[G.R. No. 138941.

October 8, 2001]
AMERICAN
HOME
ASSURANCE
COMPANY, petitioner, vs. TANTUCO
ENTERPRISES, INC., respondent.
DECISION
PUNO, J.:
Before
us
is
a
Petition
for
Review
on Certiorari assailing the Decision of the Court of
Appeals in CA-G.R. CV No. 52221 promulgated on
January 14, 1999, which affirmed in toto the Decision of
the Regional Trial Court, Branch 53, Lucena City in Civil
Case No. 92-51 dated October 16, 1995.
Respondent Tantuco Enterprises, Inc. is engaged
in the coconut oil milling and refining industry. It owns
two oil mills. Both are located at its factory compound
at Iyam, Lucena City. It appears that respondent
commenced its business operations with only one oil
mill. In 1988, it started operating its second oil
mill. The latter came to be commonly referred to as the
new oil mill.
The two oil mills were separately covered by fire
insurance policies issued by petitioner American Home
Assurance Co., Philippine Branch.[1] The first oil mill was
insured for three million pesos (P3,000,000.00) under
Policy No. 306-7432324-3 for the period March 1, 1991
to 1992.[2]The new oil mill was insured for six million
pesos (P6,000,000.00) under Policy No. 306-7432321-9
for the same term.[3] Official receipts indicating
payment for the full amount of the premium were
issued by the petitioner's agent.[4]
A fire that broke out in the early morning of
September 30,1991 gutted and consumed the new oil
mill. Respondent immediately notified the petitioner of
the incident. The latter then sent its appraisers who
inspected the burned premises and the properties
destroyed. Thereafter, in a letter dated October 15,
1991, petitioner rejected respondents claim for the
insurance proceeds on the ground that no policy was
issued by it covering the burned oil mill. It stated that
the description of the insured establishment referred to
another building thus: Our policy nos. 306-7432321-9
(Ps 6M) and 306-7432324-4 (Ps 3M) extend insurance
coverage to your oil mill under Building No. 5, whilst
the affected oil mill was under Building No. 14. [5]

(c) P300,000.00 for and as attorneys fees; and

(d) Pay the costs.
SO ORDERED.[6]
Petitioner assailed this judgment before the Court
of Appeals. The appellate court upheld the same in a
Decision promulgated on January 14, 1999, the
pertinent portion of which states:
WHEREFORE, the instant appeal is hereby DISMISSED
for lack of merit and the trial courts Decision dated
October 16, 1995 is hereby AFFIRMED in toto.
SO ORDERED.[7]
Petitioner moved for reconsideration. The motion,
however, was denied for lack of merit in a Resolution
promulgated on June 10, 1999.
Hence, the present course of action, where
petitioner ascribes to the appellate court the following
errors:
(1) The Court of Appeals erred in its conclusion
that the issue of non-payment of the premium was
beyond its jurisdiction because it was raised for
the first time on appeal.[8]
(2) The Court of Appeals erred in its legal
interpretation of 'Fire Extinguishing Appliances
Warranty' of the policy.[9]
(3) With due respect, the conclusion of the Court
of Appeals giving no regard to the parole evidence
rule and the principle of estoppel is erroneous.[10]
The petition is devoid of merit.
The primary reason advanced by the petitioner in
resisting the claim of the respondent is that the burned
oil
mill
is
not
covered
by
any
insurance
policy. According to it, the oil mill insured is specifically
described in the policy by its boundaries in the
following manner:
Front: by a driveway thence at 18 meters distance by
Bldg. No. 2.
Right: by an open space thence by Bldg. No. 4.

A complaint for specific performance and

damages was consequently instituted by the
respondent with the RTC, Branch 53 of Lucena City. On
October 16, 1995, after trial, the lower court rendered
a Decision finding the petitioner liable on the insurance
policy thus:
WHEREFORE, judgment is rendered in favor of the
plaintiff ordering defendant to pay plaintiff:
(a) P4,406,536.40 representing damages for loss
by fire of its insured property with interest at the legal
rate;
(b) P80,000.00 for litigation expenses;

1 | INSURANCE

Left: Adjoining thence an imperfect wall by Bldg. No. 4.

Rear: by an open space thence at 8 meters distance.
However, it argues that this specific boundary
description clearly pertains, not to the burned oil mill,
but to the other mill. In other words, the oil mill gutted
by fire was not the one described by the specific
boundaries in the contested policy.
What exacerbates respondents predicament,
petitioner posits, is that it did not have the supposed
wrong description or mistake corrected. Despite the
fact that the policy in question was issued way back in
1988, or about three years before the fire, and despite

the Important Notice in the policy that Please read and

examine the policy and if incorrect, return it
immediately for alteration, respondent apparently did
not call petitioners attention with respect to the
misdescription.
By way of conclusion, petitioner argues that
respondent is barred by the parole evidence rule from
presenting evidence (other than the policy in question)
of its self-serving intention (sic) that it intended really
to insure the burned oil mill, just as it is barred
by estoppel from claiming that the description of the
insured oil mill in the policy was wrong, because it
retained the policy without having the same corrected
before the fire by an endorsement in accordance with
its Condition No. 28.
These contentions can not pass judicial muster.
In construing the words used descriptive of a
building insured, the greatest liberality is shown by the
courts in giving effect to the insurance.[11] In view of the
custom of insurance agents to examine buildings
before writing policies upon them, and since a mistake
as to the identity and character of the building is
extremely unlikely, the courts are inclined to consider
that the policy of insurance covers any building which
the parties manifestly intended to insure, however
inaccurate the description may be.[12]
Notwithstanding, therefore, the misdescription in
the policy, it is beyond dispute, to our mind, that what
the parties manifestly intended to insure was the new
oil mill. This is obvious from the categorical statement
embodied in the policy, extending its protection:
On machineries and equipment with complete
accessories usual to a coconut oil mill including stocks
of copra, copra cake and copra mills whilst contained in
the new oil mill building, situate (sic) at UNNO.
ALONG NATIONAL HIGH WAY, BO. IYAM, LUCENA CITY
UNBLOCKED.[13](emphasis supplied.)
If the parties really intended to protect the first oil
mill, then there is no need to specify it as new.
Indeed, it would be absurd to assume that
respondent would protect its first oil mill for different
amounts and leave uncovered its second one. As
mentioned earlier, the first oil mill is already covered
under Policy No. 306-7432324-4 issued by the
petitioner. It is unthinkable for respondent to obtain the
other policy from the very same company. The latter
ought to know that a second agreement over that
same realty results in its overinsurance.
The imperfection in the description of the insured
oil mills boundaries can be attributed to a
misunderstanding between the petitioners general
agent, Mr. Alfredo Borja, and its policy issuing clerk,
who made the error of copying the boundaries of the
first oil mill when typing the policy to be issued for the
new one. As testified to by Mr.Borja:
Atty. G. Camaligan:
Q: What did you do when you received the report?
A: I told them as will be shown by the map the
intention really of Mr. Edison Tantuco is to

2 | INSURANCE

cover the new oil mill that is why when I

presented the existing policy of the old policy,
the policy issuing clerk just merely (sic) copied
the wording from the old policy and what she
typed is that the description of the
boundaries from the old policy was copied
but she inserted covering the new oil mill
and to me at that time the important
thing is that it covered the new oil
mill because it is
just within one
compound and there are only two oil
mill[s] and so just enough, I had the policy
prepared. In fact, two policies were prepared
having the same date one for the old one and
the other for the new oil mill and exactly the
same policy period, sir.[14] (emphasis supplied)
It is thus clear that the source of the discrepancy
happened during the preparation of the written
contract.
These facts lead us to hold that the present case
falls within one of the recognized exceptions to the
parole evidence rule. Under the Rules of Court, a party
may present evidence to modify, explain or add to the
terms of the written agreement if he puts in issue in his
pleading, among others, its failure to express the true
intent and agreement of the parties thereto. [15] Here,
the contractual intention of the parties cannot be
understood
from
a
mere
reading
of
the
instrument. Thus,
while
the
contract
explicitly
stipulated that it was for the insurance of the new oil
mill, the boundary description written on the policy
concededly pertains to the first oil mill. This
irreconcilable difference can only be clarified by
admitting evidence aliunde, which will explain the
imperfection and clarify the intent of the parties.
Anent petitioners argument that the respondent is
barred by estoppel from claiming that the description
of the insured oil mill in the policy was wrong, we find
that
the
same
proceeds
from
a
wrong
assumption. Evidence
on
record
reveals
that
respondents operating manager, Mr. Edison Tantuco,
notified Mr. Borja (the petitioners agent with whom
respondent negotiated for the contract) about the
inaccurate description in the policy. However, Mr. Borja
assured
Mr.
Tantuco
that
the
use
of
the
adjective new will distinguish the insured property. The
assurance convinced respondent that, despite the
impreciseness in the specification of the boundaries,
the insurance will cover the new oil mill. This can be
seen from the testimony on cross of Mr. Tantuco:
"ATTY. SALONGA:
Q: You mentioned, sir, that at least in so far as
Exhibit A is concern you have read what the
policy contents.(sic)
Kindly take a look in the page of Exhibit A which
was marked as Exhibit A-2 particularly the
boundaries of the property insured by the
insurance policy Exhibit A, will you tell us as
the manager of the company whether the
boundaries stated in Exhibit A-2 are the
boundaries of the old (sic) mill that was burned
or not.

A: It was not, I called up Mr. Borja regarding

this matter and he told me that what is
important is the word new oil mill. Mr.
Borja said, as a matter of fact, you can never
insured (sic) one property with two (2) policies,
you will only do that if you will make to
increase the amount and it is by indorsement
not by another policy, sir."[16]
We again stress that the object of the court in
construing a contract is to ascertain the intent of the
parties to the contract and to enforce the agreement
which the parties have entered into. In determining
what the parties intended, the courts will read and
construe the policy as a whole and if possible, give
effect to all the parts of the contract, keeping in mind
always, however, the prime rule that in the event of
doubt, this doubt is to be resolved against the
insurer. In determining the intent of the parties to the
contract, the courts will consider the purpose and
object of the contract.[17]
In a further attempt to avoid liability, petitioner
claims that respondent forfeited the renewal policy for
its failure to pay the full amount of the premium and
breach of the Fire Extinguishing Appliances Warranty.
The amount of the premium stated on the face of
the policy was P89,770.20. From the admission of
respondents own witness, Mr. Borja, which the
petitioner cited, the former only paid it P75,147.00,
leaving a difference of P14,623.20. The deficiency,
petitioner argues, suffices to invalidate the policy, in
accordance with Section 77 of the Insurance Code.[18]
The Court of Appeals refused to consider this
contention of the petitioner. It held that this issue was
raised for the first time on appeal, hence, beyond its
jurisdiction to resolve, pursuant to Rule 46, Section 18
of the Rules of Court.[19]
Petitioner, however, contests this finding of the
appellate court. It insists that the issue was raised in
paragraph 24 of its Answer, viz.:
24. Plaintiff has not complied with the condition of
the policy and renewal certificate that the renewal
premium should be paid on or before renewal
date.
Petitioner adds that the issue was the subject of the
cross-examination of Mr. Borja, who acknowledged that
the paid amount was lacking by P14,623.20 by reason
of a discount or rebate, which rebate under Sec. 361 of
the Insurance Code is illegal.
The argument fails to impress. It is true that the
asseverations petitioner made in paragraph 24 of its
Answer ostensibly spoke of the policys condition for
payment of the renewal premium on time and
respondents non-compliance with it. Yet, it did not
contain any specific and definite allegation that
respondent did not pay the premium, or that it did not
pay the full amount, or that it did not pay the amount
on time.
Likewise, when the issues to be resolved in the
trial court were formulated at the pre-trial proceedings,
the question of the supposed inadequate payment was
never raised. Most significant to point, petitioner fatally

3 | INSURANCE

neglected to present, during the whole course of the

trial, any witness to testify that respondent indeed
failed to pay the full amount of the premium. The
thrust of the cross-examination of Mr. Borja, on the
other hand, was not for the purpose of proving this
fact. Though it briefly touched on the alleged
deficiency, such was made in the course of discussing
a discount or rebate, which the agent apparently gave
the respondent. Certainly, the whole tenor of Mr. Borjas
testimony, both during direct and cross examinations,
implicitly assumed a valid and subsisting insurance
policy. It must be remembered that he was called to
the stand basically to demonstrate that an existing
policy issued by the petitioner covers the burned
building.
Finally, petitioner contends that respondent
violated the express terms of the Fire Extinguishing
Appliances Warranty. The said warranty provides:
WARRANTED that during the currency of this
Policy, Fire Extinguishing Appliances as mentioned
below shall be maintained in efficient working
order on the premises to which insurance applies:
- PORTABLE EXTINGUISHERS
- INTERNAL HYDRANTS
- EXTERNAL HYDRANTS
- FIRE PUMP
- 24-HOUR SECURITY SERVICES
BREACH of this warranty shall render this policy
null and void and the Company shall no longer be
liable for any loss which may occur.[20]
Petitioner argues that the warranty clearly
obligates the insured to maintain all the appliances
specified therein. The breach occurred when the
respondent failed to install internal fire hydrants inside
the burned building as warranted. This fact was
admitted by the oil mills expeller operator, Gerardo
Zarsuela.
Again, the argument lacks merit. We agree with
the
appellate
courts
conclusion
that
the
aforementioned warranty did not require respondent to
provide for all the fire extinguishing appliances
enumerated therein. Additionally, we find that neither
did it require that the appliances are restricted to those
mentioned in the warranty. In other words, what the
warranty mandates is that respondent should maintain
in efficient working condition within the premises of the
insured property, fire fighting equipments such as, but
not limited to, those identified in the list, which will
serve as the oil mills first line of defense in case any
part of it bursts into flame.
To be sure, respondent was able to comply with
the warranty. Within the vicinity of the new oil mill can
be found the following devices: numerous portable fire
extinguishers, two fire hoses, [21] fire hydrant,[22] and an
emergency fire engine.[23] All of these equipments were
in efficient working order when the fire occurred.

