G.R. No. L-14300 January 19, 1920 In this connection it appears that on January 12, 1916, D. P.
In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which
SAN MIGUEL BREWERY, ETC., plaintiff-appellee,
vs.
LAW UNION AND ROCK INSURANCE CO., (LTD.) ET AL., defendants-appellees.
HENRY HARDING, defendant-appellant.
Crossfield and O'Brien for appellant Harding.
Lawrence and Ross for appellee Law Union etc. Ins. Co.
Sanz and Luzuriaga for appellee "Filipinas, Compaia de Seguros."
No appearance for the other appellee.
STREET, J.:
This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff,
the San Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten
respectively by Law Union and Rock Insurance Company (Ltd.), and the "Filipinas" Compania de Seguros, for
the sum of P7,500 each, insuring certain property which has been destroyed by fire. The plaintiff, the San
Miguel Brewery, is named as the party assured in the two policies referred to, but it is alleged in the
complaint that said company was in reality interested in the property which was the subject of insurance in
the character of a mortgage creditor only, and that the owner of said property upon the date the policies
were issued was one D. P. Dunn who was later succeeded as owner by one Henry Harding. Accordingly said
Harding was made a defendant, as a person interested in the subject of the litigation.
The prayer of the complaint is that judgment be entered in favor of the plaintiff against the two companies
named for the sum of P15,000, with interest and costs, and further that upon satisfaction of the balance of
P4,505.30 due to the plaintiff upon the mortgage debt, and upon the cancellation of the mortgage, the
plaintiff be absolved from liability to the defendants or any of them. The peculiar form of the latter part of
the prayer is evidently due to the design of the plaintiff to lay a foundation for Harding to recover the
difference between the plaintiff's credit and the amount for which the property was insured. Accordingly, as
was to be expected, Harding answered, admitting the material allegations of the complaint and claiming for
himself the right to recover the difference between the plaintiff's mortgage credit and the face value of the
policies. The two insurance companies also answered, admitting in effect their liability to the San Miguel
Brewery to the extent of its mortgage credit, but denying liability to Harding on the ground that under the
contracts of insurance the liability of the insurance companies was limited to the insurable interest of the
plaintiff therein. Soon after the action was begun the insurance companies effected a settlement with the
San Miguel Brewery by paying the full amount of the credit claimed by it, with the result that the litigation as
between the original plaintiff and the two insurance companies came to an end, leaving the action to be
prosecuted to final judgement by the defendant Harding with respect to the balance claimed to be due to
him upon the policies.
Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action
whatever against the companies and absolved them from liability without special finding as to costs. From
this decision the said Henry Harding has appealed.
The two insurance companies who are named as defendants do not dispute their liability to the San Miguel
Brewery, to the extent already stated, and the only question here under discussion is that of the liability of
the insurance companies to Harding. It is therefore necessary to take account of such facts only as bear upon
this aspect of the case.
MASAOY, QMM
the insurance relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10,000. In the
contract of mortgage Dunn agreed to keep the property insured at his expense to the full amount of its value
in companies to be selected by the Brewery Company and authorized the latter in case of loss to receive the
proceeds of the insurance and to retain such part as might be necessary to cover the mortgage debt. At the
same time, in order more conveniently to accomplish the end in view, Dunn authorized and requested the
Brewery Company to effect said insurance itself. Accordingly on the same date Antonio Brias, general
manager of the Brewery, made a verbal application to the Law Union and Rock Insurance Company for
insurance to the extent of P15,000 upon said property. In reply to a question of the company's agent as to
whether the Brewery was the owner of the property, he stated that the company was interested only as a
mortgagee. No information was asked as to who was the owner of the property, and no information upon
this point was given.
