioned by ordinary
judicial process was expressly indicated as an exception
in the subject policies, there would have been no
controversy with respect to the interpretation of the
subject clauses.

Trial Court: Since the defendant has bound itself to pay

P1000.00 to P3,000.00 as indemnity for the death of the
insured but the policy does not positively state any
definite amount that may be recovered in case of death
by drowning, there is an ambiguity in this respect in the
policy, which ambiguity must be interpreted in favor of
the insured and strictly against the insurer so as to allow
greater indemnity.
All the parties agree that indemnity has to be paid. The
conflict centers on how much should the indemnity be.
We believe that under the proven facts and
circumstances, the findings and conclusions of the
trial court, are well taken, for they are supported
by the generally accepted principles or rulings on
insurance, which enunciate that where there is an
ambiguity with respect to the terms and
conditions of the policy, the same will be resolved
against the one responsible thereof. It should be
recalled in this connection, that generally, the
insured, has little, if any, participation in the
preparation of the policy, together with the
drafting of its terms and Conditions. The
interpretation of obscure stipulations in a
contract should not favor the party who cause the
obscurity (Art. 1377, N.C.C.), which, in the case at
bar, is the insurance company.
. . . . And so it has been generally held that the
"terms in an insurance policy, which are
ambiguous, equivocal or uncertain . . . are
to be construed strictly against, the
insurer, and liberally in favor of the
insured so as to effect the dominant
purpose of indemnity or payment to the
insured, especially where a forfeiture is
involved," (29 Am. Jur. 181) and the reason
for this rule is that the "insured usually
has no voice in the selection or
arrangement of the words employed and
that the language of the contract is
selected with great care and deliberation
by expert and legal advisers employed by,
and acting exclusively in the interest of,
the insurance company"

Be that as it may, exceptions to the general coverage

are construed most strongly against the company. Even
an express exception in a policy is to be construed
against the underwriters by whom the policy is framed,
and for whose benefit the exception is introduced.
An insurance contract should be so interpreted as
to carry out the purpose for which the parties
entered into the contract which is, to insure
against risks of loss or damage to the goods.
Such interpretation should result from the natural
and reasonable meaning of language in the
policy. Where restrictive provisions are open to
two interpretations, that which is most favorable
to the insured is adopted.
Indemnity and liability insurance policies are
construed in accordance with the general rule of
resolving any ambiguity therein in favor of the
insured, where the contract or policy is prepared
by the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any
ambiguity therein should be resolved against the
insurer; in other words, it should be construed
liberally in favor of the insured and strictly
against the insurer. Limitations of liability should
be regarded with extreme jealousy and must be
construed in such a way as to preclude the
insurer from noncompliance with its obligations.

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY
CO., INC., defendant-appellant.

. . . . Where two interpretations, equally fair, of

languages used in an insurance policy may be
made, that which allows the greater indemnity
will prevail.

3.

FORTUNE INSURANCE AND SURETY CO.,

INC., petitioner,
vs.
COURT OF APPEALS and PRODUCERS BANK OF
THE PHILIPPINES, respondents.

Trial Court: The trial court ruled that Magalong (driver of

the armored car) and Atiga (security guard) were not
employees or representatives of Producers.
CA: Court of Appeals agreed with the conclusion of the
trial court that Magalong and Atiga were neither
employees nor authorized representatives of Producers.
Ratiocinated that Said driver and security guard cannot
be considered as employees of plaintiff-appellee bank
because it has no power to hire or to dismiss said driver
and security guard under the contracts except only to
ask for their replacements from the contractors.
It has been aptly observed that in burglary,
robbery, and theft insurance, "the opportunity to
defraud the insurer the moral hazard is so
great that insurers have found it necessary to fill
up their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the
insurer assume the risk of all losses due to the hazards
insured against." Persons frequently excluded under
such provisions are those in the insured's service and
employment. The purpose of the exception is to
guard against liability should the theft be
committed by one having unrestricted access to
the property. In such cases, the terms specifying the
excluded classes are to be given their meaning as
understood in common speech. The terms "service"
and "employment" are generally associated with the
idea of selection, control, and compensation.
A contract of insurance is a contract of adhesion,
thus any ambiguity therein should be resolved
against the insurer, or it should be construed
liberally in favor of the insured and strictly
against the insurer. Limitations of liability should
be regarded with extreme jealousy and must be
construed
in such a way, as to preclude the insurer from
non-compliance with its obligation. It goes
without saying then that if the terms of the
contract are clear and unambiguous, there is no
room for construction and such terms cannot be
enlarged or diminished by judicial construction.
An insurance contract is a contract of indemnity
upon the terms and conditions specified
therein. It is settled that the terms of the policy
constitute the measure of the insurer's
liability. In the absence of statutory prohibition
to the contrary, insurance companies have the
same rights as individuals to limit their liability
and to impose whatever conditions they deem
best upon their obligations not inconsistent with
public policy.
But even granting for the sake of argument that these
contracts were not "labor-only" contracts, and PRC
Management Systems and Unicorn Security Services
were truly independent contractors, we are satisfied
that Magalong and Atiga were, in respect of the transfer

of Producer's money from its Pasay City branch to its

head office in Makati, its "authorized representatives"
who served as such with its teller Maribeth Alampay.
Howsoever viewed, Producers entrusted the three with
the specific duty to safely transfer the money to its
head office, with Alampay to be responsible for its
custody in transit; Magalong to drive the armored
vehicle which would carry the money; and Atiga to
provide the needed security for the money, the vehicle,
and his two other companions. In short, for these
particular tasks, the three acted as agents of Producers.
A "representative" is defined as one who represents or
stands in the place of another; one who represents
others or another in a special capacity, as an agent, and
is interchangeable with "agent."

4.

RAFAEL (REX) VERENDIA, petitioner,

vs.
COURT OF APPEALS and FIDELITY & SURETY
CO. OF THE PHILIPPINES, respondents.

FIDELITY & SURETY CO. OF THE PHILIPPINES, INC.,

petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS,
respondents.
Basically a contract of indemnity, an insurance
contract is the law between the parties (Pacific
Banking Corporation vs. Court of Appeals 168 SCRA 1
[1988]). Its terms and conditions constitute the
measure of the insurer's liability and compliance
therewith is a condition precedent to the
insured's right to recovery from the insurer
(Oriental Assurance Corporation vs. Court of Appeals,
200 SCRA 459 [1991], citing Perla Compania de
Seguros, Inc. vs. Court of Appeals, 185 SCRA 741
[1991]). As it is also a contract of adhesion, an
insurance contract should be liberally construed
in favor of the insured and strictly against the
insurer company which usually prepares it
(Western Guaranty Corporation vs. Court of Appeals,
187 SCRA 652 [1980]).
Considering, however, the foregoing discussion
pointing to the fact that Verendia used a false
lease contract to support his claim under Fire
Insurance Policy No. F-18876, the terms of the
policy should be strictly construed against the
insured. Verendia failed to live by the terms of
the policy, specifically Section 13 thereof which is
expressed in terms that are clear and
unambiguous, that all benefits under the policy
shall be forfeited "If the claim be in any respect
fraudulent, or if any false declaration be made or
used in support thereof, or if any fraudulent
means or devises are used by the Insured or

anyone acting in his behalf to obtain any benefit

under the policy". Verendia, having presented a
false declaration to support his claim for benefits
in the form of a fraudulent lease contract, he
forfeited all benefits therein by virtue of Section
13 of the policy in the absence of proof that
Fidelity waived such provision (Pacific Banking
Corporation vs. Court of Appeals, supra). Worse yet,
by presenting a false lease contract, Verendia,
reprehensibly disregarded the principle that
insurance contracts are uberrimae fidae and
demand the most abundant good faith (Velasco vs.
Apostol, 173 SCRA 228 [1989]).

5.

NEW LIFE ENTERPRISES and JULIAN

SY, petitioners,
vs.
HON. COURT OF APPEALS, EQUITABLE
INSURANCE CORPORATION, RELIANCE SURETY
AND INSURANCE CO., INC. and WESTERN
GUARANTY CORPORATION, respondents.