It ought to be remembered that not only are

warranties strictly construed against the insurer, but
they should, likewise, by themselves be reasonably
interpreted.[24] That
reasonableness
is
to
be
ascertained in light of the factual conditions prevailing
in each case. Here, we find that there is no more need
for an internal hydrant considering that inside the
burned building were: (1) numerous portable fire
extinguishers, (2) an emergency fire engine, and (3) a
fire hose which has a connection to one of the external
hydrants.
IN VIEW WHEREOF, finding no reversible error in
the impugned Decision, the instant petition is hereby
DISMISSED.
SO ORDERED.

G.R. No. L-33637

December 31, 1931

ANG GIOK CHIP, doing business under the name

and style of Hua Bee Kong Si, plaintiff-appellee,
vs.
SPRINGFIELD
FIRE
&
MARINE
INSURANCE
COMPANY, defendant-appellant.
MALCOLM, J.:
An important question in the law of insurance, not
heretofore considered in this jurisdiction and, according
to our information, not directly resolved in California
from which State the Philippine Insurance Act was
taken, must be decided on this appeal for the future
guidance of trial courts and of insurance companies
doing business in the Philippine Islands. This question,
flatly stated, is whether a warranty referred to in the
policy as forming part of the contract of insurance and
in the form of a rider to the insurance policy, is null and
void because not complying with the Philippine
Insurance Act. The court has had the benefit of
instructive briefs and memoranda from the parties and
has also been assisted by a well prepared brief
submitted on behalf of amici curiae.
The admitted facts are these: Ang Giok Chip doing
business under the name and style of Hua Bee Kong Si
was formerly the owner of a warehouse situated at No.
643 Calle Reina Regente, City of Manila. The contents
of the warehouse were insured with the three
insurance companies for the total sum of P60,000. One
insurance policy, in the amount of P10,000, was taken
out with the Springfield Fire & Marine Insurance
Company. The warehouse was destroyed by fire on
January 11, 1928, while the policy issued by the latter
company was in force.
Predicated on this policy the plaintiff instituted action
in the Court of First Instance of Manila against the
defendant to recover a proportional part of the loss
coming to P8,170.59. Four special defenses were
interposed on behalf of the insurance company, one
being planted on a violation of warranty F fixing the
amount of hazardous goods which might be stored in
the insured building. The trial judge in his decision
found against the insurance company on all points, and
gave judgment in favor of the plaintiff for the sum of
P8,188.74. From this judgment the insurance company
has appealed, and it is to the first and fourth errors
assigned that we would address particular attention.
Considering the result at which we arrive, it is
unnecessary for us to discuss three of the four special
defenses which were made by the insurance company.
We think, however, that it would be a reasonable

4 | INSURANCE

deduction to conclude that more than 3 per cent of the

total value of the merchandise contained in the
warehouse constituted hazardous goods, and that this
per cent reached as high as 39. We place reliance on
the consular invoices and on the testimony of the
adjuster, Herridge. Having thus swept to one side all
intervening obstacle, the legal question recurs, as
stated in the beginning of this decision, of whether or
not warranty F was null and void.
To place this question in its proper light, we turn to the
policy issued by the Springfield Fire & Marine Insurance
Company in favor of the plaintiff. The description of the
risk in this policy is as follows:lawphil.net

Ten thousand pesos Philippine Currency.

On general non-hazardous merchandise,
chiefly consisting of chucherias, also
produce, Cacao, Flour, all the property of
the Insured, or held by them in trust, on
commission or on joint account with others,
or for which he is responsible, while
contained during the currency of this policy
in the godown, situate No. 643 Calle Reina
Regent. . . .
This policy is subject to the hereon
attached "Ordinary Short Period Rate
Scale"Warranties A & F, Co-insurances
Clause
"and
Three
Fourths
Loss
Clause," which are forming part of same.
Co-insurance declared:
"P20,000. Sun Insurance Office Ltd. (K &
S)." (Emphasis inserted.) Securely pasted
on the left hand margin of the face of the
policy are five warranties and special
clauses. One of them is warranty F,
specially referred to on the face of the
policy, reading in part as follows:
WARRANTY F
It is hereby declared and agreed that during
the currency of this policy no hazardous
goods be stored in the Building to which
this insurance applies or in any building
communicating
therewith,
provided,
always, however, that the Insured be
permitted to stored a small quantity of the
hazardous goods specified below, but not
exceeding in all 3 per cent of the total value
of the whole of the goods or merchandise
contained in said warehouse, viz; . . . .
The applicable law is found in the Instance
Act, Act No. 2427, as amended, section 65
reading:

"Every express warranty, made at or before the

execution of a policy, must be contained in the policy
itself, or in another instrument signed by the insured
and referred to in the policy, as making a part of it." As
the Philippine law was taken verbatim from the law of
California, in accordance with well settled canons of
statutory construction, the court should follow in
fundamental points, at least, the construction placed
by California courts on a California law. Unfortunately
the researches of counsel reveal no authority coming
from the courts of California which is exactly on all
fours with the case before us. However, there are
certain consideration lying at the basis of California law
and certain indications in the California decisions which
point the way for the decision in this case

Section 65 of the Philippine Insurance Act corresponds

to section 2605 of the Civil Cod of California. The
comments of the Code Examiners of California disclose
that the language of section 2605 was quite different
from that under the Code as adopted in 1872. That
language was found too harsh as to insurance
companies. The Code Examiners' notes state: "The
amendment restores the law as it existed previous to
the Code: See Parsons on Maritime Law, 106, and
Phillips on Insurance, sec. 756." The passage referred
to in Philips on Insurance, was worded by the author as
follows:
"Any express warranty or condition is always a part of
the policy, but, like any other part of an express
contract, may be written in the margin, or contained in
proposals or documents expressly referred to in the
policy, and so made a part of it." The annotator of the
Civil Code of California, after setting forth these facts,
adds:
. . . The section as it now reads is in harmony
with the rule that a warranty may be contained
in another instrument than the policy when
expressly referred to in the policy as forming a
part thereof: . . . .
What we have above stated has been paraphrased
from the decision of the California Court of Appeals in
the case of Isaac Upham Co. vs. United States Fidelity
& Guaranty Co. ( [1922], 211 Pac., 809), and thus
discloses the attitude of the California courts. Likewise
in the Federal courts, in the case of Conner vs.
Manchester Assur. Co. ([1904], 130 Fed., 743), section
2605 of the Civil Code of California came under
observation, and it was said that it "is in effect an
affirmance of the generally accepted doctrine
applicable to such contracts."
We, therefore, think it wrong to hold that the California
law represents a radical departure from the basic
principles governing the law of insurance. We are more
inclined to believe that the codification of the law of
California had exactly the opposite purpose, and that in
the language of the Federal court it was but an
affirmance of the generally accepted doctrine
applicable to such contracts. This being true, we turn
to two of such well recognized doctrines. In the first
place, it is well settled that a rider attached to a policy
is a part of the contract, to the same extent and with
like effect as it actually embodied therein. (I Couch,
Cyclopedia of Insurance Law, sec. 159.) In the second
place, it is equally well settled that an express
warranty must appear upon the face of the policy, or
be clearly incorporated therein and made a part
thereof by explicit reference, or by words clearly
evidencing such intention. (4 Couch, Cyclopedia of
Insurance Law, sec. 862.)
Section 65 of the Insurance Act and its counterpart,
section 265 of the Civil Code of California, will bear
analysis as tested by reason and authority. The law
says that every express warranty must be "contained
in the policy itself." The word "contained," according to
the
dictionaries,
means
"included,"
inclosed,"
"embraced," "comprehended," etc. When, therefore,
the courts speak of a rider attached to the policy, and
thus
"embodied" therein, or of a warranty
"incorporated" in the policy, it is believed that the
phrase "contained in the policy itself" must necessarily
include such rider and warranty. As to the alternative
relating to "another instrument," "instrument" as here
used could not mean a mere slip of paper like a rider,
but something akin to the policy itself, which in section
48 of the Insurance Act is defined as "The written
instrument, in which a contract of insurance is set
forth." In California, every paper writing is not
necessarily an "instrument" within the statutory
meaning of the term. The word "instrument has a well
defined definition in California, and as used in the

5 | INSURANCE

Codes invariably means some written paper or

instrument signed and delivered by one person to
another, transferring the title to, or giving a lien, on
property, or giving a right to debt or duty. (Hoag vs.
Howard [1880], 55 Cal., 564; People vs. Fraser[1913],
137 Pac., 276.) In other words, the rider, warranty F, is
contained in the policy itself, because by the contract
of insurance agreed to by the parties it is made to form
a part of the same, but is not another instrument
signed by the insured and referred to in the policy as
forming a part of it.
Again, referring to the jurisprudence of California,
another rule of insurance adopted in that State is in
point. It is admitted that the policy before us was
accepted by the plaintiff. The receipt of this policy by
the insured without objection binds both the acceptor
and the insured to the terms thereof. The insured may
not thereafter be heard to say that he did not read the
policy or know its terms, since it is his duty to read his
policy and it will be assumed that he did so. In
California Jurisprudence, vol. 14, p. 427, from which
these statements are taken with citations to California
decisions, it is added that it has been held that where
the holder of a policy discovers a mistake made by
himself and the local agent in attaching the wrong rider
to his application, elects to retain the policy issued to
him, and neither requests the issuance of a different
one nor offers to pay the premium requisite to insure
against the risk which he believe the rider to cover, he
thereby accepts the policy.
We are given to understand, and there is no indication
to the contrary, that we have here a standard
insurance policy. We are further given to understand,
and there is no indication to the contrary, that the
issuance of the policy in this case with its attached
rider conforms to well established practice in the
Philippines and elsewhere. We are further given to
understand, and there is no indication to the contrary,
that there are no less than sixty-nine insurance
companies doing business in the Philippine Islands with
outstanding policies more or less similar to the one
involved in this case, and that to nullify such policies
would place an unnecessary hindrance in the
transaction of insurance business in the Philippines.
These are matters of public policy. We cannot believe
that it was ever the legislative intention to insert in the
Philippine Law on Insurance an oddity, an incongruity,
entirely out of harmony with the law as found in other
jurisdiction, and destructive of good business practice.
We have studied this case carefully and having done so
have reached the definite conclusion that warranty F, a
rider attached to the face of the insurance policy, and
referred to in contract of insurance, is valid and
sufficient under section 65 of the Insurance Act.
Accordingly, sustaining the first and fourth errors
assigned, and it being unnecessary to discuss the
remaining errors, the result will be to reverse the
judgment appealed from and to order the dismissal of
the complaint, without special pronouncement as to
costs in either instance.

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.
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
"1-K", 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

6 | INSURANCE

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 defendantappellant, as insurer, to avoid its
liability thereunder. It appears on the
face of said policy that a co-insurance
in the amount of P20,000.00 was
secured from the Great American
Insurance and was declared by the
plaintiff-appellee 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
cross-examined 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. 3536). 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 defendantappellant 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.

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.

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 coinsurance, 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 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:

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

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

7 | INSURANCE

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.)

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)
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 nondisclosure 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

8 | INSURANCE

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 ORDERED.