It seems that the insurance company to whom this application was directed did not want to carry more than
one-half the risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount to be
issued by the "Filipinas" Compania de Seguros. Both policies were issued in the name of the San Miguel
Brewery as the assured, and contained no reference to any other interest in the property. Both policies
contain the usual clause requiring assignments to be approved and noted on the policy. The premiums were
paid by the Brewery and charged to Dunn. A year later the policies were renewed, without change, the
renewal premiums being paid by the Brewery, supposedly for the account of the owner. In the month of
March of the year 1917 Dunn sold the insured property to the defendant Henry Harding, but not assignment
of the insurance, or of the insurance policies, was at any time made to him.
We agree with the trial court that no cause of action in Henry Harding against the insurance companies is
show. He is not a party to the contracts of insurance and cannot directly maintain an action thereon. (Uy
Tam and Uy Yet vs.Leonard, 30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and
must be made effective, if at all, through the San Miguel Brewery in whose name the contracts are written.
Now the Brewery, as mortgagee of the insured property, undoubtedly had an insurable interest therein; but
it could not, in any event, recover upon these policies an amount in excess of its mortgage credit. In this
connection it will be remembered that Antonio Brias, upon making application for the insurance, informed
the company with which the insurance was placed that the Brewery was interested only as a mortgagee. It
would, therefore, be impossible for the Brewery mortgage on the insured property.
This conclusion is not only deducible from the principles governing the operation and effect of insurance
contracts in general but the point is clearly covered by the express provisions of sections 16 and 50 of the
Insurance Act (Act No. 2427). In the first of the sections cited, it is declared that "the measure of an insurable
interest in property is the extent to which the insured might be damnified by loss or injury thereof" (sec. 16);
while in the other it is stated that "the insurance shall be applied exclusively to the proper interest of the
person in whose name it is made unless otherwise specified in the policy" (sec. 50).
These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership of
the property had continued in him up to the time of the loss; and as regards Harding, an additional
insuperable obstacle is found in the fact that the ownership of the property had been charged, prior to the
loss, without any corresponding change having been effected in the policy of insurance. In section 19 of the
Insurance Act we find it stated that "a change of interest in any part of a thing insured unaccompanied by a
corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the
interest in the thing and the interest in the insurance are vested in the same person." Again in section 55 it is
declared that "the mere transfer of a thing insured does not transfer the policy, but suspends it until the
same person becomes the owner of both the policy and the thing insured."
INSRANCE 2ND BATCH FULLTEXT III-C Page 1 of 23
Undoubtedly these policies of insurance might have been so framed as to have been "payable to the Sane
Miguel Brewery, mortgagee, as its interest may appear, remainder to whomsoever, during the continuance
of the risk, may become the owner of the interest insured." (Sec 54, Act No. 2427.) Such a clause would have
proved an intention to insure the entire interest in the property, not merely the insurable interest of the San
Miguel Brewery, and would have shown exactly to whom the money, in case of loss, should be paid. But the
policies are not so written.
It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony of
Brias, the manager of the San Miguel Brewery, that, as the insurance was written up, the obligation of the
insurance companies was different from that contemplated by Dunn, at whose request the insurance was
written, and Brias. In the contract of mortgage Dunn had agreed, at his own expense, to insure the
mortgaged property for its full value and to indorse the policies in such manner as to authorize the Brewery
Company to receive the proceeds in case of loss and to retain such part thereof as might be necessary to
satisfy the remainder then due upon the mortgage debt. Instead, however, of effecting the insurance himself
Dunn authorized and requested the Brewery Company to procure insurance on the property in the amount
of P15,000 at Dunn's expense. The Brewery Company undertook to carry this mandate into effect, and it of
course became its duty to procure insurance of the character contemplated, that is, to have the policies so
written as to protect not only the insurable interest of the Brewery, but also the owner. Brias seems to have
supposed that the policies as written had this effect, but in this he was mistaken. It was certainly a hardship
on the owner to be required to pay the premiums upon P15,000 of insurance when he was receiving no
benefit whatever except in protection to the extent of his indebtedness to the Brewery. The blame for the
situation thus created rests, however, with the Brewery rather than with the insurance companies, and there
is nothing in the record to indicate that the insurance companies were requested to write insurance upon
the insurable interest of the owner or intended to make themselves liable to that extent.