The terms of the contract are clear and unambiguous.

The insured is specifically required to disclose to the
insurer any other insurance and its
particulars which he may have effected on the
same subject matter. The knowledge of such insurance
by the insurer's agents, even assuming the acquisition
thereof by the former, is not the "notice" that
would estop the insurers from denying the claim.
Besides, the so-called theory of imputed knowledge,
that is, knowledge of the agent is
knowledge of the principal, aside from being
of dubious applicability here has likewise been roundly
refuted by respondent court whose factual findings we fi
nd acceptable.
Thus, it points out that while petitioner Julian Sy
claimed that he had informed insurance agent Alvarez
regarding the co-insurance on the property, he
contradicted
himself by inexplicably claiming that he had not read th
e terms of the policies; that
Yap Dam Chuan could not likewise have obtained such
knowledge for the same reason, aside from the fact that
the insurance with Western was obtained before those
of Reliance and Equitable; and that the conclusion of
the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawn
from the mere fact that Yap Kam Chuan was
an agent for both companies which also had the
same insurance claims adjuster. Availment of the
services of the same agents and adjusters by diff
erent companies is a common
practice in the insurance business and such facts
do not warrant the speculative conclusion of the
trial court.
Furthermore, when the words and language of docu
ments are clear and plain
or readily understandable by an ordinary reader
thereof, there is absolutely no room for

interpretation or construction
anymore. Courts are not allowed to make
contracts for the parties; rather, they will
intervene
only when the terms of the policy are ambiguous,
equivocal,
or uncertain. The parties must abide by the
terms of the contract because such terms constit
ute the
measureof the insurer's liability and compliance t
herewith is a
condition precedent to the insured's right of reco
very from the insurer.
While it is a cardinal
principle of insurance law that a policy or
contract of insurance is to be construed liberally
inf
avor of the insured and strictly against the insure
r
company, yet contracts of insurance, like other co
ntracts, are to be construed according to
the sense and meaning of the terms which
the parties themselves have used. If such terms
are clear and
unambiguous, they must be taken and understoo
d in their plain, ordinary and popular
sense. Moreover,
obligations arising from contracts have the force
of law between
the contracting parties and should be
complied with in good faith.
Petitioners should be aware of the fact that a party is
not relieved of the duty to exercise the ordinary care
and prudence that would be exacted in relation to other
contracts. The conformity of the insured to the terms of
the policy is implied from his failure to express any
disagreement with what is provided for. It may be true
that themajority rule, as cited
by petitioners, is that injured
persons may accept policies without reading them, and
that this is not negligence per se. But, this is not without
any exception. It is and was incumbent upon petitioner
Sy to read the insurance contracts, and this can be
reasonably expected
of him considering that he has been a businessman
since 1965 and the contract concerns indemnity in case
ofloss in his money-making trade of which important
consideration he could not have been unaware as it was
pre-in case of loss in his money-making trade of which
important consideration he could not have been
unaware as it was precisely the reason for his procuring
the same.

6.

NATIONAL POWER CORPORATION, petitioner,

vs.
COURT OF APPEALS and PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., respondents.

As correctly assessed by the trial court, the evidence

on record shows that as early as May 30, 1963,
Philamgen was duly informed of the failure of its

principal to comply with its undertaking. In fact,

said notice of failure was also signed by its Assistant
Vice President. On July 19, 1963, when FEEI informed
NPC that it was abandoning the construction job, the
latter forthwith informed Philamgen of the fact on the
same date. Moreover, on August 1, 1963, the fact that
Philamgen was seasonably notified, was even bolstered
by its request from NPC for information of the
percentage completed by the bond principal prior to the
relinquishment of the job to the latter and the reason for
said relinquishment. (Record on Appeal, pp. 193-195).
The 30-day notice adverted to in the surety bond
applies to the completion of the work by the
contractor. This completion by the contractor
never materialized.
The surety bond must be read in its entirety and
together with the contract between NPC and the
contractors. The provisions must be construed
together to arrive at their true meaning. Certain
stipulations cannot be segregated and then made
to control.
Furthermore, it is well settled that contracts of
insurance are to be construed liberally in favor of
the insured and strictly against the insurer. Thus
ambiguity in the words of an insurance contract
should be interpreted in favor of its beneficiary.
(Serrano v. Court of Appeals, 130 SCRA 327, July 16,
1984).
In the case at bar, it cannot be denied that the
breach of contract in this case, that is, the
abandonment of the unfinished work of the
transmission line of the petitioner by the
contractor Far Eastern Electric, Inc. was within
the effective date of the contract and the surety
bond. Such abandonment gave rise to the
continuing liability of the bond as provided for in
the contract which is deemed incorporated in the
surety bond executed for its completion. To rule
therefore that private respondent was not
properly notified would be gross error.

INSURANCE AS A CONSENUAL CONTRACT

7.

GREAT PACIFIC LIFE ASSURANCE

COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.

LAPULAPU D. MONDRAGON, petitioner,

vs.
HON. COURT OF APPEALS and NGO
HING, respondents.

Re: Binding Receipt; Absence of meeting of the

minds
In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing
over the 20-year endowment life insurance in the
amount of P50,000.00 in favor of the latter's one-year
old daughter, and with the non-compliance of the
abovequoted conditions stated in the disputed binding
deposit receipt, there could have been no insurance
contract duly perfected between thenl Accordingly, the
deposit paid by private respondent shall have to be
refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance
Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented
to by both parties either in person or by their
agents ... The contract, to be binding from the
date of the application, must have been a
completed contract, one that leaves nothing to be
done, nothing to be completed, nothing to be
passed upon, or determined, before it shall take
effect. There can be no contract of insurance
unless the minds of the parties have met in
agreement."
We are not impressed with private respondent's
contention that failure of petitioner Mondragon to
communicate to him the rejection of the
insurance application would not have any adverse
effect on the allegedly perfected temporary
contract (Respondent's Brief, pp. 13-14). In this
first place, there was no contract perfected
between the parties who had no meeting of their
minds. Private responden t, being an authorized
insurance agent of Pacific Life at Cebu branch office, is
indubitably aware that said company does not offer the
life insurance applied for. When he filed the insurance
application in dispute, private respondent was,
therefore, only taking the chance that Pacific Life will
approve the recommendation of Mondragon for the
acceptance and approval of the application in question
along with his proposal that the insurance company
starts to offer the 20-year endowment insurance plan
for children less than seven years. Nonetheless, the
record discloses that Pacific Life had rejected the
proposal and recommendation. Secondly, having an
insurable interest on the life of his one-year old
daughter, aside from being an insurance agent
and an offense associate of petitioner
Mondragon, private respondent Ngo Hing must
have known and followed the progress on the
processing of such application and could not
pretend ignorance of the Company's rejection of
the 20-year endowment life insurance
application.
Re: Concealment

This Court is of the firm belief that private

respondent had deliberately concealed the state
of health and physical condition of his daughter
Helen Go. Where private respondent supplied the
required essential data for the insurance
application form, he was fully aware that his oneyear old daughter is typically a mongoloid child.
Such a congenital physical defect could never be
ensconced nor disguised. Nonetheless, private
respondent, in apparent bad faith, withheld the fact
material to the risk to be assumed by the insurance
company. As an insurance agent of Pacific Life, he
ought to know, as he surely must have known his
duty and responsibility to such a material fact.
Had he diamond said significant fact in the insurance
application form Pacific Life would have verified the
same and would have had no choice but to disapprove
the application outright.

liability for loss or damage to the goods if no suit is filed

within one year after delivery of the goods or the date
when they should have been delivered. Under this
provision,
only
the
carrier's
liability
is
extinguished if no suit is brought within one
year. But the liability of the insurer is not
extinguished because the insurer's liability is
based not on the contract of carriage but on the
contract of insurance. A close reading of the law
reveals that the Carriage of Goods by Sea Act
governs the relationship between the carrier on
the one hand and the shipper, the consignee
and/or the insurer on the other hand. It defines
the obligations of the carrier under the contract
of carriage. It does not, however, affect the
relationship between the shipper and the
insurer. The latter case is governed by the
Insurance Code.