G.R. No. L-24833

September 23, 1968

FIELDMEN'S INSURANCE CO., INC., petitioner,

vs.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. and
COURT OF APPEALS, respondents.
FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co.,
Inc., was not allowed to escape liability under a
common carrier insurance policy on the pretext that
what was insured, not once but twice, was a private
vehicle and not a common carrier, the policy being
issued upon the insistence of its agent who discounted
fears of the insured that his privately owned vehicle
might not fall within its terms, the insured moreover
being "a man of scant education," finishing only the
first grade. So it was held in a decision of the lower
court thereafter affirmed by respondent Court of
Appeals. Petitioner in seeking the review of the above
decision of respondent Court of Appeals cannot be so
sanguine as to entertain the belief that a different
outcome could be expected. To be more explicit, we
sustain the Court of Appeals.
The facts as found by respondent Court of Appeals,
binding upon us, follow: "This is a peculiar case.
Federico Songco of Floridablanca, Pampanga, a man of
scant education being only a first grader ..., owned a
private jeepney with Plate No. 41-289 for the year
1960. On September 15, 1960, as such private vehicle
owner, he was induced by Fieldmen's Insurance
Company Pampanga agent Benjamin Sambat to apply
for a Common Carrier's Liability Insurance Policy
covering his motor vehicle ... Upon paying an annual
premium of P16.50, defendant Fieldmen's Insurance
Company, Inc. issued on September 19, 1960,
Common Carriers Accident Insurance Policy No. 45-HO4254 ... the duration of which will be for one (1) year,
effective September 15, 1960 to September 15, 1961.
On September 22, 1961, the defendant company, upon
payment of the corresponding premium, renewed the
policy by extending the coverage from October 15,
1961 to October 15, 1962. This time Federico Songco's
private jeepney carried Plate No. J-68136-Pampanga1961. ... On October 29, 1961, during the effectivity of
the renewed policy, the insured vehicle while being
driven by Rodolfo Songco, a duly licensed driver and
son of Federico (the vehicle owner) collided with a car
in the municipality of Calumpit, province of Bulacan, as
a result of which mishap Federico Songco (father) and
Rodolfo Songco (son) died, Carlos Songco (another
son), the latter's wife, Angelita Songco, and a family
friend by the name of Jose Manuel sustained physical
injuries of varying degree." 1

It was further shown according to the decision of

respondent Court of Appeals: "Amor Songco, 42-yearold son of deceased Federico Songco, testifying as
witness, declared that when insurance agent Benjamin
Sambat was inducing his father to insure his vehicle,
he butted in saying: 'That cannot be, Mr. Sambat,
because our vehicle is an "owner" private vehicle and
not for passengers,' to which agent Sambat replied:
'whether our vehicle was an "owner" type or for
passengers it could be insured because their company
is not owned by the Government and the Government
has nothing to do with their company. So they could do
what they please whenever they believe a vehicle is
insurable' ... In spite of the fact that the present case
was filed and tried in the CFI of Pampanga, the
defendant company did not even care to rebut Amor
Songco's testimony by calling on the witness-stand
agent Benjamin Sambat, its Pampanga Field
Representative." 2
The plaintiffs in the lower court, likewise respondents
here, were the surviving widow and children of the
deceased Federico Songco as well as the injured
passenger Jose Manuel. On the above facts they
prevailed, as had been mentioned, in the lower court
and in the respondent Court of Appeals.1awphl.nt
The basis for the favorable judgment is the doctrine
announced in Qua Chee Gan v. Law Union and Rock
Insurance Co., Ltd., 3 with Justice J. B. L. Reyes speaking
for the Court. It is now beyond question that where
inequitable conduct is shown by an insurance firm, it is
"estopped from enforcing forfeitures in its favor, in
order to forestall fraud or imposition on the insured." 4
As much, if not much more so than the Qua Chee
Gan decision, this is a case where the doctrine of
estoppel undeniably calls for application. After
petitioner Fieldmen's Insurance Co., Inc. had led the
insured Federico Songco to believe that he could
qualify under the common carrier liability insurance
policy, and to enter into contract of insurance paying
the premiums due, it could not, thereafter, in any
litigation arising out of such representation, be
permitted to change its stand to the detriment of the
heirs of the insured. As estoppel is primarily based on
the doctrine of good faith and the avoidance of harm
that will befall the innocent party due to its injurious
reliance, the failure to apply it in this case would result
in a gross travesty of justice.
That is all that needs be said insofar as the first alleged
error of respondent Court of Appeals is concerned,
petitioner being adamant in its far-from-reasonable
plea that estoppel could not be invoked by the heirs of
the insured as a bar to the alleged breach of warranty
and condition in the policy. lt would now rely on the
fact that the insured owned a private vehicle, not a
common carrier, something which it knew all along
when not once but twice its agent, no doubt without
any objection in its part, exerted the utmost pressure
on the insured, a man of scant education, to enter into
such a contract.
Nor is there any merit to the second alleged error of
respondent Court that no legal liability was incurred
under the policy by petitioner. Why liability under the
terms of the policy 5 was inescapable was set forth in
the decision of respondent Court of Appeals. Thus:
"Since some of the conditions contained in the policy
issued by the defendant-appellant were impossible to

9 | INSURANCE

comply with under the existing conditions at the time

and 'inconsistent with the known facts,' the insurer 'is
estopped from asserting breach of such conditions.'
From this jurisprudence, we find no valid reason to
deviate and consequently hold that the decision
appealed from should be affirmed. The injured parties,
to wit, Carlos Songco, Angelito Songco and Jose
Manuel, for whose hospital and medical expenses the
defendant company was being made liable, were
passengers of the jeepney at the time of the
occurrence, and Rodolfo Songco, for whose burial
expenses the defendant company was also being made
liable was the driver of the vehicle in question. Except
for the fact, that they were not fare paying passengers,
their status as beneficiaries under the policy is
recognized therein." 6
Even if it be assumed that there was an ambiguity, an
excerpt from the Qua Chee Gan decision would reveal
anew the weakness of petitioner's contention. Thus:
"Moreover, taking into account the well known rule that
ambiguities or obscurities must be strictly interpreted
against the party that caused them, the 'memo of
warranty' invoked by appellant bars the latter from
questioning the existence of the appliances called for
in the insured premises, since its initial expression, 'the
undernoted appliances for the extinction of fire being
kept on the premises insured hereby, ... it is hereby
warranted ...,' admits of interpretation as an admission
of the existence of such appliances which appellant
cannot now contradict, should the parol evidence rule
apply." 7
To the same effect is the following citation from the
same leading case: "This rigid application of the rule on
ambiguities has become necessary in view of current
business practices. The courts cannot ignore that
nowadays monopolies, cartels and concentration of
capital, endowed with overwhelming economic power,
manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party
may not change one whit, his participation in the
'agreement' being reduced to the alternative to 'take it
or leave it' labelled since Raymond Saleilles 'contracts
by adherence' (contrats d'adhesion), in contrast to
those entered into by parties bargaining on an equal
footing, such contracts (of which policies of insurance
and international bills of lading are prime examples)
obviously call for greater strictness and vigilance on
the part of courts of justice with a view to protecting
the weaker party from abuses and imposition, and
prevent their becoming traps for the unwary (New Civil
Code. Article 24; Sent. of Supreme Court of Spain, 13
Dec. 1934, 27 February 1942)." 8
The last error assigned which would find fault with the
decision of respondent Court of Appeals insofar as it
affirmed the lower court award for exemplary damages
as well as attorney's fees is, on its face, of no
persuasive force at all.
The conclusion that inescapably emerges from the
above is the correctness of the decision of respondent
Court of Appeals sought to be reviewed. For, to borrow
once again from the language of the Qua Chee Gan
opinion: "The contract of insurance is one of perfect
good faith (uberima fides) not for the insured alone,but
equally so for the insurer; in fact, it is more so for the
latter, since its dominant bargaining position carries
with it stricter responsibility." 9

This is merely to stress that while the morality of the

business world is not the morality of institutions of
rectitude like the pulpit and the academe, it cannot
descend so low as to be another name for guile or
deception. Moreover, should it happen thus, no court of
justice should allow itself to lend its approval and
support.1awphl.nt
We have no choice but to recognize the monetary
responsibility of petitioner Fieldmen's Insurance Co.,
Inc. It did not succeed in its persistent effort to avoid
complying with its obligation in the lower court and the
Court of Appeals. Much less should it find any
receptivity from us for its unwarranted and unjustified
plea to escape from its liability.
WHEREFORE, the decision of respondent Court of
Appeals of July 20, 1965, is affirmed in its entirety.
Costs against petitioner Fieldmen's Insurance Co., Inc.

G.R. No. L-9370

March 31, 1915

K. S. YOUNG, plaintiff-appellee,
vs.
THE MIDLAND TEXTILE INSURANCE
COMPANY, defendant-appellant.
JOHNSON, J.:
The purpose of the present action is to recover the sum
of P3,000 upon an insurance policy. The lower court
rendered a judgment in favor of the plaintiff and
against the defendant for the sum of P2,708.78, and
costs. From that judgment the defendant appealed to
this court.
The undisputed facts upon which said action is based
are as follows:
1. The plaintiff conducted a candy and fruit
store on the Escolta, in the city of Manila, and
occupied a building at 321 Calle Claveria, as a
residence and bodega (storehouse).
2. On the 29th of May, 1912, the defendant, in
consideration of the payment of a premium of
P60, entered into a contract of insurance with
the plaintiff (policy No. 509105) by the terms of
which the defendant company, upon certain
conditions, promised to pay to the plaintiff the
sum of P3,000, in case said residence
and bodega and contends should be destroyed
by fire.
3. On the conditions of said contract of
insurance is found in "warranty B" and is as
follows: "Waranty B. It is hereby declared
and agreed that during the pendency of this
policy no hazardous goods stored or kept for
sale, and no hazardous trade or process be
carried on, in the building to which this
insurance applies, or in any building connected
therewith."
4. On the 4th or 5th of February, 1913, the
plaintiff
placed
in
said
residence
and bodega three boxes, 18 by 18 by 20 inches

10 | I N S U R A N C E

measurement, which belonged to him and

which were filed with fireworks.
5. On the 18th day of March, q913, said
residence and bodega and the contents thereof
were partially destroyed by fire.
6. Said fireworks had been given to the plaintiff
by the former owner of the Luneta Candy
Store; that the plaintiff intended to use the
same in the celebration of the Chinese new
year; that the authorities of the city of Manila
had prohibited the use of fireworks on said
occasion, and that the plaintiff then placed the
same in said bodega, where they remained
from the 4th or 5th of February, 1913, until
after the fire of the 18th of March, 1913.
7. Both of the parties agree that said fireworks
come within the phrase "hazardous goods,"
mentioned in said "warranty B" of the policy.
8. That said fireworks were found in a part of
the building not destroyed by the fire; that they
in no way contributed to the fire, or to the loss
occasioned thereby.
The only question presented by the parties is whether
or not the placing of said fireworks in the building
insured, under the conditions above enumerated, they
being "hazardous goods," is a violation of the terms of
the contract of insurance and especially of "warranty
B." "Warranty B" provides that "no hazardous goods
be stored" in the building insured. It is admitted by
both parties that the fireworks are "hazardous goods."
The defendant alleged that they were "stored." The
plaintiff contends that under all the facts and
circumstances of the case, they were not "stored" in
said building, and that the placing of them in the
building was not a violation of the terms of the
contract. Both the plaintiff and defendant agree that if
they were "hazardous goods," and if they were
"stored," then the act of the plaintiff was a violation of
the terms of the contract of insurance and the
defendant was justified in repudiating its liability
thereunder.
This leads us to a consideration of the meaning of the
accord "stored" as used in said "warranty B." While the
word "stored" has been variously defined by authors,
as well as by courts, we have found no case exactly
analogous to the present. The plaintiff says that he
placed said fireworks in the bodega after he had been
notified that he could not use them on the Chinese new
year, in order that he might later send them to a friend
in the provinces. Whether a particular article is "stored"
or not must, in some degree, depend upon the
intention of the parties. The interpretation of the word
"stored" is quite difficult, in view of the many decisions
upon the various conditions presented. Nearly all of the
cases cited by the lower court are cases where the
article was being put to some reasonable and actual
use, which might easily have been permitted by the
terms of the policy, and within the intention of the
parties, and excepted from the operation of the
warranty, like the present. Said decision are upon
cases like:
1. Where merchants have had or kept the
"hazardous" articles in small quantities, and for

actual daily use, for safe, such as gasoline,

gunpowder, etc.;
2. Where such articles have been brought on
the premises for actual use thereon, and in
small quantities, such as oil, paints, etc; and
3. Where such articles or goods were used for
lighting purpose, and in small quantities.
The author of the Century Dictionary defines the world
"store" to be a deposit in a store or warehouse for
preservation or safe keeping; o place in a warehouse or
other place of deposit for safe keeping. See also the
definitions given by the Standard Dictionary, to the
same effect.
Said definitions, of course, do not include a deposit in a
store, in small quantities, for daily use. "Daily use"
precludes the idea of a deposit for preservation or safe
keeping, as well as a deposit for future consumption, or
safe keeping.
In the present case no claim is made that the
"hazardous goods" were placed in the bodega for
present or daily use. It is admitted that they were
placed in the bodega "for future use," or for future
consumption, or for safe keeping. The plaintiff makes
no claim that he deposited them there with any other
idea than "for future use" for future consumption. It
seems clear to us that the "hazardous goods" in
question were "stored" in the bodega, as that word is
generally defined. That being true, suppose the
defendant had made an examination of the premises,
even in the absence of a fire, and had found he
"hazardous goods" there, under the conditions above
described, would it not have been justified, then and
there, in declaring the policy null and of no effect by
reason of a violation of its terms on he par of the
plaintiff? If it might, then may it no repudiate is liability,
even after the fire? If the "warranty" is a term of the
contract, will not its violation cause a breach and justify
noncompliance or a repudiation?
Contracts of insurance are contracts of indemnity upon
the terms and conditions specified in the policy. The
parties have a right to impose such reasonable
conditions at the time of the making of the contract as
they may deem wise and necessary. The rate of
premium is measured by the character of the risk
assumed. The insurance company, for a comparatively
small consideration, undertakes to guarantee the
insured against loss or damage, upon the terms and
conditions agreed upon, and upon no other, and when
called upon to pay, in case of loss, the insurer,
therefore, may justly insist upon a fulfillment of these
terms. If the insured cannot bring himself within the
conditions of the policy, he is not entitled to recover for
the loss. The terms of the policy constitute the
measure of the insurer's liability, and in order to
recover the insured must show himself within those
terms; and if it appears that the contract has been
terminated by a violation, on the part of the insured, of
its conditions, then there can be no right of
recovery. The compliance of the insured with the terms
of the contract is a condition precedent to the right of
recovery. If the insured has violated or failed to
perform the conditions of the contract, and such a
violation or want of performance has not been waived
by the insurer, then the insured cannot recover. Courts

11 | I N S U R A N C E

are not permitted to make contracts for the parties.