If during the negotiations which resulted in the writing of this insurance, it had been agreed between the
contracting parties that the insurance should be so written as to protect not only the interest of the
mortgagee but also the residuary interest of the owner, and the policies had been, by inadvertence,
ignorance, or mistake written in the form in which they were issued, a court would have the power to reform
the contracts and give effect to them in the sense in which the parties intended to be bound. But in order to
justify this, it must be made clearly to appear that the minds of the contracting parties did actually meet in
agreement and that they labored under some mutual error or mistake in respect to the expression of their
purpose. Thus, in Bailey vs. American Central Insurance Co. (13 Fed., 250), it appeared that a mortgage
desiring to insure his own insurable interest only, correctly stated his interest, and asked that the same be
insured. The insurance company agreed to accept the risk, but the policy was issued in the name of the
owner, because of the mistaken belief of the company's agent that the law required it to be so drawn. It was
held that a court of equity had the power, at the suit of the mortgage, to reform the instrument and give
judgment in his favor for the loss thereunder, although it had been exactly as it was. Said the court: "If the
applicant correctly states his interest and distinctly asks for an insurance thereon, and the agent of the
insurer agrees to comply with his request, and assumes to decide upon the form of the policy to be written
for that purpose, and by mistake of law adopts the wrong form, a court of equity will reform the instrument
so as to make it insurance upon the interest named." (See also Fink vs. Queens Insurance Co., 24 Fed., 318;
Esch vs. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings etc., Co., vs. Charter Oak
Insurance Co., 31 Conn., 517; Balen vs. Hanover Fire Insurance Co., 67 Mich., 179.)
Similarly, in cases where the mortgage is by mistake described as owner, the court may grant reformation
and permit a recovery by the mortgage in his character as such. (Dalton vs. Milwaukee etc. Insurance Co.,
126 Iowa, 377; Spare vs. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson vs. Phoenix Insurance Co.
(136 U.S., 287; 34 L. 3d., 408), it appeared that one Kearney made application to an insurance company for
MASAOY, QMM
insurance on certain property in his hands as receiver and it was understood between him and the
company's agent that, in case of loss, the proceeds of the policy should accrue to him and his successors as
receiver and to others whom it might concern. However, the policy, as issued, was so worded as to be
payable only to him as receiver. In an action brought on the policy by a successor of Kearney, it was alleged
that the making of the contract in this form was due to inadvertence, accident, and mistake upon the part of
both Kearney and the company.
Said the court:
If by inadvertence, accident, or mistake the terms of the contract were not fully set forth in the policy, the
plaintiff is entitled to have it reformed.
In another case the same court said:
We have before us a contract from which by mistake, material stipulations have been omitted, whereby the
true intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded
agreement as to insurance, which, in point of time, preceded the preparation and delivery of the policy, and
this is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of
the parties. In the agreement there has been a mutual mistake, caused chiefly by that contracting party who
now seeks to limit the insurance to an interest in the property less than that agreed to be insured. The
written agreement did not effect that which the parties intended. That a court of equity can afford relief in
such a case, is, we think, well settled by the authorities. (Smell vs. Atlantic, etc., Ins. Co., 98 U.S., 85, 89; 25 L.
ed., 52.)
But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must
clearly appear that the contract failed to express the real agreement between the parties. (Philippine Sugar
Estates Development Company vs. Government of the Philippine Islands, 62 L. ed.,
1177, reversing Government of Philippine Island vs. Philippine Sugar Estates Development Co., 30 Phil. Rep.,
27.)
In the case now before us the proof is entirely insufficient to authorize the application of the doctrine state
in the foregoing cases, for it is by means clear from the testimony of Brias and none other was offered
that the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It
results that the defendant Harding is not entitled to relief in any aspect of the case.
The judgment is therefore affirmed, with costs against the appellant. So ordered.