The contract of insurance is one of perfect good faith

uberrima fides meaning good faith, absolute and perfect
candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law
Dictionary, 2nd Edition], not for the alone but equally so
for the insurer (Field man's Insurance Co., Inc. vs. Vda
de Songco, 25 SCRA 70). Concealment is a neglect to
communicate that which a party knows and ought
to communicate (Section 25, Act No. 2427). Whether
intentional or unintentional the concealment
entitles the insurer to rescind the contract of
insurance (Section 26, Id.: Yu Pang Cheng vs. Court of
Appeals, et al, 105 Phil 930; Satumino vs. Philippine
American Life Insurance Company, 7 SCRA 316).
Private respondent appears guilty thereof.

Our ruling in Filipino Merchants Insurance Co., Inc. v.

Alejandro[8] and the other cases[9] cited therein does not
support respondent court's view that the insurer's
liability prescribes after one year if no action for
indemnity is filed against the carrier or the insurer. In
that case, the shipper filed a complaint against the
insurer for recovery of a sum of money as indemnity for
the loss and damage sustained by the insured
goods. The insurer, in turn, filed a third-party complaint
against the carrier for reimbursement of the amount it
paid to the shipper. The insurer filed the third-party
complaint on January 9, 1978, more than one year after
delivery of the goods on December 17, 1977. The court
held that the Insurer was already barred from filing a
claim against the carrier because under the Carriage of
Goods by Sea Act, the suit against the carrier must be
filed within one year after delivery of the goods or the
date when the goods should have been delivered. The
court said that "the coverage of the Act includes the
insurer of the goods."[10]

We are thus constrained to hold that no insurance

contract was perfected between the parties with
the noncompliance of the conditions provided in
the binding receipt, and concealment, as legally
defined, having been committed by herein private
respondent.

AS CONTRACT OF INDEMNITY
8. MAYER
STEEL
PIPE
CORPORATION
and
HONGKONG
GOVERNMENT
SUPPLIES
DEPARTMENT, petitioners,
vs.
COURT
OF
APPEALS,
SOUTH
SEA
SURETY
AND
INSURANCE CO., INC. and the CHARTER
INSURANCE CORPORATION, respondents.
Respondent court erred in applying Section 3(6)
of the Carriage of Goods by Sea Act.
Section 3(6) of the Carriage of Goods by Sea Act states
that the carrier and the ship shall be discharged from all

The Filipino Merchants case is different from the

case at bar. In Filipino Merchants, it was the
insurer which filed a claim against the carrier for
reimbursement of the amount it paid to the
shipper. In the case at bar, it was the shipper
which filed a claim against the insurer. The basis
of the shipper's claim is the "all risks" insurance
policies issued by private respondents to
petitioner Mayer.
The ruling in Filipino Merchants should apply only to
suits against the carrier filed either by the shipper, the
consignee or the insurer. When the court said in Filipino
Merchants that Section 3(6) of the Carriage of Goods by
Sea Act applies to the insurer, it meant that the insurer,
like the shipper, may no longer file a claim against the
carrier beyond the one-year period provided in the
law. But it does not mean that the shipper may no
longer file a claim against the insurer because the basis

of the insurer's liability is the insurance contract. An

insurance contract is a contract whereby one
party, for a consideration known as the premium,
agrees to indemnify another for loss or damage
which he may suffer from a specified peril. An "all
risks" insurance policy covers all kinds of loss other than
those due to willful and fraudulent act of the
insured. Thus, when private respondents issued the "all
risks" policies to petitioner Mayer, they bound
themselves to indemnify the latter in case of loss or
damage to the goods insured. Such obligation
prescribes in ten years, in accordance with Article 1144
of the New Civil Code.

9.

PARAMOUNT INSURANCE
CORPORATION, petitioner,
vs.
HON. MAXIMO M. JAPZON, Presiding Judge, Br.
36, RTC, Manila; City Sheriff and Deputy
Sheriffs Nestor Macabilin & Teodoro Episcope,
public respondents, JOSE LARA and ARSENIO
PAED, private respondents.

However, there is merit in petitioner's contention that

its liability is limited only to P50,000.00 as expressed in
Insurance Policy No. CV-3466 issued on February 23,
1978. The said insurance policy clearly and
categorically placed the petitioners liability for all
damages arising out of death or bodily injury sustained
by one person as a result of any one accident at
P50,000.00. Said amount complied with the minimum
fixed by law then prevailing, Section 377 of Presidential
Decree No. 6123 (which was retained by P.D. No. 1460,
the Insurance Code of 1978), which provided that the
liability of land transportation vehicle operators for
bodily injuries sustained by a passenger arising out of
the use of their vehicles shall not be less than
P12,000.00. Since the petitioner's liability under the
insurance contract is neither less than P12,000.00 nor
contrary to law, morals, good customs, public order or
public policy, said stipulation must be upheld as
effective and binding between the parties. Therefore,
the terms of the contract constitute the measure
of the insurer's liability.

RIGHT TO SUBROGATION
10. THE
PHILIPPINE
AMERICAN
GENERAL
INSURANCE COMPANY, INC., petitioner, vs.
COURT
OF
APPEALS
and
FELMAN
SHIPPING LINES, respondents.

PHILAMGENs action against FELMAN is squarely

sanctioned by Art. 2207 of the Civil Code which
provides:
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.
In Pan Malayan Insurance Corporation v. Court of
Appeals,[18] we said that payment by the assurer to
the assured operates as an equitable assignment
to
the
assurer of
all
the
remedies
which the assured may have against the third
party whose negligence or wrongful act caused
the loss. The right of subrogation is not
dependent upon, nor does it grow out of any
privity
of
contract
or
upon payment by the insurance company of the
insurance claim. It accrues simply upon payment
by the insurance company of the insurance claim.
The doctrine of subrogation has its roots in equity. It is
designed to promote and to accomplish justice and is
the mode which equity adopts to compel the ultimate
payment of a debt by one who in justice, equity and
good conscience ought to pay.[19] Therefore, the
payment made by PHILAMGEN to Coca-Cola
Bottlers Philippines, Inc., gave the former the
right to bring an action as subrogee against
FELMAN. Having failed to rebut the presumption of
fault, the liability of FELMAN for the loss of the 7,500
cases of 1-liter Coca-Cola softdrink bottles is inevitable.

11. FIREMAN'S FUND INSURANCE COMPANY and

FIRESTONE TIRE AND RUBBER COMPANY OF
THE PHILIPPINES, plaintiffs-appellants,
vs.
JAMILA & COMPANY, INC. and FIRST QUEZON
CITY INSURANCE CO., INC., defendantsappellees.
We hold that Firestone is really a nominal, party in this
case. It had already been indemnified for the loss which
it had sustained. Obviously, it joined as a party-plaintiff
in order to help Fireman's Fund to recover the amount of
the loss from Jamila and First Quezon City Insurance Co.,
Inc. Firestone had tacitly assigned to Fireman's