The function and duty of the courts consist simply in
enforcing and carrying out he contracts actually made.
While it is true, as a general rule, that contracts of
insurance are construed most favorably to the insured,
yet contracts of insurance, like other contracts, 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 understood in their plain, ordinary and
popular sense. (Imperial Fire Ins. Co. vs. County of
Coos, 151 U. S., 542; Kyte vs. Commercial Union
Assurance Co., 149 Mass., 116, 122.) The conditions of
contracts of insurance, when plainly expressed in a
policy, are binding upon the parties and should be
enforced by the courts, if the evidence brings the case
clearly within their meaning and intent. It tends to
bring the law itself into disrepute when, by astute and
subtle distinctions, a plain case is attempted to be
taken without the operation of a clear, reasonable, and
material obligation of the contract. (Mack vs. Rochester
German Ins. Co., 106 N. Y., 560, 564.)
The appellant argues, however, that in view of the fact
that the "storing" of the fireworks on the premises of
the insured did not contribute in any way to the
damage occasioned by the fire, he should be permitted
to recover that the "storing" of the "hazardous
goods" in no way caused injury to the defendant
company. That argument, however, is beside the
question, if the "storing" was a violation of the terms of
the contract. The violation of the terms of the contract,
by virtue of the provisions of the policy itself,
terminated, at the election of either party, he
contractual relations. (Kyte vs. Commercial Union
Assurance Co., 149 Mass., 116, 122.) The plaintiff paid
a premium based upon the risk at the time the policy
was issued. Certainly it cannot be denied that the
placing of the firecrackers in the building insured
increased the risk. The plaintiff had not paid a premium
based upon the increased risk, neither had the
defendant issued a policy upon the theory of a different
risk. The plaintiff was enjoying, if his contention may
be allowed may be allowed, the benefits of an
insurance policy upon one risk, whereas, as a matter of
fact, it was issued upon an entirely different risk. The
defendant had neither been paid nor had issues a
policy to cover the increased risk. An increase of risk
which is substantial and which is continued for a
considerable period of time, is a direct and certain
injury to the insurer, and changes the basis upon which
the contract of insurance rests. (Kyte vs. Commercial
Union Assurance Co. (supra); Frost's Detroit Lumber
Worksvs. Millers' Mutual Ins. Co., 37 Minn., 300, 302;
Moore vs. Phoenix
Ins.
Co.,
62
N.
H.,
240;
Ferree vs. Oxford Fire & Life Ins. Co., 67 Pa. State, 373.)
Therefore and for the foregoing reasons, the judgment
of the lower court is hereby revoked and the defendant
is hereby relieved from any responsibility under said
complaint, and, without any finding as to costs, it is so
ordered.

[G.R. No. 119655. May 24, 1996]

SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY
and OFELIA M. RORALDO, VICTORINA M.
RORALDO, VIRGILIO M. RORALDO, MYRNA
M.
RORALDO
and
ROSABELLA
M.

RORALDO, petitioners,
vs. COURT
APPEALS
and
FORTUNE
LIFE
GENERAL
INSURANCE
INC., respondents.

OF
AND
CO.,

D E C I S I O N*
BELLOSILLO, J.:
May a fire insurance policy be valid, binding and
enforceable upon mere partial payment of premium?
On 22 January 1987 private respondent Fortune
Life and General Insurance Co., Inc. (FORTUNE) issued
Fire Insurance Policy No. 136171 in favor of Violeta R.
Tibay and/or Nicolas Roraldo on their two-storey
residential building located at 5855 Zobel Street,
Makati City, together with all their personal effects
therein. The insurance was for P600,000.00 covering
the period from 23 January 1987 to 23 January
1988. On 23 January 1987, of the total premium of
P2,983.50, petitioner Violeta Tibay only paid P600.00
thus leaving a considerable balance unpaid.
On 8 March 1987 the insured building was
completely destroyed by fire. Two days later or on 10
March 1987 Violeta Tibay paid the balance of the
premium. On the same day, she filed with FORTUNE a
claim on the fire insurance policy. Her claim was
accordingly referred to its adjuster, Goodwill
Adjustment Services, Inc. (GASI), which immediately
wrote Violeta requesting her to furnish it with the
necessary documents for the investigation and
processing
of
her
claim. Petitioner
forthwith
complied. On 28 March 1987 she signed a non-waiver
agreement with GASI to the effect that any action
taken by the companies or their representatives in
investigating the claim made by the claimant for his
loss which occurred at 5855 Zobel Roxas, Makati on
March 8, 1987, or in the investigating or ascertainment
of the amount of actual cash value and loss, shall not
waive or invalidate any condition of the policies of such
companies held by said claimant, nor the rights of
either or any of the parties to this agreement, and
such action shall not be, or be claimed to be, an
admission of liability on the part of said companies or
any of them.[1]
In a letter dated 11 June 1987 FORTUNE denied
the claim of Violeta for violation of Policy Condition No.
2 and of Sec. 77 of the Insurance Code. Efforts to settle
the case before the Insurance Commission proved
futile. On 3 March 1988 Violeta and the other
petitioners sued FORTUNE for damages in the amount
of P600,000.00 representing the total coverage of the
fire insurance policy plus 12% interest per annum, P
100,000.00 moral damages, and attorneys fees
equivalent to 20% of the total claim.
On 19 July 1990 the trial court ruled for petitioners
and adjudged FORTUNE liable for the total value of the
insured building and personal properties in the amount
of P600,000.00 plus interest at the legal rate of 6% per
annum from the filing of the complaint until full
payment, and attorneys fees equivalent to 20% of the
total amount claimed plus costs of suit.[2]
On 24 March 1995 the Court of Appeals reversed
the court a quo by declaring FORTUNE not to be liable
to plaintiff-appellees therein but ordering defendant-

12 | I N S U R A N C E

appellant to return to the former the premium of

P2,983.50 plus 12% interest from 10 March 1987 until
full payment.[3]
Hence this petition for review with petitioners
contending mainly that contrary to the conclusion of
the appellate court, FORTUNE remains liable under the
subject fire insurance policy inspite of the failure of
petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm
the Court of Appeals.
Insurance is a contract whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event.[4] The consideration is the premium,
which must be paid at the time and in the way and
manner specified in the policy, and if not so paid, the
policy will lapse and be forfeited by its own terms. [5]
The pertinent provisions in the Policy on premium
read
THIS POLICY OF INSURANCE WITNESSETH, THAT only
after payment to the Company in accordance with
Policy Condition No. 2 of the total premiums by the
insured as stipulated above for the period
aforementioned for insuring against Loss or Damage by
Fire or Lightning as herein appears, the Property herein
described x x x
2. This policy including any renewal thereof and/or any
endorsement thereon is not in force until the premium
has been fully paid to and duly receipted by the
Company in the manner provided herein.
Any supplementary agreement seeking to amend this
condition prepared by agent, broker or Company
official, shall be deemed invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where
corresponding rules and regulations which are or may
hereafter be in force provide for the payment of the
stipulated premiums in periodic installments at fixed
percentage, it is hereby declared, agreed and
warranted that this policy shall be deemed effective,
valid and binding upon the Company only when the
premiums therefor have actually been paid in full and
duly acknowledged in a receipt signed by any
authorized official or representative/agent of the
Company in such manner as provided herein, (Italics
supplied).[6]
Clearly the Policy provides for payment of
premium in full. Accordingly, where the premium has
only been partially paid and the balance paid only after
the peril insured against has occurred, the insurance
contract did not take effect and the insured cannot
collect at all on the policy. This is fully supported by
Sec. 77 of the Insurance Code which provides
SEC. 77. An insurer is entitled to payment of the
premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement
to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding
unless and until the premium thereof has been

paid, except in the case of a life or an industrial life

policy whenever the grace period provision applies
(Italics supplied).
Apparently the crux of the controversy lies in the
phrase unless and until the premium thereof has been
paid. This leads us to the manner of payment
envisioned by the law to make the insurance policy
operative
and binding.
For whatever
judicial
construction may be accorded the disputed phrase
must ultimately yield to the clear mandate of the
law. The principle that where the law does not
distinguish the court should neither distinguish
assumes that the legislature made no qualification on
the use of a general word or expression. In Escosura v.
San Miguel Brewery, inc.,[7] the Court through Mr.
Justice Jesus G. Barrera, interpreting the phrase with
pay used in connection with leaves of absence with pay
granted to employees, ruled x x x the legislative practice seems to be that when the
intention is to distinguish between full and partial
payment, the modifying term is used x x x
Citing C. A. No. 647 governing maternity leaves of
married women in government, R. A. No. 679
regulating employment of women and children, R.A.
No. 843 granting vacation and sick leaves to judges of
municipal courts and justices of the peace, and finally,
Art. 1695 of the New Civil Code providing that every
househelp shall be allowed four (4) days vacation each
month, which laws simply stated with pay, the Court
concluded that it was undisputed that in all these laws
the phrase with pay used without any qualifying
adjective meant that the employee was entitled to full
compensation during his leave of absence.
Petitioners maintain otherwise. Insisting that
FORTUNE is liable on the policy despite partial payment
of the premium due and the express stipulation thereof
to the contrary, petitioners rely heavily on the 1967
case of Philippine Phoenix and Insurance Co., Inc. v.
Woodworks, Inc.[8] where the Court through Mr. Justice
Arsenio P. Dizon sustained the ruling of the trial court
that partial payment of the premium made the policy
effective during the whole period of the policy. In that
case, the insurance company commenced action
against the insured for the unpaid balance on a fire
insurance policy. In its defense the insured claimed that
nonpayment of premium produced the cancellation of
the insurance contract. Ruling otherwise the Court held
It is clear x x x that on April 1, 1960, Fire Insurance
Policy No. 9652 was issued by appellee and delivered
to appellant, and that on September 22 of the same
year, the latter paid to the former the sum of
P3,000.00 on account of the total premium of
P6,051.95 due thereon. There is, consequently, no
doubt at all that, as between the insurer and the
insured, there was not only a perfected contract of
insurance but a partially performed one as far as the
payment of the agreed premium was
concerned. Thereafter the obligation of the insurer to
pay the insured the amount, for which the policy was
issued in case the conditions therefor had been
complied with, arose and became binding upon it,
while the obligation of the insured to pay the
remainder of the total amount of the premium due
became demandable.

13 | I N S U R A N C E

The 1967 Phoenix case is not persuasive; neither is it

decisive of the instant dispute. For one, the factual
scenario is different. In Phoenix it was the insurance
company that sued for the balance of the premium,
i.e., it recognized and admitted the existence of an
insurance contract with the insured. In the case before
us, there is, quite unlike in Phoenix, a specific
stipulation that (t)his policy xxx is not in force until the
premium has been fully paid and duly receipted by the
Company x x x. Resultantly, it is correct to say that
in Phoenix a contract was perfected upon partial
payment of the premium since the parties had not
otherwise stipulated that prepayment of the premium
in full was a condition precedent to the existence of a
contract.
In Phoenix, by accepting the initial payment of
P3,000.00 and then later demanding the remainder of
the premium without any other precondition to its
enforceability as in the instant case, the insurer in
effect had shown its intention to continue with the
existing contract of insurance, as in fact it was
enforcing its right to collect premium, or exact specific
performance from the insured. This is not so here. By
express agreement of the parties, no vinculum juris or
bond of law was to be established until full payment
was effected prior to the occurrence of the risk insured
against.
In Makati Tuscany Condominium Corp. v. Court of
Appeals[9] the parties mutually agreed that the
premiums could be paid in installments, which in fact
they did for three (3) years, hence, this Court refused
to invalidate the insurance policy. In giving effect to the
policy, the Court quoted with approval the Court of
Appeals
The obligation to pay premiums when due is ordinarily
an indivisible obligation to pay the entire
premium. Here, the parties x x x agreed to make the
premiums payable in installments, and there is no
pretense that the parties never envisioned to make the
insurance contract binding between them. It was
renewed for two succeeding years, the second and
third policies being a renewal/replacement for the
previous one. And the insured never informed the
insurer that it was terminating the policy because the
terms were unacceptable.
While it maybe true that under Section 77 of the
Insurance Code, the parties may not agree to make the
insurance contract valid and binding without payment
of premiums, there is nothing in said section which
suggests that the parties may not agree to allow
payment of the premiums in installment, or to consider
the contract as valid and binding upon payment of the
first premium. Otherwise we would allow the insurer to
renege on its liability under the contract, had a loss
incurred (sic) before completion of payment of the
entire premium, despite its voluntary acceptance of
partial payments, a result eschewed by basic
considerations of fairness and equity x x x.
These
two
(2)
cases, Phoenix and Tuscany, adequately demonstrate
the waiver, either express or implied, of prepayment in
full by the insurer: impliedly, by suing for the balance
of the premium as inPhoenix, and expressly, by
agreeing to make premiums payable in installments as
in Tuscany. But contrary to the stance taken by
petitioners, there is no waiver express or implied in the