INSRANCE 2ND BATCH FULLTEXT III-C Page 2 of 23
G.R. No. L-7667 November 28, 1955
CHERIE PALILEO, plaintiff-appellee,
vs.
BEATRIZ COSIO, defendant-appellant.
Claro M. Recto for appellant.
Bengson, Villegas, Jr. and Villar for appellee.
BAUTISTA ANGELO, J.:
Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the
transaction entered into between them on December 18, 1951 be declared as one of loan, and the
document executed covering the transaction as one of equitable mortgage to secure the payment of said
loan; (2) the defendant be ordered to credit to the plaintiff with the necessary amount from the sum
received by the defendant from the Associated Insurance & Surety Co., Inc. and to apply the same to the
payment of plaintiff's obligation thus considering it as fully paid; and (3) the defendant be ordered to pay to
plaintiff the difference between the alleged indebtedness of plaintiff and the sum received by defendant
from the aforementioned insurance company, plus the sum allegedly paid to defendant as interest on the
alleged indebtedness.
On December 19, 1952, defendant filed her answer setting up as special defense that the transaction
entered into between the plaintiff and defendant is one of sale with option to repurchase but that the period
for repurchase had expired without plaintiff having returned the price agreed upon as a result of which the
ownership of the property had become consolidated in the defendant. Defendant also set up certain
counterclaims which involve a total amount of P4,900.
On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by the
parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor
her counsel appeared, even if the latter had been notified of the postponement almost a month earlier, and
so the court received the evidence of the plaintiff. On January 18, 1954, the court, having in view the
evidence presented, rendered judgment granting the relief prayed for in the complaint.
On February 2, 1954, the original counsel for the defendant was substituted and the new counsel
immediately moved that the judgment be set aside on the ground that, due to mistake or excusable
negligence, defendant was unable to present her evidence and the decision was contrary to law, and this
motion having been denied, defendant took the present appeal.
The important issue to be determined in this appeal is whether the lower court committed a grave abuse of
discretion in not reopening the case to give defendant an opportunity to present her evidence considering
that the failure of her original counsel to appear was due to mistake or execusable negligence which ordinary
prudence could not have guarded against.
The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel
showed interest in the early disposal of this case by moving the court to have it set for trial. The first date set
was April 7, 1953, but no hearing was had on that date because plaintiff had moved to postpone it. The case
was next set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was transferred to
November 6, 1953. Then, upon petition of defendant, the trial had to be moved to December 15, 1953, and
because Atty. Guerrero could not appear on said date because of a case he had in Cebu City, the hearing was
postponed to January 18, 1954.
MASAOY, QMM
And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was appointed
Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and unexpected
that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any preparation at
all. It is averred that "The days that followed his appointment were very busy days for defendant's former
counsel. There was an immediate need for clearing the backlog of official business, including the
reorganization of the Department of Foreign Affairs and our Foreign Service, and more importantly, he had
to assist the Secretary of Foreign Affairs in negotiations of national importance like the Japanese reparations,
and the revision of the trade agreement with the United States, that, Atty. Guerrero had to work as much as
fourteen hours daily . . . Because of all these unavoidable confusion that followed in the wake of Atty.
Guerrero's sudden and unexpected appointment, the trial of this case scheduled for January 18, 1954
escaped his memory, and consequently, Atty. Guerrero and the defendant were unable to appear when the
case was called for trial." These reasons, it is intimated, constitute excusable negligence which ordinary
prudence could not have guarded against and should have been considered by the trial court as sufficient
justification to grant the petition of defendant for a rehearing.