Fund its cause of action against Jamila for breach

of contract. Sufficient ultimate facts are alleged
in the complaint to sustain that cause of action.
On the other hand, Fireman's Fund's action against
Jamila is squarely sanctioned by article 2207. As
the insurer, Fireman's Fund is entitled to go after
the person or entity that violated its contractual
commitment to answer for the loss insured
against (Cf. Philippine Air Lines, Inc. vs. Heald Lumber
Co., 101 Phil. 1032; Rizal Surety & Insurance Co. vs.
Manila Railroad Company, L-24043, April 25, 1968, 23
SCRA 205).
The trial court erred in applying to this case the rules on
novation. The plaintiffs in alleging in their complaint
that Fireman's Fund "became a party in interest in this
case by virtue of a subrogation right given in its favor
by" Firestone, were not relying on the novation by
change of creditors as contemplated in articles 1291
and 1300 to 1303 of the Civil Code but rather on article
2207.
Article 2207 is a restatement of a settled principle of
American jurisprudence. Subrogation has been referred
to as the doctrine of substitution. It "is an arm of equity
that may guide or even force one to pay a debt for
which an obligation was incurred but which was in whole
or in part paid by another" (83 C.J.S. 576, 678, note 16,
citing Fireman's Fund Indemnity Co. vs. State
Compensation Insurance Fund, 209 Pac. 2d 55).
"Subrogation is founded on principles of justice and
equity, and its operation is governed by principles of
equity. It rests on the principle that substantial justice
should be attained regardless of form, that is, its basis is
the doing of complete, essential, and perfect justice
between all the parties without regard to form"(83 C.J.S.
579- 80)
Subrogation is a normal incident of indemnity
insurance (Aetna L. Ins. Co. vs Moses, 287 U.S. 530, 77
L. ed. 477). Upon payment of the loss, the insurer
is entitled to be subrogated pro tanto to any right
of action which the insured may have against the
third person whose. negligence or wrongful act
caused the loss (44 Am. Jur. 2nd 745, citing Standard
Marine Ins. Co. vs. Scottish Metropolitan Assurance Co.,
283 U. S. 294, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The
loss in the first instance is that of the insured but
after reimbursement or compensation, it becomes
the loss of the insurer (44 Am. Jur. 2d 746, note 16,
citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio St. 382).
"Although many policies including policies in the
standard form, now provide for subrogation, and thus

determine the rights of the insurer in this respect, the

equitable right of subrogation as the legal effect of
payment inures to the insurer without any formal
assignment or any express stipulation to that effect in
the policy" (44 Am. Jur. 2nd 746). Stated otherwise,
when the insurance company pays for the loss, such
payment operates as an equitable assignment to the
insurer of the property and all remedies which the
insured may have for the recovery thereof. That right is
not dependent upon, nor does it grow out of, any privity
of contract, or upon written assignment of claim, and
payment to the insured makes the insurer an assignee
in equity (Shambley v. Jobe-Blackley Plumbing and
Heating Co., 264 N. C. 456,142 SE 2d 18).

12. FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO.,
INC., respondent.
There is no question that majority of the stockholders of
the respondent corporation were German subjects. This
being so, we have to rule that said respondent became
an enemy corporation upon the outbreak of the war
between the United States and Germany.
The Philippine Insurance Law (Act No. 2427, as
amended,) in section 8, provides that "anyone
except a public enemy may be insured." It stands
to reason that an insurance policy ceases to be
allowable as soon as an insured becomes a public
enemy.
Effect of war, generally. All intercourse
between citizens of belligerent powers which is
inconsistent with a state of war is prohibited by
the law of nations. Such prohibition includes all
negotiations, commerce, or trading with the
enemy; all acts which will increase, or tend to
increase, its income or resources; all acts of
voluntary submission to it; or receiving its
protection; also all acts concerning the
transmission of money or goods; and all
contracts relating thereto are thereby nullified.
It further prohibits insurance upon trade with or
by the enemy, upon the life or lives of aliens
engaged in service with the enemy; this for the
reason that the subjects of one country cannot
be permitted to lend their assistance to protect
by insurance the commerce or property of
belligerent, alien subjects, or to do anything
detrimental too their country's interest. The
purpose of war is to cripple the power and
exhaust the resources of the enemy, and it is
inconsistent that one country should destroy its
enemy's property and repay in insurance the
value of what has been so destroyed, or that it

should in such manner increase the resources of

the enemy, or render it aid, and the
commencement of war determines, for like
reasons, all trading intercourse with the enemy,
which prior thereto may have been lawful. All
individuals therefore, who compose the
belligerent powers, exist, as to each other, in a
state of utter exclusion, and are public enemies.
(6 Couch, Cyc. of Ins. Law, pp. 5352-5353.)
In the case of an ordinary fire policy, which
grants insurance only from year, or for some
other specified term it is plain that when the
parties become alien enemies, the contractual
tie is broken and the contractual rights of the
parties, so far as not vested. lost. (Vance, the
Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy
corporation on December 10, 1941, the insurance
policy issued in its favor on October 1, 1941, by
the petitioner (a Philippine corporation) had
ceased to be valid and enforcible, and since the
insured goods were burned after December 10,
1941, and during the war, the respondent was not
entitled to any indemnity under said policy from
the petitioner. However, elementary rules of
justice (in the absence of specific provision in the
Insurance Law) require that the premium paid by
the respondent for the period covered by its
policy from December 11, 1941, should be
returned by the petitioner.

INSURABLE INTEREST IN LIFE

13. PEOPLE
OF
appellee,
vs.
appellant.

THE
YIP

PHILIPPINES, plaintiffWAI
MING, accused-

There is, however, no evidence that the victim

secured an insurance policy for a big amount in
US dollars and indicated accused-appellant as the
beneficiary. The prosecution presented Exhibit X, a
mere xerox copy of a document captioned
Proposal for Life Insurance as proof of the alleged
insurance. It is not a certified copy, nor was the
original first identified.
There is, however, no evidence that the
victim secured an insurance policy for a big
amount in US dollars and indicated accusedappellant as the beneficiary. The prosecution
presented Exhibit X, a mere xerox copy of a
document captioned Proposal for Life Insurance
as proof of the alleged insurance. It is not a
certified copy, nor was the original first identified.

The authenticity of the document has thus

not been duly established. Exhibit X was secured in
Hongkong when Lam Chi Keung, the brother of the
victim, learned that his sister was murdered in Manila. It
is not shown how and from whom the information about
any alleged insurance having been secured came. There
is no signature indicating that the victim herself applied
for the insurance. There is no marking in Exhibit X of
any entry which purports to be the victims
signature. There is a signature of Apple Lam which is
most unusual for an insurance application because the
victims name is Lam Po Chun. To be sure nobody insures
himself or herself under a nickname. The entries in the
form are in block letters uniformly written by one
hand. Below the printed name Lam Po Chun are Chinese
characters which presumably are the Chinese
translation of her name. Nobody was presented to
identify the author of the block handwriting. Neither the
prosecution nor the trial court made any comparisons,
such as the signature of Lam Po Chun on her passport
(Exh. C), with her purported signature or any other entry
in the form.
It needs not much emphasis to say that an
application form does not prove that insurance
was secured. Anybody can get an application form for
insurance, fill it up at home before filing it with the
insurance company. In fact, the very first sentence of
the form states that it merely forms the basis of a
contract between you and NZI Life. There was no
contract yet.
There is evidence in the record that the family of
Lam Po Chun did not like her relationship with accusedappellant. After all the trouble that her brother went
through to gather evidence to pin down accusedappellant, the fact that all he could come up with is an
unsigned insurance application form shows there was no
insurance money forthcoming for accused-appellant if
Lam Po Chun died. There is no proof that the
insurance company approved the proposal, no
proof that any premium payments were made,
and no proof from the record of exhibits as to the
date it was accomplished. It appearing that no
insurance was issued to Lam Po Chun with
accused-appellant as the beneficiary, the motive
capitalized upon by the trial court vanishes. Thus,
the picture changes to one of the alleged perpetrator
killing his fiancee under cold-blooded circumstances for
nothing.
There are other suspicious circumstances about the
insurance angle. Lam Po Chun was working for the
National Insurance Company. Why then should she
insure her life with the New Zealand Insurance
Company? Lams monthly salary was only HK $5,000.00.
The premiums for the insurance were HK $5,400.00 or
US $702.00 per month. Why should Lam insure herself
with the monthly premiums exceeding her monthly

salary? And why should any insurance company

approve insurance, the premiums of which the
supposed insured obviously can not afford to pay, in the
absence of any showing that somebody else is paying
for said premiums. It is not even indicated whether or
not there are rules in Hongkong allowing a big amount
of insurance to be secured where the beneficiary is not
a spouse, a parent, a sibling, a child, or other close
relative.
Lam Po Chun must have been unbelievably trusting
or stupid to follow the alleged advice of Andy Kwong. It
is usually the man who insures himself with the
wife or future wife as beneficiary instead of the
other way around. Why should Lam Po Chun, with
her relatively small salary which is not even
enough to pay for the monthly premiums, insure
herself for such a big amount. This is another reason
why doubts arise as to the truth of the insurance angle.