case at bench. Precisely, the insurer and the insured

expressly stipulated that (t)his policy including any
renewal thereof and/or any indorsement thereon is not
in force until the premium has been fully paid to and
duly receipted by the Company x x x and that this
policy shall be deemed effective, valid and binding
upon the Company only when the premiums therefor
have actually been paid in full and duly acknowledged.
Conformably with the aforesaid stipulations
explicitly worded and taken in conjunction with Sec. 77
of the Insurance Code the payment of partial premium
by the assured in this particular instance should not be
considered the payment required by the law and the
stipulation of the parties. Rather, it must be taken in
the concept of a deposit to be held in trust by the
insurer until such time that the full amount has been
tendered and duly receipted for. In other words, as
expressly agreed upon in the contract, full payment
must be made before the risk occurs for the policy to
be considered effective and in force.
Thus, no vinculum juris whereby the insurer bound
itself to indemnify the assured according to law ever
resulted from the fractional payment of premium. The
insurance contract itself expressly provided that the
policy would be effective only when the premium was
paid in full. It would have been altogether different
were it not so stipulated. Ergo, petitioners had absolute
freedom of choice whether or not to be insured by
FORTUNE under the terms of its policy and they freely
opted to adhere thereto.
Indeed, and far more importantly, the cardinal
polestar in the construction of an insurance contract is
the intention of the parties as expressed in the policy.
[10]
Courts have no other function but to enforce the
same. The rule that contracts of insurance will be
construed in favor of the insured and most strongly
against the insurer should not be permitted to have the
effect of making a plain agreement ambiguous and
then construe it in favor of the insured. [11] Verily, it is
elemental law that the payment of premium is
requisite to keep the policy of insurance in force. If the
premium is not paid in the manner prescribed in the
policy as intended by the parties the policy is
ineffective. Partial payment even when accepted as a
partial payment will not keep the policy alive even for
such fractional part of the year as the part payment
bears to the whole payment.[12]
Applying
further
the
rules
of
statutory
construction, the position maintained by petitioners
becomes even more untenable. The case of South Sea
Surety and Insurance Company, Inc. v. Court of
Appeals,[13] speaks only of two (2) statutory exceptions
to the requirement of payment of the entire premium
as a prerequisite to the validity of the insurance
contract. These exceptions are: (a) in case the
insurance coverage relates to life or industrial life
(health) insurance when a grace period applies, and (b)
when the insurer makes a written acknowledgment of
the receipt of premium, this acknowledgment being
declared by law to, be then conclusive evidence of the
premium payment.[14]
A maxim of recognized practicality is the rule that
the expressed exception or exemption excludes
others. Exceptio firm at regulim in casibus non
exceptis. The express mention of exceptions operates
to exclude other exceptions; conversely, those which

14 | I N S U R A N C E

are not within the enumerated exceptions are deemed

included in the general rule. Thus, under Sec. 77, as
well as Sec. 78, until the premium is paid, and the law
has not expressly excepted partial payments, there is
no valid and binding contract. Hence, in the absence of
clear waiver of prepayment in full by the insurer, the
insured cannot collect on the proceeds of the policy.
In the desire to safeguard the interest of the
assured, itmust not be ignored that the contract of
insurance is primarily a risk-distributing device, a
mechanism by which all members of a group exposed
to a particular risk contribute premiums to an
insurer. From these contributory funds are paid
whatever losses occur due to exposure to the peril
insured against. Each party therefore takes a risk: the
insurer, that of being compelled upon the happening of
the contingency to pay the entire sum agreed upon,
and the insured, that of parting with the amount
required as premium, without receiving anything
therefor in case the contingency does not happen. To
ensure payment for these losses, the law mandates all
insurance companies to maintain a legal reserve fund
in favor of those claiming under their policies. [15] It
should be understood that the integrity of this fund
cannot be secured and maintained if by judicial fiat
partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer
despite an express agreement to the contrary. For what
could prevent the insurance applicant from deliberately
or wilfully holding back full premium payment and wait
for the risk insured against to transpire and then
conveniently pass on the balance of the premium to be
deducted from the proceeds of the insurance? Worse,
what if the insured makes an initial payment of only
10%, or even 1%, of the required premium, and when
the risk occurs simply points to the proceeds from
where to source the balance? Can an insurance
company then exist and survive upon the payment of
1%, or even 10%, of the premium stipulated in the
policy on the basis that, after all, the insurer can
deduct from the proceeds of the insurance should the
risk insured against occur?
Interpreting the contract of insurance stringently
against the insurer but liberally in favor of the insured
despite clearly defined obligations of the parties to the
policy can be carried out to extremes that there is the
danger that we may, so to speak, kill the goose that
lays the golden egg. We are well aware of insurance
companies falling into the despicable habit of collecting
premiums promptly yet resorting to all kinds of excuses
to deny or delay payment of just insurance claims. But,
in this case, the law is manifestly on the side of the
insurer. For as long as the current Insurance
Code remains unchanged and partial payment of
premiums is not mentioned at all as among the
exceptions provided in Secs. 77 and 78, no policy of
insurance can ever pretend to be efficacious or
effective until premium has been fully paid.
And so it must be. For it cannot be disputed that
premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal
reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt
payment and full satisfaction.[16] It must be emphasized
here that all actuarial calculations and various
tabulations of probabilities of losses under the risks
insured against are based on the sound hypothesis of
prompt payment of premiums. Upon this bedrock

insurance firms are enabled to offer the assurance of

security to the public at favorable rates. But once
payment of premium is left to the whim and caprice of
the insured, as when the courts tolerate the payment
of a mere P600.00 as partial undertaking out of the
stipulated total premium of P2,983.50 and the balance
to be paid even after the risk insured against has
occurred, as petitioners have done in this case, on the
principle that the strength of the vinculumjuris is not
measured by any specific amount of premium
payment, we will surely wreak havoc on the business
and set to naught what has taken actuarians centuries
to devise to arrive at a fair and equitable distribution of
risks and benefits between the insurer and the insured.
The terms of the insurance policy constitute the
measure of the insurers liability. In the absence of
statutory prohibition to the contrary, insurance
companies have the same rights as individuals to limit
their liability and to impose whatever conditions they
deem best upon their obligations not inconsistent with
public policy.[17] The validity of these limitations is by
law passed upon by the Insurance Commissioner who
is empowered to approve all forms of policies,
certificates or contracts of insurance which insurers
intend to issue or deliver. That the policy contract in
the case at bench was approved and allowed issuance
simply reaffirms the validity of such policy, particularly
the provision in question.
WHEREFORE, the petition is DENIED and the
assailed Decision of the Court of Appeals dated 24
March 1995 is AFFIRMED.
SO ORDERED.

G.R. No. 95546 November 6, 1992

MAKATI
TUSCANY
CONDOMINIUM
CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME
ASSURANCE CO., represented by American
International
Underwriters
(Phils.),
Inc., respondent.
BELLOSILLO, J.:
This case involves a purely legal question: whether
payment by installment of the premiums due on an
insurance policy invalidates the contract of insurance,
in view of Sec. 77 of P.D. 612, otherwise known as the
Insurance Code, as amended, which provides:
Sec. 77. An insurer is entitled to the
payment of the premium as soon as
the thing is exposed to the peril
insured against. Notwithstanding any
agreement to the contrary, no policy or
contract of insurance issued by an
insurance company is valid and binding
unless and until the premium thereof
has been paid, except in the case of a
life or an industrial life policy whenever
the grace period provision applies.
Sometime in early 1982, private respondent American
Home Assurance Co. (AHAC), represented by American

15 | I N S U R A N C E

International Underwriters (Phils.), Inc., issued in favor

of petitioner Makati Tuscany Condominium Corporation
(TUSCANY) Insurance Policy No. AH-CPP-9210452 on
the latter's building and premises, for a period
beginning 1 March 1982 and ending 1 March 1983,
with a total premium of P466,103.05. The premium was
paid on installments on 12 March 1982, 20 May 1982,
21 June 1982 and 16 November 1982, all of which were
accepted by private respondent.
On 10 February 1983, private respondent issued to
petitioner Insurance Policy No. AH-CPP-9210596, which
replaced and renewed the previous policy, for a term
covering 1 March 1983 to 1 March 1984. The premium
in the amount of P466,103.05 was again paid on
installments on 13 April 1983, 13 July 1983, 3 August
1983, 9 September 1983, and 21 November 1983. All
payments were likewise accepted by private
respondent.
On 20 January 1984, the policy was again renewed and
private respondent issued to petitioner Insurance Policy
No. AH-CPP-9210651 for the period 1 March 1984 to 1
March 1985. On this renewed policy, petitioner made
two installment payments, both accepted by private
respondent, the first on 6 February 1984 for
P52,000.00 and the second, on 6 June 1984 for
P100,000.00. Thereafter, petitioner refused to pay the
balance of the premium.
Consequently, private respondent filed an action to
recover the unpaid balance of P314,103.05 for
Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the
issuance of Insurance Policy No. AH-CPP-9210651. It
explained that it discontinued the payment of
premiums because the policy did not contain a credit
clause in its favor and the receipts for the installment
payments covering the policy for 1984-85, as well as
the two (2) previous policies, stated the following
reservations:
2. Acceptance of this payment shall not
waive any of the company rights to
deny liability on any claim under the
policy arising before such payments or
after the expiration of the credit clause
of the policy; and
3. Subject to no loss prior to premium
payment. If there be any loss such is
not covered.
Petitioner further claimed that the policy was never
binding and valid, and no risk attached to the policy. It
then pleaded a counterclaim for P152,000.00 for the
premiums already paid for 1984-85, and in its answer
with amended counterclaim, sought the refund of
P924,206.10 representing the premium payments for
1982-85.
After some incidents, petitioner and private respondent
moved for summary judgment.
On 8 October 1987, the trial court dismissed the
complaint and the counterclaim upon the following
findings:

While it is true that the receipts issued

to the defendant contained the
aforementioned reservations, it is
equally true that payment of the
premiums of the three aforementioned
policies (being sought to be refunded)
were made during the lifetime or term
of said policies, hence, it could not be
said, inspite of the reservations, that
no risk attached under the policies.
Consequently,
defendant's
counterclaim for refund is not justified.
As regards the unpaid premiums on
Insurance Policy No. AH-CPP-9210651,
in view of the reservation in the
receipts ordinarily issued by the
plaintiff on premium payments the only
plausible conclusion is that plaintiff has
no right to demand their payment after
the lapse of the term of said policy on
March
1,
1985.
Therefore,
the
defendant was justified in refusing to
pay the same. 1
Both parties appealed from the judgment of the trial
court. Thereafter, the Court of Appeals rendered a
decision 2modifying that of the trial court by ordering
herein petitioner to pay the balance of the premiums
due on Policy No. AH-CPP-921-651, or P314,103.05 plus
legal interest until fully paid, and affirming the denial of
the counterclaim. The appellate court thus explained
The obligation to pay premiums when
due
is
ordinarily
as
indivisible
obligation to pay the entire premium.
Here, the parties herein agreed to
make the premiums payable in
installments, and there is no pretense
that the parties never envisioned to
make the insurance contract binding
between them. It was renewed for two
succeeding years, the second and third
policies being a renewal/replacement
for the previous one. And the insured
never informed the insurer that it was
terminating the policy because the
terms were unacceptable.
While it may be true that under Section
77 of the Insurance Code, the parties
may not agree to make the insurance
contract valid and binding without
payment of premiums, there is nothing
in said section which suggests that the
parties may not agree to allow
payment
of
the
premiums
in
installment, or to consider the contract
as valid and binding upon payment of
the first premium. Otherwise, we would
allow the insurer to renege on its
liability under the contract, had a loss
incurred (sic) before completion of
payment of the entire premium,
despite its voluntary acceptance of
partial payments, a result eschewed by
a basic considerations of fairness and
equity.
To our mind, the insurance contract
became valid and binding upon

16 | I N S U R A N C E

payment of the first premium, and the

plaintiff could not have denied liability
on the ground that payment was not
made in full, for the reason that it
agreed
to
accept
installment
payment. . . . 3
Petitioner now asserts that its payment by installment
of the premiums for the insurance policies for 1982,
1983 and 1984 invalidated said policies because of the
provisions of Sec. 77 of the Insurance Code, as
amended, and by the conditions stipulated by the
insurer in its receipts, disclaiming liability for loss for
occurring before payment of premiums.
It argues that where the premiums is not actually paid
in full, the policy would only be effective if there is an
acknowledgment in the policy of the receipt of
premium pursuant to Sec. 78 of the Insurance Code.
The absence of an express acknowledgment in the
policies of such receipt of the corresponding premium
payments, and petitioner's failure to pay said
premiums on or before the effective dates of said
policies rendered them invalid. Petitioner thus
concludes that there cannot be a perfected contract of
insurance upon mere partial payment of the premiums
because under Sec. 77 of the Insurance Code, no
contract of insurance is valid and binding unless the
premium thereof has been paid, notwithstanding any
agreement to the contrary. As a consequence,
petitioner seeks a refund of all premium payments
made on the alleged invalid insurance policies.
We hold that the subject policies are valid even if the
premiums were paid on installments. The records
clearly show that petitioner and private respondent
intended subject insurance policies to be binding and
effective notwithstanding the staggered payment of
the premiums. The initial insurance contract entered
into in 1982 was renewed in 1983, then in 1984. In
those three (3) years, the insurer accepted all the
installment payments. Such acceptance of payments
speaks loudly of the insurer's intention to honor the
policies it issued to petitioner. Certainly, basic
principles of equity and fairness would not allow the
insurer to continue collecting and accepting the
premiums, although paid on installments, and later
deny liability on the lame excuse that the premiums
were not prepared in full.
We therefore sustain the Court of Appeals. We quote
with approval the well-reasoned findings and
conclusion of the appellate court contained in its
Resolution denying the motion to reconsider its
Decision
While the import of Section 77 is that
prepayment of premiums is strictly
required as a condition to the validity
of the contract, We are not prepared to
rule that the request to make
installment payments duly approved by
the insurer, would prevent the entire
contract of insurance from going into
effect despite payment and acceptance
of the initial premium or first
installment.
Section
78
of
the
Insurance Code in effect allows waiver
by the insurer of the condition of
prepayment
by
making
an
acknowledgment in the insurance

policy of receipt of premium as

conclusive evidence of payment so far
as to make the policy binding despite
the fact that premium is actually
unpaid. Section 77 merely precludes
the parties from stipulating that the
policy is valid even if premiums are not
paid, but does not expressly prohibit an
agreement granting credit extension,
and such an agreement is not contrary
to morals, good customs, public order
or public policy (De Leon, the Insurance
Code,
at
p.
175).
So
is
an
understanding to allow insured to pay
premiums in installments not so
proscribed. At the very least, both
parties should be deemed in estoppel
to question the arrangement they have
voluntarily accepted. 4

replacement-renewal policies effective and binding

from 22 May 1992 until 22 May 1993; and (c) ordering
Petitioner to pay Respondent P18,645,000.00 as
indemnity for the burned properties covered by the
renewal-replacement
policies. The
modification
consisted in the (1) deletion of the trial courts
declaration that three of the policies were in force from
August 1991 to August 1992; and (2) reduction of the
award of the attorneys fees from 25% to 10% of the
total amount due the Respondent.

The reliance by petitioner on Arce vs. Capital Surety

and
Insurance
Co. 5 is unavailing because the facts therein are
substantially different from those in the case at bar.
In Arce, no payment was made by the insured at all
despite the grace period given. In the case before Us,
petitioner paid the initial installment and thereafter
made staggered payments resulting in full payment of
the 1982 and 1983 insurance policies. For the 1984
policy, petitioner paid two (2) installments although it
refused to pay the balance.

All five (5) policies reflect on their face the effectivity

term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of 22
May 1992." On June 13, 1992, plaintiff's properties
located at 2410-2432 and 2442-2450 Taft Avenue,
Pasay City were razed by fire. On July 13, 1992, plaintiff
tendered, and defendant accepted, five (5) Equitable
Bank Manager's Checks in the total amount of
P225,753.45 as renewal premium payments for which
Official Receipt Direct Premium No. 62926 (Exhibit "Q",
Record, p. 191) was issued by defendant. On July 14,
1992, Masagana made its formal demand for
indemnification for the burned insured properties. On
the same day, defendant returned the five (5)
manager's checks stating in its letter (Exhibit "R"/"8",
Record, p. 192) that it was rejecting Masagana's claim
on the following grounds:

It appearing from the peculiar circumstances that the

parties actually intended to make three (3) insurance
contracts valid, effective and binding, petitioner may
not be allowed to renege on its obligation to pay the
balance of the premium after the expiration of the
whole term of the third policy (No. AH-CPP-9210651) in
March 1985. Moreover, as correctly observed by the
appellate court, where the risk is entire and the
contract is indivisible, the insured is not entitled to a
refund of the premiums paid if the insurer was exposed
to the risk insured for any period, however brief or
momentary.
WHEREFORE, finding no reversible error in the
judgment appealed from, the same is AFFIRMED. Costs
against petitioner.
SO ORDERED.

The material operative facts upon which the

appealed judgment was based are summarized by the
Court of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant
[herein Petitioner] five (5) insurance policies (Exhibits
"A" to "E", Record, pp. 158-175) on its properties [in
Pasay City and Manila].

"a) Said policies expired last May 22, 1992

and were not renewed for another term;
b) Defendant had put plaintiff and its alleged
broker on notice of non-renewal earlier;
and
c) The properties covered by the said policies
were burned in a fire that took place last
June 13, 1992, or before tender of
premium payment."
(Record, p. 5)
Hence Masagana filed this case.

[G.R. No. 137172. April 4, 2001]

UCPB GENERAL INSURANCE CO. INC., petitioner,
vs. MASAGANA
TELAMART,
INC., respondent.
RESOLUTION
DAVIDE, JR., C.J.:
In our decision of 15 June 1999 in this case, we
reversed and set aside the assailed decision [1] of the
Court of Appeals, which affirmed with modification the
judgment of the trial court (a) allowing Respondent to
consign the sum of P225,753.95 as full payment of the
premiums for the renewal of the five insurance policies
on Respondents properties; (b) declaring the

17 | I N S U R A N C E

The Court of Appeals disagreed with Petitioners

stand that Respondents tender of payment of the
premiums on 13 July 1992 did not result in the renewal
of the policies, having been made beyond the effective
date of renewal as provided under Policy Condition No.
26, which states:
26. Renewal Clause. -- Unless the company at least
forty five days in advance of the end of the policy
period mails or delivers to the assured at the address
shown in the policy notice of its intention not to renew
the policy or to condition its renewal upon reduction of
limits or elimination of coverages, the assured shall be
entitled to renew the policy upon payment of the
premium due on the effective date of renewal.

Both the Court of Appeals and the trial court found that
sufficient proof exists that Respondent, which had
procured insurance coverage from Petitioner for a
number of years, had been granted a 60 to 90-day
credit term for the renewal of the policies. Such a
practice had existed up to the time the claims were
filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990
to May 22, 1991 was issued on May 7, 1990 but
premium was paid more than 90 days later on August
31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire
Insurance Policy No. 34660 for Insurance Risk Coverage
from May 22, 1990 to May 22, 1991 was issued by
UCPB on May 4, 1990 but premium was collected by
UCPB only on July 13, 1990 or more than 60 days later
under O.R. No. 46487 (Exhs. "V" and "V-1"). And so
were as other policies: Fire Insurance Policy No. 34657
covering risks from May 22, 1990 to May 22, 1991 was
issued on May 7, 1990 but premium therefor was paid
only on July 19, 1990 under O.R. No. 46583 (Exhs. "W"
and "W-1"). Fire Insurance Policy No. 34661 covering
risks from May 22, 1990 to May 22, 1991 was issued on
May 3, 1990 but premium was paid only on July 19,
1990 under O.R. No. 46582 (Exhs. "X' and "X-1"). Fire
Insurance Policy No. 34688 for insurance coverage
from May 22, 1990 to May 22, 1991 was issued on May
7, 1990 but premium was paid only on July 19, 1990
under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire
Insurance Policy No. 29126 to cover insurance risks
from May 22, 1989 to May 22, 1990 was issued on May
22, 1989 but premium therefor was collected only on
July 25, 1990[sic] under O.R. No. 40799 (Exhs. "AA"
and "AA-1"). Fire Insurance Policy No. HO/F-26408
covering risks from January 12, 1989 to January 12,
1990 was issued to Intratrade Phils. (Masagana's sister
company) dated December 10, 1988 but premium
therefor was paid only on February 15, 1989 under O.R.
No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance
Policy No. 29128 was issued on May 22, 1989 but
premium was paid only on July 25, 1989 under O.R. No.
40800 for insurance coverage from May 22, 1989 to
May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance
Policy No. 29127 was issued on May 22, 1989 but
premium was paid only on July 17, 1989 under O.R. No.
40682 for insurance risk coverage from May 22, 1989
to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire
Insurance Policy No. HO/F-29362 was issued on June
15, 1989 but premium was paid only on February 13,
1990 under O.R. No. 39233 for insurance coverage
from May 22, 1989 to May 22, 1990 (Exhs. "EE" and
"EE-1"). Fire Insurance Policy No. 26303 was issued on
November 22, 1988 but premium therefor was
collected only on March 15, 1989 under O.R. NO. 38573
for insurance risks coverage from December 15, 1988
to December 15, 1989 (Exhs. "FF" and "FF-1").
Moreover, according to the Court of Appeals the
following circumstances constitute preponderant proof
that no timely notice of non-renewal was made by
Petitioner:
(1) Defendant-appellant received the confirmation
(Exhibit 11, Record, p. 350) from Ultramar
Reinsurance Brokers that plaintiffs reinsurance
facility had been confirmed up to 67.5% only on
April 15, 1992 as indicated on Exhibit
11. Apparently, the notice of non-renewal (Exhibit
7, Record, p. 320) was sent not earlier than said
date, or within 45 days from the expiry dates of
the policies as provided under Policy Condition No.

18 | I N S U R A N C E

26; (2) Defendant insurer unconditionally

accepted, and issued an official receipt for, the
premium payment on July 1[3], 1992 which
indicates defendant's willingness to assume the
risk despite only a 67.5% reinsurance cover[age];
and (3) Defendant insurer appointed Esteban
Adjusters and Valuers to investigate plaintiffs
claim as shown by the letter dated July 17, 1992
(Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the
main issue to be whether the fire insurance policies
issued by petitioner to the respondent covering the
period from May 22, 1991 to May 22, 1992 had been
extended or renewed by an implied credit arrangement
though actual payment of premium was tendered on a
later date and after the occurrence of the (fire) risk
insured against. We resolved this issue in the negative
in view of Section 77 of the Insurance Code and our
decisions in Valenzuela v. Court of Appeals [2]; South
Sea Surety and Insurance Co., Inc. v. Court of
Appeals[3]; and Tibay v. Court of Appeals.[4] Accordingly,
we reversed and set aside the decision of the Court of
Appeals.
Respondent seasonably filed a motion for the
reconsideration of the adverse verdict. It alleges in the
motion that we had made in the decision our own
findings of facts, which are not in accord with those of
the trial court and the Court of Appeals. The courts
below correctly found that no notice of non-renewal
was made within 45 days before 22 May 1992, or
before the expiration date of the fire insurance
policies. Thus, the policies in question were renewed by
operation of law and were effective and valid on 30
June 1992 when the fire occurred, since the premiums
were paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that
parties may neither agree expressly or impliedly on the
extension of credit or time to pay the premium nor
consider a policy binding before actual payment. It
urges the Court to take judicial notice of the fact that
despite the express provision of Section 77 of the
Insurance Code, extension of credit terms in premium
payment has been the prevalent practice in the
insurance
industry. Most
insurance
companies,
including Petitioner, extend credit terms because
Section 77 of the Insurance Code is not a prohibitive
injunction but is merely designed for the protection of
the parties to an insurance contract. The Code itself, in
Section 78, authorizes the validity of a policy
notwithstanding non-payment of premiums.
Respondent also asserts that the principle of
estoppel applies to Petitioner. Despite its awareness of
Section 77 Petitioner persuaded and induced
Respondent to believe that payment of premium on the
60- to 90-day credit term was perfectly alright; in fact it
accepted payments within 60 to 90 days after the due
dates. By extending credit and habitually accepting
payments 60 to 90 days from the effective dates of the
policies, it has implicitly agreed to modify the tenor of
the insurance policy and in effect waived the provision
therein that it would pay only for the loss or damage in
case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondents
motion for reconsideration. It argues that both the trial
court and the Court of Appeals overlooked the fact that
on 6 April 1992 Petitioner sent by ordinary mail to

Respondent a notice of non-renewal and sent by

personal delivery a copy thereof to Respondents
broker, Zuellig. Both courts likewise ignored the fact
that Respondent was fully aware of the notice of nonrenewal. A reading of Section 66 of the Insurance Code
readily shows that in order for an insured to be entitled
to a renewal of a non-life policy, payment of the
premium due on the effective date of renewal should
first be made. Respondents argument that Section 77
is not a prohibitive provision finds no authoritative
support.
Upon a meticulous review of the records and
reevaluation of the issues raised in the motion for
reconsideration and the pleadings filed thereafter by
the parties, we resolved to grant the motion for
reconsideration. The following facts, as found by the
trial court and the Court of Appeals, are indeed duly
established:
1. For years, Petitioner had been issuing fire
policies to the Respondent, and these
policies were annually renewed.
2. Petitioner had been granting Respondent a
60- to 90-day credit term within which to
pay the premiums on the renewed
policies.
3. There was no valid notice of non-renewal of
the policies in question, as there is no
proof at all that the notice sent by
ordinary
mail
was
received
by
Respondent, and the copy thereof
allegedly sent to Zuellig was ever
transmitted to Respondent.
4. The premiums for the policies in question
in the aggregate amount of P225,753.95
were paid by Respondent within the 60- to
90-day credit term and were duly
accepted and received by Petitioners
cashier.
The instant case has to rise or fall on the core
issue of whether Section 77 of the Insurance Code of
1978 (P.D. No. 1460) must be strictly applied to
Petitioners advantage despite its practice of granting a
60- to 90-day credit term for the payment of premiums.
Section
provides:

77 of

the

Insurance

Code of

1978

SEC. 77. An insurer is entitled to payment of the

premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement
to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding
unless and until the premium thereof has been paid,
except in the case of a life or an industrial life policy
whenever the grace period provision applies.
This Section is a reproduction of Section 77 of P.D.
No. 612 (The Insurance Code) promulgated on 18
December 1974. In turn, this Section has its source in
Section 72 of Act No. 2427 otherwise known as the
Insurance Act as amended by R.A. No. 3540, approved
on 21 June 1963, which read:

19 | I N S U R A N C E

SEC. 72. An insurer is entitled to payment of premium

as soon as the thing insured is exposed to the peril
insured against, unless there is clear agreement to
grant the insured credit extension of the premium
due. No policy issued by an insurance company is valid
and binding unless and until the premium thereof has
been paid. (Underscoring supplied)
It can be seen at once that Section 77 does not
restate the portion of Section 72 expressly permitting
an agreement to extend the period to pay the
premium. But are there exceptions to Section 77?
The answer is in the affirmative.
The first exception is provided by Section 77 itself,
and that is, in case of a life or industrial life policy
whenever the grace period provision applies.
The second is that covered by Section 78 of the
Insurance Code, which provides:
SEC. 78. Any acknowledgment in a policy or contract of
insurance of the receipt of premium is conclusive
evidence of its payment, so far as to make the policy
binding, notwithstanding any stipulation therein that it
shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany
Condominium Corporation vs. Court of Appeals,
[5]
wherein we ruled that Section 77 may not apply if
the parties have agreed to the payment in installments
of the premium and partial payment has been made at
the time of loss. We said therein, thus:
We hold that the subject policies are valid even if the
premiums were paid on installments. The records
clearly show that the petitioners and private
respondent intended subject insurance policies to be
binding and effective notwithstanding the staggered
payment of the premiums. The initial insurance
contract entered into in 1982 was renewed in 1983,
then in 1984. In those three years, the insurer
accepted all the installment payments. Such
acceptance of payments speaks loudly of the insurers
intention to honor the policies it issued to
petitioner. Certainly, basic principles of equity and
fairness would not allow the insurer to continue
collecting and accepting the premiums, although paid
on installments, and later deny liability on the lame
excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with
approval the following pronouncement of the Court of
Appeals in its Resolution denying the motion for
reconsideration of its decision:
While the import of Section 77 is that prepayment of
premiums is strictly required as a condition to the
validity of the contract, We are not prepared to rule
that the request to make installment payments duly
approved by the insurer would prevent the entire
contract of insurance from going into effect despite
payment and acceptance of the initial premium or first
installment. Section 78 of the Insurance Code in effect
allows waiver by the insurer of the condition of
prepayment by making an acknowledgment in the
insurance policy of receipt of premium as conclusive
evidence of payment so far as to make the policy
binding despite the fact that premium is actually

unpaid. Section 77 merely precludes the parties from

stipulating that the policy is valid even if premiums are
not paid, but does not expressly prohibit an agreement
granting credit extension, and such an agreement is
not contrary to morals, good customs, public order or
public policy (De Leon, The Insurance Code, p. 175). So
is an understanding to allow insured to pay premiums
in installments not so prescribed. At the very least,
both parties should be deemed in estoppel to question
the arrangement they have voluntarily accepted.

This case was certified to this Tribunal by the Court of

Appeals in its Resolution of October 4, 1965 on a pure
question of law and "because the issues raised are
practically the same as those in CA-G.R. No. 32017-R"
between the same parties, which case had been
forwarded to us on April 1, 1964. The latter case,
"Philippine Phoenix Surety & Insurance Inc. vs.
Woodworks, Inc.," docketed in this Court as L-22684,
was decided on August 31, 1967 and has been
reported in 20 SCRA 1270.

By the approval of the aforequoted findings and

conclusion of the Court of Appeals, Tuscany has
provided a fourth exception to Section 77, namely, that
the insurer may grant credit extension for the payment
of the premium. This simply means that if the insurer
has granted the insured a credit term for the payment
of the premium and loss occurs before the expiration of
the term, recovery on the policy should be allowed
even though the premium is paid after the loss but
within the credit term.

Specifically, this action is for recovery of unpaid

premium on a fire insurance policy issued by plaintiff,
Philippine Phoenix Surety & Insurance Company, in
favor of defendant Woodworks, Inc.

Moreover, there is nothing in Section 77 which

prohibits the parties in an insurance contract to provide
a credit term within which to pay the premiums. That
agreement is not against the law, morals, good
customs, public order or public policy. The agreement
binds the parties. Article 1306 of the Civil Code
provides:
ART. 1306. The contracting parties may establish such
stipulations clauses, terms and conditions as they may
deem convenient, provided they are not contrary to
law, morals, good customs, public order, or public
policy.
Finally in the instant case, it would be unjust and
inequitable if recovery on the policy would not be
permitted against Petitioner, which had consistently
granted a 60- to 90-day credit term for the payment of
premiums despite its full awareness of Section
77. Estoppel bars it from taking refuge under said
Section, since Respondent relied in good faith on such
practice. Estoppel then is the fifth exception to Section
77.
WHEREFORE, the Decision in this case of 15 June
1999 is RECONSIDERED and SET ASIDE, and a new
one is hereby entered DENYING the instant petition for
failure of Petitioner to sufficiently show that a
reversible error was committed by the Court of Appeals
in
its
challenged
decision,
which
is
hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.

G.R. No. L-25317 August 6, 1979

PHILIPPINE PHOENIX SURETY & INSURANCE
COMPANY, plaintiff-appellee,
vs.
WOODWORKS, INC., defendant-appellant.
MELENCIO-HERRERA, J.:

The following are the established facts:

On July 21, 1960, upon defendant's application, plaintiff
issued in its favor Fire Insurance Policy No. 9749 for
P500,000.00 whereby plaintiff insured defendant's
building, machinery and equipment for a term of one
year from July 21, 1960 to July 21, 1961 against loss by
fire. The premium and other charges including the
margin fee surcharge of P590.76 and the documentary
stamps in the amount of P156.60 affixed on the Policy,
amounted to P10,593.36.
It is undisputed that defendant did not pay the
premium stipulated in the Policy when it was issued nor
at any time thereafter.
On April 19, 1961, or before the expiration of the oneyear term, plaintiff notified defendant, through its
Indorsement No. F-6963/61, of the cancellation of the
Policy allegedly upon request of defendant. 1 The latter
has denied having made such a request. In said
Indorsement, plaintiff credited defendant with the
amount of P3,110.25 for the unexpired period of 94
days, and claimed the balance of P7,483.11
representing ,learned premium from July 21, 1960 to
18th April 1961 or, say 271 days." On July 6, 1961,
plaintiff demanded in writing for the payment of said
amount. 2Defendant, through counsel, disclaimed any
liability in its reply- letter of August 15, 1961,
contending, in essence, that it need not pay premium
"because the Insurer did not stand liable for any
indemnity during the period the premiums were not
paid." 3
On January 30, 1962, plaintiff commenced action in the
Court of First Instance of Manila, Branch IV (Civil Case
No. 49468), to recover the amount of P7,483.11 as
"earned premium." Defendant controverted basically
on the theory that its failure "to pay the premium after
the issuance of the policy put an end to the insurance
contract and rendered the policy unenforceable." 4
On September 13, 1962, judgment was rendered in
plaintiff's favor "ordering defendant to pay plaintiff the
sum of P7,483.11, with interest thereon at the rate of
6%, per annum from January 30, 1962, until the
principal shall have been fully paid, plus the sum of
P700.00 as attorney's fees of the plaintiff, and the
costs of the suit." From this adverse Decision,
defendant appealed to the Court of Appeals which, as
heretofore stated, certified the case to us on a question
of law.
The errors assigned read:

20 | I N S U R A N C E

1. The lower court erred in sustaining

that Fire Insurance Policy, Exhibit A,
was a binding contract even if the
premium stated in the policy has not
been paid.
2. That the lower court erred in
sustaining that the premium in
Insurance Policy, Exhibit B, became an
obligation which was demandable even
after the period in the Policy has
expired.
3. The lower court erred in not deciding
that a premium not paid is not a debt
enforceable by action of the insurer.
We find the appeal meritorious.
Insurance is "a contract whereby one undertakes for a
consideration to indemnify another against loss,
damage or liability arising from an unknown or
contingent event." 5 The consideration is the
"premium". "The premium must be paid at the time
and in the way and manner specified in the policy and,
if not so paid, the policy will lapse and be forfeited by
its own terms." 6
The provisions on premium in the subject Policy read:
THIS POLICY OF INSURANCE
WITNESSETH, THAT in consideration of
MESSRS. WOODWORKS, INC.
hereinafter called the
Insured, paying to the PHILIPPINE
PHOENIX SURETY AND INSURANCE,
INC., hereinafter called the Company,
the sum of PESOS NINE THOUSAND
EIGHT HUNDRED FORTY SIX ONLY
the Premium for the first period
hereinafter mentioned. ...
xxx xxx xxx
THE COMPANY HEREBY AGREES with
the Insured ... that if the Property
above described, or any part thereof,
shall be destroyed or damaged by Fire
or Lightning after payment of
Premium, at any time between 4:00
o'clock in the afternoon of the TWENTY
FIRST day of JULY One Thousand Nine
Hundred and SIXTY and 4:00 o'clock in
the afternoon of the TWENTY FIRST day
of JULY One Thousand Nine Hundred
and SIXTY ONE. ... (Emphasis supplied)
Paragraph "2" of the Policy further contained the
following condition:
2. No payment in respect of any
premium shall be deemed to be
payment to the Company unless a
printed form of receipt for the same
signed by an Official or duly-appointed
Agent of the Company shall have been
given to the Insured.
Paragraph "10" of the Policy also provided:

21 | I N S U R A N C E

10. This insurance may be terminated

at any time at the request of the
Insured, in which case the Company
will retain the customary short period
rate for the time the policy has been in
force. This insurance may also at any
time be terminated at the option of the
Company, on notice to that effect
being given to the Insured, in which
case the Company shall be liable to
repay on demand a ratable proportion
of the premium for the unexpired term
from the date of the cancelment.
Clearly, the Policy provides for pre-payment of
premium. Accordingly; "when the policy is tendered the
insured must pay the premium unless credit is given or
there is a waiver, or some agreement obviating the
necessity for prepayment." 7 To constitute an extension
of credit there must be a clear and express agreement
therefor." 8
From the Policy provisions, we fail to find any clear
agreement that a credit extension was accorded
defendant. And even if it were to be presumed that
plaintiff had extended credit from the circumstances of
the unconditional delivery of the Policy without
prepayment of the premium, yet it is obvious that
defendant had not accepted the insurer's offer to
extend credit, which is essential for the validity of such
agreement.
An acceptance of an offer to allow
credit, if one was made, is as essential
to make a valid agreement for credit,
to change a conditional delivery of an
insurance policy to an unconditional
delivery, as it is to make any other
contract. Such an acceptance could not
be merely a mental act or state of
mind, but would require a promise to
pay made known in some manner to
defendant. 9
In this respect, the instant case differs from that
involving the same parties entitled Philippine Phoenix
Surety & Insurance Inc. vs. Woodworks, Inc., 10 where
recovery of the balance of the unpaid premium was
allowed inasmuch as in that case "there was not only a
perfected contract of insurance but a partially
performed one as far as the payment of the agreed
premium was concerned." This is not the situation
obtaining here where no partial payment of premiums
has been made whatsoever.
Since the premium had not been paid, the policy must
be deemed to have lapsed.
The non-payment of premiums does
not merely suspend but put, an end to
an insurance contract, since the time of
the payment is peculiarly of the
essence of the contract. 11
... the rule is that under policy
provisions that upon the failure to
make a payment of a premium or
assessment at the time provided for,
the policy shall become void or
forfeited, or the obligation of the

insurer shall cease, or words to like

effect, because the contract so
prescribes and because such a
stipulation is a material and essential
part of the contract. This is true, for
instance, in the case of life, health and
accident, fire and hail insurance
policies. 12
In fact, if the peril insured against had occurred,
plaintiff, as insurer, would have had a valid defense
against recovery under the Policy it had issued. Explicit
in the Policy itself is plaintiff's agreement to indemnify
defendant for loss by fire only "after payment of
premium," supra. Compliance by the insured with the
terms of the contract is a condition precedent to the
right of recovery.
The burden is on an insured to keep a
policy in force by the payment of
premiums, rather than on the insurer to
exert every effort to prevent the
insured from allowing a policy to elapse
through a failure to make premium
payments. The continuance of the
insurer's obligation is conditional upon
the payment of premiums, so that no
recovery can be had upon a lapsed
policy, the contractual relation between
the parties having ceased. 13
Moreover, "an insurer cannot treat a contract as valid
for the purpose of collecting premiums and invalid for
the purpose of indemnity." 14
The foregoing findings are buttressed by section 77 of
the Insurance Code (Presidential Decree No. 612,
promulgated on December 18, 1974), which now
provides that no contract of insurance issued by an
insurance company is valid and binding unless and
until the premium thereof has been paid,
notwithstanding any agreement to the contrary.
WHEREFORE, the judgment appealed from is reversed,
and plaintiff's complaint hereby dismissed.

G.R. No. L-20552

May 20, 1966

FILIPINAS
LIFE
ASSURANCE
AL., petitioners,
vs.
GONZALO P. NAVA, respondent.