RIGHT TO CHANGE BENEFICIARY

14. THE PHILIPPINE AMERICAN INSURANCE
COMPANY, petitioner,
vs.
HONORABLE GREGORIO G. PINEDA in his
capacity as Judge of the Court of First
Instance of Rizal, and RODOLFO C.
DIMAYUGA, respondents.
Needless to say, the applicable law in the instant
case is the Insurance Act, otherwise known as Act
No. 2427 as amended, the policy having been
procured in 1968. Under the said law, the
beneficiary designated in a life insurance contract
cannot be changed without the consent of the
beneficiary because he has a vested interest in
the policy (Gercio v. Sun Life Ins. Co. of Canada, 48
Phil. 53; Go v. Redfern and the International Assurance
Co., Ltd., 72 Phil. 71).
In this regard, it is worth noting that the Beneficiary
Designation Indorsement in the policy which
forms part of Policy Number 0794461 in the name
of Rodolfo Cailles Dimayuga states that the
designation of the beneficiaries is irrevocable
(Annex "A" of Petition in Sp. Proc. No. 9210, Annex "C"
of the Petition for Review on Certiorari), to wit:
It is hereby understood and agreed that,
notwithstanding the provisions of this
policy to the contrary, inasmuch as the
designation of the primary/contingent
beneficiary/beneficiaries in this Policy
has been made without reserving the
right to change said beneficiary/
beneficiaries, such designation may not

be surrendered to the Company,

released or assigned; and no right or
privilege under the Policy may be
exercised, or agreement made with the
Company to any change in or
amendment to the Policy, without the
consent of the said
beneficiary/beneficiaries. (Petitioner's
Memorandum, p. 72, Rollo)
Be it noted that the foregoing is a fact which the private
respondent did not bother to disprove.
Inevitably therefore, based on the aforequoted provision
of the contract, not to mention the law then applicable,
it is only with the consent of all the beneficiaries
that any change or amendment in the policy
concerning the irrevocable beneficiaries may be
legally and validly effected. Both the law and the
policy do not provide for any other exception,
thus, abrogating the contention of the private
respondent that said designation can be amended
if the Court finds a just, reasonable ground to do
so.
Similarly, the alleged acquiescence of the six (6)
children beneficiaries of the policy (the
beneficiary-wife predeceased the insured) cannot
be considered an effective ratification to the
change of the beneficiaries from irrevocable to
revocable. Indubitable is the fact that all the six
(6) children named as beneficiaries were minors
at the time,** for which reason, they could not
validly give their consent. Neither could they act
through their father insured since their interests are
quite divergent from one another. In point is an excerpt
from the
Therefore, the parent-insured cannot exercise
rights and/or privileges pertaining to the
insurance contract, for otherwise, the vested
rights of the irrevocable beneficiaries would be
rendered inconsequential.
Of equal importance is the well-settled rule that the
contract between the parties is the law binding on both
of them and for so many times, this court has
consistently issued pronouncements upholding the
validity and effectivity of contracts. Where there is
nothing in the contract which is contrary to law, good
morals, good customs, public policy or public order the
validity of the contract must be sustained. Likewise,
contracts which are the private laws of the contracting
parties should be fulfilled according to the literal sense
of their stipulations, if their terms are clear and leave no
room for doubt as to the intention of the contracting
parties, for contracts are obligatory, no matter in what
form they may be, whenever the essential requisites for
their validity are present (Phoenix Assurance Co., Ltd.

vs. United States Lines, 22 SCRA 675, Phil. American

General Insurance Co., Inc. vs. Mutuc, 61 SCRA 22.)
Undeniably, the contract in the case at bar, contains the
indispensable elements for its validity and does not in
any way violate the law, morals, customs, orders, etc.
leaving no reason for Us to deny sanction thereto.
Finally, the fact that the contract of insurance does not
contain a contingency when the change in the
designation of beneficiaries could be validly effected
means that it was never within the contemplation of the
parties. The lower court, in gratuitously providing for
such contingency, made a new contract for them, a
proceeding which we cannot tolerate. Ergo, We cannot
help but conclude that the lower court acted in excess
of its authority when it issued the Order dated March 19,
1980 amending the designation of the beneficiaries
from "irrevocable" to "revocable" over the
disapprobation of the petitioner insurance company.

APPLICABILITY OF ART. 739, NCC

15. THE INSULAR LIFE ASSURANCE COMPANY,
LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE
EBRADO, defendants-appellants.
It is quite unfortunate that the Insurance Act (RA 2327,
as amended) or even the new Insurance Code (PD No.
612, as amended) does not contain any specific
provision grossly resolutory of the prime question at
hand. Section 50 of the Insurance Act which
provides that "(t)he insurance shag be applied
exclusively to the proper interest of the person in
whose name it is made" 1 cannot be validly seized
upon to hold that the mm includes the
beneficiary. The word "interest" highly suggests
that the provision refers only to the "insured" and
not to the beneficiary, since a contract of
insurance is personal in character. 2 Otherwise, the
prohibitory laws against illicit relationships especially on
property and descent will be rendered nugatory, as the
same could easily be circumvented by modes of
insurance. Rather, the general rules of civil law should
be applied to resolve this void in the Insurance Law.
Article 2011 of the New Civil Code states: "The contract
of insurance is governed by special laws. Matters not
expressly provided for in such special laws shall be
regulated by this Code." When not otherwise specifically
provided for by the Insurance Law, the contract of life
insurance is governed by the general rules of the civil
law regulating contracts. 3 And under Article 2012 of
the same Code, "any person who is forbidden
from receiving any donation under Article 739
cannot be named beneficiary of a fife insurance

policy by the person who cannot make a donation

to him. 4 Common-law spouses are, definitely,
barred from receiving donations from each other.
Article 739 of the new Civil Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of
adultery or concubinage at the time of donation;
Those made between persons found guilty of the same
criminal offense, in consideration thereof;
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his office.
In the case referred to in No. 1, the action for
declaration of nullity may be brought by the spouse of
the donor or donee; and the guilt of the donee may be
proved by preponderance of evidence in the same
action.
In essence, a life insurance policy is no different
from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same
consideration: liberality. A beneficiary is like a
donee, because from the premiums of the policy which
the insured pays out of liberality, the beneficiary will
receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the
new Civil Code should equally operate in life
insurance contracts. The mandate of Article 2012
cannot be laid aside: any person who cannot receive a
donation cannot be named as beneficiary in the life
insurance policy of the person who cannot make the
donation.5 Under American law, a policy of life insurance
is considered as a testament and in construing it, the
courts will, so far as possible treat it as a will and
determine the effect of a clause designating the
beneficiary by rules under which wins are interpreted.
xxx
We do not think that a conviction for adultery or
concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More
specifically, with record to the disability on "persons
who were guilty of adultery or concubinage at the time
of the donation," Article 739 itself provides: +.wph!
1
In the case referred to in No. 1, the
action for declaration of nullity may be
brought by the spouse of the donor or
donee; and the guilty of the donee may
be proved by preponderance of
evidence in the same action.

The underscored clause neatly conveys that no

criminal conviction for the offense is a condition
precedent. In fact, it cannot even be from the
aforequoted provision that a prosecution is needed. On
the contrary, the law plainly states that the guilt of the
party may be proved "in the same acting for declaration
of nullity of donation. And, it would be sufficient if
evidence preponderates upon the guilt of the consort for
the offense indicated. The quantum of proof in criminal
cases is not demand
In the caw before Us, the requisite proof of common-law
relationship between the insured and the beneficiary
has been conveniently supplied by the stipulations
between the parties in the pre-trial conference of the
case. It case agreed upon and stipulated therein that
the deceased insured Buenaventura C. Ebrado was
married to Pascuala Ebrado with whom she has six
legitimate children; that during his lifetime, the
deceased insured was living with his common-law wife,
Carponia Ebrado, with whom he has two children. These
stipulations are nothing less than judicial
admissions which, as a consequence, no longer require
proof and cannot be contradicted. 8 A fortiori, on the
basis of these admissions, a judgment may be validly
rendered without going through the rigors of a trial for
the sole purpose of proving the illicit liaison between the
insured and the beneficiary. In fact, in that pretrial, the
parties even agreed "that a decision be rendered based
on this agreement and stipulation of facts as to who
among the two claimants is entitled to the policy."