CO.,

ET

BAUTISTA ANGELO, J.:

This is a petition for review of a decision of the Court of
Appeals which affirms that of the court a quo (1)
rescinding the insurance contracts entered into
between plaintiff and defendants; (2) ordering
defendant Filipinas Life Assurance Co. to pay plaintiff
the amount of P32,072.60 as the total amount paid by
said plaintiff on his insurance policies; and (3) ordering
defendant Insular Life Assurance Co., Ltd. to pay
plaintiff the amount of P2,574.00 as the total amount
paid by plaintiff on account of his insurance policy.
On January 1, 1936, plaintiff and defendant Insular Life
Assurance Co., Ltd. entered into a contract of life

22 | I N S U R A N C E

insurance with a face value of P5,000.00 for which the

insurer issued Policy No. 58999.
On February 28, 1939, plaintiff and defendant Filipinas
Life Assurance Co. entered into 17 separate contracts
of life insurance for which the insurer issued 17 life
insurance policies, one of said policies having a face
value of P10,000.00 while the rest a face value of
P5,000.00 each, or a total of P90,000.00. Each and
everyone of the 18 policies issued by defendants to
plaintiff contains a loan clause of the following tenor:
Policy loans. After three full years' premiums
have been paid upon this Policy, if no premium
payment is in default, the Company, subject to
its then existing rules, will advance on proper
assignment and delivery of this Policy and on
the sole security thereof a sum equal to, or at
the option of the owner less than, the cash
value specified in the Schedule of Policy
Values, less any existing indebtedness on or
secured by this Policy and any unpaid balance
of the premium for the current policy-year;
provided interest at six per centum per annum
on the whole amount of the loan is paid in
advance to the end of the current policy-year.
At the end of the current policy-year interest at
the same rate for one year in advance will be
due and payable, and annually thereafter, and
if not so paid will be added to the principal and
bear the same rate of interest. Failure to repay
any such loan or interest shall not avoid this
Policy unless the total indebtedness shall equal
or exceed the full amount of the loan value
available hereunder.
Any indebtedness on this Policy shall first be
deducted from any money payable or in any
settlement under this Policy.
On account of the policies abovementioned, plaintiff
had so far paid to defendant Insular Life Assurance Co.,
Ltd. the following amounts: from 1936 to December,
1941, P1,544.40, and from January, 1942 to January,
1945, P1,029.60, or a total of P2,574.00; and to
defendant Filipinas Life Assurance Co. plaintiff had paid
the following amounts: from February, 1939 to
December, 1941, P13,976.40, and from January, 1942
to January, 1945, P18,096.20, or a total of P32,072.60.
In other words, the total amount paid by plaintiff to
defendants on the 18 policies before the war and
during the Japanese occupation is P34,646.60.
On April 28, 1948, plaintiff applied to defendants for a
loan in the sum of P5,000.00 in line with the loan
clause contained in said policies, but defendants
refused to grant the loan on the excuse that certain
regulations issued by the Insurance Commissioner on
May 20, 1946 required the insurance companies to
withhold the payments on premiums made during the
Japanese occupation because the same shall be
subject to future adjustments " as soon as debtorcreditor relationship is established" and because of
such process of "withholding" plaintiff was not entitled
to borrow any amount until such adjustment has been
made.
On September 30, 1948, plaintiff called the attention of
the insurance companies to the decision of our
Supreme Court in the case of Haw Pia v. China Banking

Corporation1 establishing
and
recognizing
the
relationship of debtor and creditor with respect to
payments in fiat currency made during the Japanese
occupation on pre-war obligations, but in spite of that
fact the insurance companies refused to give to
plaintiff the loan he solicited giving as reason the
excuse that said decision of our Supreme Court was
not applicable to transactions undertaken during
Japanese occupation when they relate to life insurance
policies. On February 4, 1949, plaintiff reiterated his
request for his much-needed loan of P5,000.00, and as
said request was again refused by the insurance
companies notwithstanding the fact that the total
amount of the cash surrender values of the 18 policies
issued in his favor reached the sum of P9,468.29,
plaintiff commenced the present action on February 10,
1949 before the Court of First Instance of Manila
praying for the rescission of the abovementioned 18
policies and for the refund to him of all the premiums
so far paid by him to defendants in the amount of
P31,633.80, plus 6% interest thereon as damages, and
the costs of action.
On November 28, 1951, defendants passed a
resolution which was approved by the Insurance
Commissioner, giving full credit to all premium
payments made by their policyholders in fiat currency
during the Japanese occupation on account of pre-war
policies for which reason they filed an amended answer
offering to pay plaintiff the amount of P9,468.29 which
represents the aggregate cash surrender values of all
the policies in question as of February 10, 1949, but
apparently this offer was refused.
After trial, the court a quo rendered judgment the
dispositive part of which already appears recited in the
early part of this decision. This is the decision that was
later affirmed by the Court of Appeals in its decision of
November 14, 1962, from which defendants interposed
the present petition for review.
In the present petition for review, petitioners now
contend that the Court of Appeals erred (1) in ruling
that as a consequence of the decision in the Haw Pia
case petitioners violated the loan clause contained in
the insurance policies thereby entitling respondent to
their rescission; (2) in ruling that by virtue of Article
1295 of the old Civil Code petitioners should refund to
defendant all the premiums paid on his insurance
policies as a consequence of their rescission; and (3) in
not ruling that, even if respondent is entitled to the
rescission of said insurance policies, he can only
recover their cash surrender value at the time the
complaint was filed on February 10, 1949.
The issues raised will be the subject of separate
consideration.
1. It is contended that the failure of petitioners to give
to respondent the loan of P5,000.00 applied for by him
on April 28, 1948 was justified in view of certain
regulations issued by the Insurance Commissioner on
May 20, 1946 which, among other things, provide that
the amount corresponding to occupation premiums
paid on pre-war policies as well as those paid on prewar loans should be withheld subject to adjustment "as
soon as debtor-creditor relationship is established", for
which reason petitioners were not in a position to grant
the loan considering the amount of the fiat currency
employed by respondent to pay the premiums during
the Japanese occupation, and since this eventuality has

23 | I N S U R A N C E

not yet occurred it stands to reason that petitioners

cannot be made responsible to respondent for their
alleged non-compliance with the loan clause contained
in the insurance policies issued to respondent.
But, as correctly stated by the Court of Appeals, even
assuming the validity of the regulations issued by the
Insurance
Commissioner
which
required
the
withholding of the payments made in fiat currency of
the premiums on insurance policies issued before the
war subject to whatever adjustment that may be made
after the relationship between debtor and creditor shall
have been established, the fact however is that such
requirement has already lost its legal effect and value
when on April 9, 1948 our Supreme Court rendered its
decision in the Haw Pia case wherein it was declared,
among others, that all payments made in fiat currency
during the Japanese occupation in relation with any
contractual obligation executed before the war were
valid to all intents and purposes, and yet petitioners
apparently did not give any importance to such
decision for in their opinion it does not have any
application to transactions which have any relation to
payment of premiums on life insurance policies. In
other words, petitioners maintain that the Haw Pia case
did not settle the question of valuation or premium
payments in Japanese military notes during the war on
life insurance policies because what said case merely
settled was the validity of payments in fiat currency by
a debtor to a creditor. Stated in another way,
petitioners are of the opinion that the Haw Pia case did
not settle the question of the valuation or premium
payments in Japanese military notes during the war on
life insurance policies because the insured is by no
means a debtor of the insurer, nor is the insurer his
creditor, considering that there is absolutely no
obligation on his part to pay the premiums.
There is no merit in this contention. In the Haw Pia
case it was ruled in a clear manner that payments
made in Japanese military notes on account of
contractual obligations entered into before the war are
valid payments for all legal intents and purposes, and
this ruling was reiterated in other similar cases. 2 And it
cannot be denied that a life insurance policy involves a
contractual obligation wherein the insured becomes
duty bound to pay the premiums agreed upon, lest he
runs the risk of having his insurance policy lapse if he
fails to pay such premiums. The fact that if the insured
had paid in full the premiums corresponding to the first
three years of the life of his policy he cannot be
considered delinquent that would cause the lapse of
his policy if the same contains an automatic premium
payment clause cannot divest such policy of its
contractual nature, for the result of such failure would
only be for him to pay later the premium plus the
corresponding interest depending upon the condition of
the policy. But certainly it does not cease to be a
contractual liability insofar as the payment of that
premium is concerned for whether he likes it or not
that premium has to be paid lest he allows the lapse of
his policy. Consequently, the payment of premiums on
the life insurance policies made by herein respondent
before and during the war up to the time he applied for
the loan in question with petitioners should be
considered likewise as valid payments upon the theory
that such insurance policies are in the nature of a
contractual obligation within the meaning of the civil
law. In effect, therefore, those payments were made by
a debtor to a creditor within the meaning of the
requirement of the regulations of the Insurance

Commissioner and as such they can offer no excuse to

petitioners for refusing to grant the loan as
contemplated in the loan clause embodied in the
policies in question. 1wph1.t

ART. 1295. Rescission makes necessary the

return of the things which were the subjectmatter of the contract, with their fruits, and of
the price paid, with interest thereon. ...xxx

The fact, however, is that the oft-repeated regulations

of the Insurance Commissioner are of doubtful validity
if their effect is to suspend the effectivity of a provision
or clause embodied in a valid insurance policy for that
would partake of the nature of a regulation the effect of
which would be to infringe or impair a contractual
obligation in violation of Section 1(10), Article III, of our
Constitution. In the case of Lim, et al. vs. Register of
Deeds of Rizal,3this Court has held that an
administrative official has no power to issue a circular
or a regulation the effect for that would be violative of
our Constitution.

We find, therefore, correct the ruling of the Court of

Appeals which orders petitioners to refund to
respondent all premiums paid by him up to the filing of
the action amounting to P34,644.60.

It is, therefore, clear from the foregoing that the

petitioners violated the loan clause embodied in each
of the 18 life insurance policies issued to respondent to
rescind all said policies under Section 69 of the
Insurance Act, which provides: "The violation of a
material warranty, or other material provision of a
policy, on the part of either party thereto, entitles the
other to rescind."
The citation that petitioners make from Vance on
Insurance to the effect that "The general rule is that a
breach of the agreement to make the loan does not
entitle the insured to rescind the contract," is not
controlling in this jurisdiction. Firstly, it was not shown
that the insurance laws in the states where said ruling
prevails contain a provision identical to Section 69 of
our Insurance Law we quoted above, and secondly, the
rule cited by Vance is not a rule uniformly followed by
all states in the United States, for on this matter there
is a marked divergence of opinion. In fact, in a case
that occured in the State of Texas, held that the insured
had the right to ask for the rescission of said contract
and ordered the insurer to refund all premiums paid by
him.4
2. Petitioners likewise contend that even if respondent
is entitled to rescind the policies in question he is not
entitled to recover all premiums paid by him to
petitioners on account of the 18 life insurance policies
question but merely to their cash surrender value upon
the theory that the respondent had fully enjoyed the
protection of the insurance on his life during the period
of the policies to the extent that during that time
petitioners had assumed the risk of the death of said
respondent. Petitioners in effect lay stress on the fact
that had respondent died in the meantime they would
have paid total sum of P95,000.00 on account of his
policies.
This contention has no basis. Considering that our
Insurance Law does not contain an express provision as
to what the court should do in cases of rescission of an
insurance policy under Section 69, the provision that
should apply is that embodied in Article 1225 of the old
Civil Code, as postulated in Article 16 of the same
Code, which provides that on matters which are not
governed by special laws the provisions of said Code
shall supplement its deficiency. And said Article 1295
provides:

24 | I N S U R A N C E

Petitioners, however, insist that the correct ruling is not

what the Court of Appeals has stated but what is
hereinafter quoted because such is the weight of
authority on that matter. Said the petitioners:
"Recovery of the full amount of the premium after the
insurer has sustained for sometime the risk of the
insurance and the insured has enjoyed the benefit of
protection is obviously unjust and is so recognized by
the better authorities."
Again we find this statement incorrect, for according to
American Law Reports Annotated, the ruling above
quoted merely represents the minority rule in the
United States, the majority rule being that the insured
can recover all premiums paid, in some cases with
interest in case of wrongful cancellation, repudiation,
termination or rescission of the contract of life
insurance.5
Nor do we find tenable the contention that because
respondent cannot restore to petitioners the "value of
the benefit of protection" which he might have
received under the 18 life insurance policies in
question he is not entitled to rescind them under the
provision of Article 1295 of the old Civil Code, because
it should be here stated that said article only
contemplates a transaction whether material things
are involved, and do not refer to intangible ones which
cannot be the subject of restoration, for to interpret it
otherwise would be to defeat the law itself with the
result that rescission can never be had under Section
69 of our Insurance Law. And it cannot be denied that
petitioners had in turn already derived material
benefits from the use of premiums paid to them by
respondent before, during and after the last war from
which they must have realized huge profits, and in this
light alone petitioners cannot claim prejudice or
unfairness if they are ordered to refund the premiums
paid by respondents.
3. Anent this issue, petitioners point out that the Court
of Appeals erred in not ruling that even if respondent is
entitled to the rescission of his 18 life insurance
policies he can only recover legally and equitably their
cash surrender value at the time the complaint was
filed on February 10, 1949.
Inasmuch as this contention is but a corollary to the
conclusion we have reached in the discussion of the
preceding assignment of error, we believe that further
refutation thereof is unnecessary.
Wherefore, the decision appealed from is affirmed.
Cost against petitioners.