RE: 1523, NCC; (SEC. 14)

16. FILIPINO MERCHANTS INSURANCE CO.,
INC., petitioner,
vs.
COURT OF APPEALS and CHOA TIEK
SENG, respondents.
An "all risks policy" should be read literally as
meaning all risks whatsoever and covering all
losses by an accidental cause of any kind. The
terms "accident" and "accidental", as used in insurance
contracts, have not acquired any technical meaning.
They are construed by the courts in their ordinary and
common acceptance. Thus, the terms have been taken
to mean that which happens by chance or fortuitously,
without intention and design, and which is unexpected,
unusual and unforeseen. An accident is an event that
takes place without one's foresight or expectation; an
event that proceeds from an unknown cause, or is an
unusual effect of a known cause and, therefore, not
expected.
Generally, the burden of proof is upon the insured
to show that a loss arose from a covered peril,

but under an "all risks" policy the burden is not

on the insured to prove the precise cause of loss
or damage for which it seeks compensation. The
insured under an "all risks insurance policy" has
the initial burden of proving that the cargo was in
good condition when the policy attached and that
the cargo was damaged when unloaded from the
vessel; thereafter, the burden then shifts to the
insurer to show the exception to the coverage. As
we held in Paris-Manila Perfumery Co. vs. Phoenix
Assurance Co., Ltd. 11 the basic rule is that the
insurance company has the burden of proving
that the loss is caused by the risk excepted and
for want of such proof, the company is liable.
Coverage under an "all risks" provision of a marine
insurance policy creates a special type of insurance
which extends coverage to risks not usually
contemplated and avoids putting upon the insured the
burden of establishing that the loss was due to the peril
falling within the policy's coverage; the insurer can
avoid coverage upon demonstrating that a specific
provision expressly excludes the loss from
coverage. 12 A marine insurance policy providing that
the insurance was to be "against all risks" must be
construed as creating a special insurance and extending
to other risks than are usually contemplated, and covers
all losses except such as arise from the fraud of the
insured. 13 The burden of the insured, therefore, is to
prove merely that the goods he transported have been
lost, destroyed or deteriorated. Thereafter, the burden is
shifted to the insurer to prove that the loss was due to
excepted perils. To impose on the insured the burden of
proving the precise cause of the loss or damage would
be inconsistent with the broad protective purpose of "all
risks" insurance.
In the present case, there being no showing that the
loss was caused by any of the excepted perils, the
insurer is liable under the policy.
Contracts of insurance are contracts of indemnity upon
the terms and conditions specified in the policy. The
agreement has the force of law between the parties.
The terms of the policy constitute the measure of the
insurer's liability. If such terms are clear and
unambiguous, they must be taken and understood in
their plain, ordinary and popular sense.
Anent the issue of insurable interest, we uphold the
ruling of the respondent court that private respondent,
as consignee of the goods in transit under an invoice
containing the terms under "C & F Manila," has
insurable interest in said goods.
Section 13 of the Insurance Code defines
insurable interest in property as every interest in
property, whether real or personal, or any
relation thereto, or liability in respect thereof, of

such nature that a contemplated peril might

directly damnify the insured. In principle, anyone
has an insurable interest in property who derives
a benefit from its existence or would suffer loss
from its destruction whether he has or has not
any title in, or lien upon or possession of the
property y. Insurable interest in property may
consist in (a) an existing interest; (b) an inchoate
interest founded on an existing interest; or (c) an
expectancy, coupled with an existing interest in
that out of which the expectancy arises.
Herein private respondent, as vendee/consignee
of the goods in transit has such existing interest
therein as may be the subject of a valid contract
of insurance. His interest over the goods is based
on the perfected contract of sale. The perfected
contract of sale between him and the shipper of the
goods operates to vest in him an equitable title even
before delivery or before be performed the conditions of
the sale. The contract of shipment, whether under
F.O.B., C.I.F., or C. & F. as in this case, is immaterial in
the determination of whether the vendee has an
insurable interest or not in the goods in transit. The
perfected contract of sale even without delivery
vests in the vendee an equitable title, an existing
interest over the goods sufficient to be the
subject of insurance.
Further, Article 1523 of the Civil Code provides that
where, in pursuance of a contract of sale, the seller is
authorized or required to send the goods to the buyer,
delivery of the goods to a carrier, whether named by the
buyer or not, for, the purpose of transmission to the
buyer is deemed to be a delivery of the goods to the
buyer, the exceptions to said rule not obtaining in the
present case. The Court has heretofore ruled that the
delivery of the goods on board the carrying
vessels partake of the nature of actual delivery
since, from that time, the foreign buyers assumed
the risks of loss of the goods and paid the
insurance premium covering them.

WHEN INSURABLE INTEREST IN PROPERTY MUST

EXIST (SEC. 19 & 20)
17. Spouses NILO CHA and STELLA UY CHA, and
UNITED INSURANCE CO., INC., petitioners, vs.
COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, respondents.
It is, of course, basic in the law on contracts that the
stipulations contained in a contract cannot be contrary
to law, morals, good customs, public order or public
policy.[3]
Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of

insurance on property shall be
enforceable except for the benefit of
some person having an insurable
interest in the property insured.
A non-life insurance policy such as the fire insurance
policy
taken
by
petitioner-spouses
over
their
merchandise
is
primarily
a
contract
of
indemnity. Insurable interest in the property
insured must exist at the time the insurance
takes effect and at the time the loss occurs.[4] The
basis of such requirement of insurable interest in
property insured is based on sound public policy:
to prevent a person from taking out an insurance
policy on property upon which he has no
insurable interest and collecting the proceeds of
said policy in case of loss of the property. In such
a case, the contract of insurance is a mere wager
which is void under Section 25 of the Insurance
Code, which provides:
SECTION 25. Every stipulation in a policy
of Insurance for the payment of loss,
whether the person insured has or has not
any interest in the property insured, or that
the policy shall be received as proof of such
interest, and every policy executed by way
of gaming or wagering, is void.
In the present case, it cannot be denied that CKS has
no
insurable interest in the goods and
merchandise inside the leased premises under
the provisions of Section 17 of the Insurance
Code which provide.
Section 17. The measure of an
insurable interest in property is the
extent to which the insured might be
damnified by loss of injury thereof."
Therefore, respondent CKS cannot, under the Insurance
Code a special law be validly a beneficiary of the fire
insurance policy taken by the petitioner-spouses over
their merchandise. This insurable interest over said
merchandise remains with the insured, the Cha
spouses. The automatic assignment of the policy
to CKS under the provision of the lease contract
previously quoted is void for being contrary to
law and/or public policy. The proceeds of the fire
insurance policy thus rightfully belong to the
spouses Nilo Cha and Stella Uy-Cha (herein copetitioners). The insurer (United) cannot be
compelled to pay the proceeds of the fire
insurance policy to a person (CKS) who has no
insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their

lease contract in that Cha spouses obtained a fire
insurance policy over their own merchandise, without
the consent of CKS, is a separate and distinct issue
which we do not resolve in this case.

made in good faith of his belief as to the nature of his

ailment and operation. Indeed, such statement must be
presumed to have been made by him without
knowledge of its incorrectness and without any
deliberate intent on his part to mislead the appellant.

CONCEALMENT (SEC. 26)

While it may be conceded that, from the viewpoint of a

medical expert, the information communicated was
imperfect, the same was nevertheless sufficient to have
induced appellant to make further inquiries about the
ailment and operation of the insured.

18. NG GAN ZEE, plaintiff-appellee,

vs.
ASIAN CRUSADER LIFE ASSURANCE
CORPORATION, defendant-appellant.
Section 27 of the Insurance Law [Act 2427]
provides:
Sec. 27. Such party a contract of insurance
must communicate to the other, in good faith,
all facts within his knowledge which are
material to the contract, and which the other
has not the means of ascertaining, and as to
which he makes no warranty. 3
Thus, "concealment exists where the assured had
knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that
he should communicate it to the assurer, but he
designedly and intentionally withholds the
same." 4
It has also been held "that the concealment must, in
the absence of inquiries, be not only material, but
fraudulent, or the fact must have been
intentionally withheld." 5
Assuming that the aforesaid answer given by the
insured is false, as claimed by the appellant. Sec. 27 of
the Insurance Law, above-quoted, nevertheless requires
that fraudulent intent on the part of the insured
be established to entitle the insurer to rescind
the contract. And as correctly observed by the lower
court, "misrepresentation as a defense of the
insurer to avoid liability is an 'affirmative'
defense. The duty to establish such a defense by
satisfactory and convincing evidence rests upon
the defendant. The evidence before the Court does
not clearly and satisfactorily establish that defense."
It bears emphasis that Kwong Nam had informed the
appellant's medical examiner that the tumor for which
he was operated on was "associated with ulcer of the
stomach." In the absence of evidence that the insured
had sufficient medical knowledge as to enable him to
distinguish between "peptic ulcer" and "a tumor", his
statement that said tumor was "associated with ulcer of
the stomach, " should be construed as an expression

Section 32 of Insurance Law [Act No. 24271

provides as follows:
Section 32. The right to information of
material facts maybe waived either by the
terms of insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated.
It has been held that where, upon the face of the
application, a question appears to be not
answered at all or to be imperfectly answered,
and the insurers issue a policy without any
further inquiry, they waive the imperfection of
the answer and render the omission to answer
more fully immaterial. 6
As aptly noted by the lower court, "if the ailment and
operation of Kwong Nam had such an important
bearing on the question of whether the defendant
would undertake the insurance or not, the court
cannot understand why the defendant or its
medical examiner did not make any further
inquiries on such matters from the Chinese
General Hospital or require copies of the hospital
records from the appellant before acting on the
application for insurance. The fact of the matter
is that the defendant was too eager to accept the
application and receive the insured's premium. It
would be inequitable now to allow the defendant
to avoid liability under the circumstances."

19. REGINA L. EDILLON, as assisted by her

husband, MARCIAL EDILLON, petitionersappellants,
vs.
MANILA BANKERS LIFE INSURANCE
CORPORATION and the COURT OF FIRST
INSTANCE OF RIZAL, BRANCH V, QUEZON
CITY, respondents-appellees.
The age of the insured Carmen 0. Lapuz was not
concealed to the insurance company. Her

application for insurance coverage which was on a

printed form furnished by private respondent and which
contained very few items of information clearly
indicated her age of the time of filing the same to be
almost 65 years of age. Despite such information which
could hardly be overlooked in the application form,
considering its prominence thereon and its materiality
to the coverage applied for, the respondent insurance
corporation received her payment of premium and
issued the corresponding certificate of insurance
without question. The accident which resulted in
the death of the insured, a risk covered by the
policy, occurred on May 31, 1969 or FORTY-FIVE
(45) DAYS after the insurance coverage was
applied for. There was sufficient time for the
private respondent to process the application and
to notice that the applicant was over 60 years of
age and thereby cancel the policy on that ground
if it was minded to do so. If the private
respondent failed to act, it is either because it
was willing to waive such disqualification; or,
through the negligence or incompetence of its
employees for which it has only itself to blame, it
simply
overlooked
such
fact.
Under
the
circumstances, the insurance corporation is
already deemed in estoppel.

CONCEALMENT; WHETHER INTENTIONAL OR NOT

(SEC. 27 & 28)
20. IGNACIO SATURNINO, in his own behalf and as
the JUDICIAL GUARDIAN OF CARLOS
SATURNINO, minor, plaintiffs-appellants,
vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE
COMPANY, defendant-appellee.
The question at issue is whether or not the insured
made such false representations of material facts
as to avoid the policy. There can be no dispute
that the information given by her in her
application for insurance was false, namely, that
she had never had cancer or tumors, or consulted
any physician or undergone any operation within
the preceding period of five years. Are the facts
then falsely represented material? The Insurance Law
(Section 30) provides that "materiality is to be
determined not by the event, but solely by the
probable and reasonable influence of the facts
upon the party to whom the communication is
due, in forming his estimate of the proposed
contract, or in making his inquiries." It seems to be
the contention of appellants that the facts subject of the
representation were not material in view of the "nonmedical" nature of the insurance applied for, which does
away with the usual requirement of medical
examination before the policy is issued. The contention

is without merit. If anything, the waiver of medical

examination renders even more material the
information required of the applicant concerning
previous condition of health and diseases
suffered, for such information necessarily
constitutes an important factor which the insurer
takes into consideration in deciding whether to
issue the policy or not. It is logical to assume that
if appellee had been properly apprised of the
insured's medical history she would at least have
been made to undergo medical examination in
order to determine her insurability.
Appellants argue that due information concerning the
insured's previous illness and operation had been given
to appellees agent Edward A. Santos, who filled the
application form after it was signed in blank by
Estefania A. Saturnino. This was denied by Santos in his
testimony, and the trial court found such testimony to
be true. This is a finding of fact which is binding upon
us, this appeal having been taken upon questions of law
alone. We do not deem it necessary, therefore, to
consider appellee's additional argument, which was
upheld by the trial court, that in signing the application
form in blank and leaving it to Edward A. Santos to fill
(assuming that to be the truth) the insured in effect
made Santos her agent for that purpose and
consequently was responsible for the errors in the
entries made by him in that capacity.
In the application for insurance signed by the insured in
this case, she agreed to submit to a medical
examination by a duly appointed examiner of appellee if
in the latter's opinion such examination was necessary
as further evidence of insurability. In not asking her to
submit to a medical examination, appellants maintain,
appellee was guilty of negligence, which precluded it
from finding about her actual state of health. No such
negligence can be imputed to appellee. It was precisely
because the insured had given herself a clean bill of
health that appellee no longer considered an actual
medical checkup necessary.
Appellants also contend there was no fraudulent
concealment of the truth inasmuch as the insured
herself did not know, since her doctor never told her,
that the disease for which she had been operated on
was cancer. In the first place the concealment of
the fact of the operation itself was fraudulent, as
there could not have been any mistake about it,
no matter what the ailment. Secondly, in order to
avoid a policy it is not necessary to show actual
fraud on the part of the insured.
Wherefore, the parties respectfully pray that the
foregoing stipulation of facts be admitted and approved
by this Honorable Court, without prejudice to the parties
adducing other evidence to prove their case not covered
by this stipulation of facts. 1wph1.t

In this jurisdiction a concealment, whether

intentional or unintentional, entitles the insurer
to rescind the contract of insurance, concealment
being defined as "negligence to communicate
that which a party knows and ought to
communicate" (Sections 24 & 26, Act No. 2427). In the
case of Argente v. West Coast Life Insurance Co., 51
Phil. 725, 732, this Court said, quoting from Joyce, The
Law of Insurance, 2nd ed., Vol. 3:
"The basis of the rule vitiating the contract in cases of
concealment is that it misleads or deceives the insurer
into accepting the risk, or accepting it at the rate of
premium agreed upon. The insurer, relying upon the
belief that the assured will disclose every material fact
within his actual or presumed knowledge, is misled into
a belief that the circumstance withheld does not exist,
and he is thereby induced to estimate the risk upon a
false basis that it does not exist."

21. SUNLIFE ASSURANCE COMPANY OF

CANADA, petitioner,
vs.
The Hon. COURT OF APPEALS and Spouses
ROLANDO and BERNARDA BACANI, respondents.
Section 26 of The Insurance Code is explicit in
requiring a party to a contract of insurance to
communicate to the other, in good faith, all facts
within his knowledge which are material to the
contract and as to which he makes no warranty,
and which the other has no means of
ascertaining. Said Section provides:
A neglect to communicate that which a party
knows and ought to communicate, is called
concealment.
Materiality is to be determined not by the event,
but solely by the probable and reasonable
influence of the facts upon the party to whom
communication is due, in forming his estimate of
the disadvantages of the proposed contract or in
making his inquiries (The Insurance Code, Sec.
31).
The terms of the contract are clear. The insured is
specifically required to disclose to the insurer matters
relating to his health.
The information which the insured failed to
disclose were material and relevant to the
approval and issuance of the insurance policy.
The matters concealed would have definitely
affected petitioner's action on his application,
either by approving it with the corresponding

adjustment for a higher premium or rejecting the

same. Moreover, a disclosure may have warranted a
medical examination of the insured by petitioner in
order for it to reasonably assess the risk involved in
accepting the application.
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443
(1993), we held that materiality of the information
withheld does not depend on the state of mind of the
insured. Neither does it depend on the actual or physical
events which ensue.
Thus, "goad faith" is no defense in concealment.
The insured's failure to disclose the fact that he
was hospitalized for two weeks prior to filing his
application for insurance, raises grave doubts
about his bonafides. It appears that such
concealment was deliberate on his part.
The argument, that petitioner's waiver of the medical
examination of the insured debunks the materiality of
the facts concealed, is untenable. We reiterate our
ruling in Saturnino v. Philippine American Life Insurance
Company, 7 SCRA 316 (1963), that " . . . the waiver of
a medical examination [in a non-medical
insurance contract] renders even more material
the information required of the applicant
concerning previous condition of health and
diseases suffered, for such information
necessarily constitutes an important factor which
the insurer takes into consideration in deciding
whether to issue the policy or not . . . "
Moreover, such argument of private respondents would
make Section 27 of the Insurance Code, which allows
the injured party to rescind a contract of insurance
where there is concealment, ineffective (See Vda. de
Canilang v. Court of Appeals, supra).
Anent the finding that the facts concealed had no
bearing to the cause of death of the insured, it is well
settled that the insured need not die of the disease
he had failed to disclose to the insurer. It is
sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of
the proposed insurance policy or in making
inquiries (Henson v. The Philippine American Life
Insurance Co., 56 O.G. No. 48 [1960]).
We, therefore, rule that petitioner properly exercised its
right to rescind the contract of insurance by reason of
the concealment employed by the insured. It must be
emphasized that rescission was exercised within the
two-year contestability period as recognized in Section
48 of The Insurance Code.

22. THELMA VDA. DE CANILANG, petitioner,

vs.
HON. COURT OF APPEALS and GREAT PACIFIC
LIFE ASSURANCE CORPORATION, respondents.
Sec. 26. A neglect to communicate that which a
party knows and ought to communicate, is called
a concealment.
xxx xxx xxx
Sec. 28. Each party to a contract of insurance
must communicate to the other, in good faith, all
factorswithin his knowledge which are material to
the contract and as to which he makes no
warranty, and which the other has not the means
of ascertaining. (Emphasis supplied)
Under the foregoing provisions, the information
concealed must be information which the
concealing party knew and "ought to [have]
communicate[d]," that is to say, information
which was "material to the contract." The test of
materiality is contained in Section 31 of the Insurance
Code of 1978 which reads:
Sec. 31. Materially is to be determined not by the
event, but solely by the probable and reasonable
influence of the facts upon the party to whom the
communication is due, in forming his estimate of
the disadvantages of the proposed contract, or in
making his inquiries. (Emphasis supplied)
"Sinus tachycardia" is considered present "when
heart rate exceeds 100 beats per minute." 13
symptoms of this condition include pounding in
chest and sometimes faintness and weakness of
person affected.

the
The
the
the

We agree with the Court of Appeals that the information

which Jaime Canilang failed to disclose was material to
the ability of Great Pacific to estimate the probable risk
he presented as a subject of life insurance. Had
Canilang disclosed his visits to his doctor, the
diagnosis made and medicines prescribed by such
doctor, in the insurance application, it may be
reasonably assumed that Great Pacific would
have made further inquiries and would have
probably refused to issue a non-medical
insurance policy or, at the very least, required a
higher premium for the same coverage. The
materiality of the information withheld by Great
Pacific did not depend upon the state of mind of
Jaime Canilang. A man's state of mind or subjective
belief is not capable of proof in our judicial process,
except through proof of external acts or failure to act
from which inferences as to his subjective belief may be
reasonably drawn. Neither does materiality depend

upon the actual or physical events which ensue.

Materiality relates rather to the "probable and
reasonable influence of the facts" upon the party to
whom the communication should have been made, in
assessing the risk involved in making or omitting to
make further inquiries and in accepting the application
for insurance; that "probable and reasonable influence
of the facts" concealed must, of course, be determined
objectively, by the judge ultimately.
The insurance Great Pacific applied for was a "nonmedical" insurance policy. In Saturnino v. PhilippineAmerican Life Insurance Company, 16 this Court held
that:
. . . if anything, the waiver of medical
examination [in a non-medical insurance
contract] renders even more material the
information required of the applicant concerning
previous condition of health and diseases
suffered, for such information necessarily
constitutes an important factor which the
insurer takes into consideration in deciding
whether to issue the policy or
not . . . . 17 (Emphasis supplied)
The Insurance Commissioner had also ruled that the
failure of Great Pacific to convey certain information to
the insurer was not "intentional" in nature, for the
reason that Jaime Canilang believed that he was
suffering from minor ailment like a common cold.
Section 27 of the Insurance Code of 1978 as it existed
from 1974 up to 1985, that is, throughout the time
range material for present purposes, provided that:
Sec. 27. A concealment entitles the injured
party to rescind a contract of insurance.
The preceding statute, Act No. 2427, as it stood
from 1914 up to 1974, had provided:
Sec. 26. A concealment, whether
intentional or unintentional, entitles the
injured party to rescind a contract of
insurance. (Emphasis supplied)
Upon the other hand, in 1985, the Insurance Code of
1978 was amended by
B.P. Blg. 874. This subsequent statute modified Section
27 of the Insurance Code of 1978 so as to read as
follows:
Sec. 27. A concealment whether
intentional or unintentional entitles the
injured party to rescind a contract of
insurance. (Emphasis supplied)

The unspoken theory of the Insurance Commissioner

appears to have been that by deleting the phrase
"intentional or unintentional," the Insurance Code of
1978 (prior to its amendment by B.P. Blg. 874) intended
to limit the kinds of concealment which generate a right
to rescind on the part of the injured party to "intentional
concealments." This argument is not persuasive. As a
simple matter of grammar, it may be noted that
"intentional" and "unintentional" cancel each other out.
The net result therefore of the phrase "whether
intentional or unitentional" is precisely to leave
unqualified the term "concealment." Thus, Section
27 of the Insurance Code of 1978 is properly read
as referring to "any concealment" without regard
to whether such concealment is intentional or
unintentional. The phrase "whether intentional or
unintentional" was in fact superfluous. The deletion of
the phrase "whether intentional or unintentional"
could not have had the effect of imposing an affirmative
requirement that a concealment must be intentional if it
is to entitle the injured party to rescind a contract of
insurance. The restoration in 1985 by B.P. Blg. 874 of
the phrase "whether intentional or unintentional" merely
underscored the fact that all throughout (from 1914 to
1985), the statute did not require proof that
concealment must be "intentional" in order to authorize
rescission by the injured party.

In any case, in the case at bar, the nature of the

facts not conveyed to the insurer was such that
the failure to communicate must have
been intentional rather than merely inadvertent.
For Jaime Canilang could not have been unaware that
his heart beat would at times rise to high and alarming
levels and that he had consulted a doctor twice in the
two (2) months before applying for non-medical
insurance. Indeed, the last medical consultation took
place just the day before the insurance application was
filed. In all probability, Jaime Canilang went to visit his
doctor precisely because of the discomfort and concern
brought about by his experiencing "sinus tachycardia."
We find it difficult to take seriously the argument that
Great Pacific had waived inquiry into the concealment
by issuing the insurance policy notwithstanding
Canilang's failure to set out answers to some of the
questions in the insurance application. Such failure
precisely constituted concealment on the part of
Canilang. Petitioner's argument, if accepted, would
obviously erase Section 27 from the Insurance Code of
1978.