It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of
mistake or excusable negligence is addressed to the sound discretion of the court (see Coombs vs. Santos, 24
Phil., 446; Daipan vs. Sigabu, 25, Phil., 184). And an order issued in the exercise of such discretion is ordinarily
not to be disturbed unless it is shown that the court has gravely abused such discretion. (See Tell vs. Tell, 48
Phil., 70; Macke vs. Camps, 5 Phil., 185; Calvo vs. De Gutierrez, 4 Phil., 203; Manzanares vs. Moreta, 38 Phil.,
821; Salva vs.Palacio and Leuterio, 90 Phil., 731.) In denying the motion for reopening the trial court said:
"After going over the same arguments, this Court is of the opinion, and so holds that the decision of this
Court of January 18, 1954 should not be disturbed." Considering the stature, ability and experience of
counsel Leon Ma. Guerrero, and the fact that he was given almost one month notice before the date set for
trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider
its decision.
Coming now to the merits of the case, we note that the lower court made the following findings: On
December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following
conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that
defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting to P4,550,
plus the sum of P250 as interest for the first month; and (c) that after making the above deductions,
defendant shall deliver to plaintiff only the balance of the loan of P12,000.
Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00
corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more
than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant
required plaintiff to sign a document known as "Conditional Sale of Residential Building", purporting to
convey to defendant, with right to repurchase, a two-story building of strong materials belonging to plaintiff.
This document did not express the true intention of the parties which was merely to place said property as
security for the payment of the loan.
After the execution of the aforesaid document, defendant insured the building against fire with the
Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in
the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant
collected from the insurance company an indemnity of P13,107.00. Plaintiff demanded from defendant that
she be credited with the necessary amount to pay her obligation out of the insurance proceeds but
defendant refused to do so. And on the strength of these facts, the court rendered decision the dispositive
part of which reads as follows:
INSRANCE 2ND BATCH FULLTEXT III-C Page 3 of 23
Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as
shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the
defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant from
the Associated Insurance & surety Co., Inc. to the payment of plaintiff's obligation in the sum of P12,000.00
as stated in the complaint, thus considering the agreement of December 18, 1951 between the herein
plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107 from the insurance
collected by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine months as
interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction
does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and
overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to
refund to herein plaintiff, plus the balance of P1,107 representing the difference of the sum loan of P12,000
and the collected insurance of P13,107 from the insurance company abovementioned to which the herein
plaintiff is entitled to receive, and to pay the costs.
The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully
compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107
representing the difference of the loan of P12,000 and the sum of P13,107 collected by said defendant from
the insurance company notwithstanding the fact that it was not proven that the insurance was taken for the
benefit of the mortgagor?
Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds of
the insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff
and in ordering said defendant to deliver to the plaintiff the difference between her indebtedness and the
amount of insurance received by the defendant, for, in the light of the majority rule we have above
enunciated, the correct solution should be that the proceeds of the insurance should be delivered to the
defendant but that her claim against the plaintiff should be considered assigned to the insurance company
who is deemed subrogated to the rights of the defendant to the extent of the money paid as indemnity.
Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as
follows:(1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an
equitable mortgage intended to secure the payment of the loan of P12,000;(2) that the proceeds of the
insurance amounting to P13,107.00 was properly collected by defendant who is not required to account for
it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have
compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming its payment
from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing the
overpayment made by plaintiff by way of interest on the loan. No pronouncement as to costs.

Is is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an
insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee,
independently of the mortgagor, insures the mortgaged property in his own name and for his own interest,
he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim
against the mortgagor, but is passed by subrogation to the insurer to the extent of the money paid." (Vance
on Insurance, 2d ed., p. 654)Or, stated in another way, "the mortgagee may insure his interest in the
property independently of the mortgagor. In that event, upon the destruction of the property the insurance
money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the
mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to the insurer, to the extent of the insurance money paid." (Vance
on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a case that arose in this
jurisdiction. In the case mentioned, an insurance contract was taken out by the mortgagee upon his own
interest, it being stipulated that the proceeds would be paid to him only and when the case came up for
decision, this Court held that the mortgagee, in case of loss, may only recover upon the policy to the extent
of his credit at the time of the loss. It was declared that the mortgaged had no right of action against the
mortgagee on the policy. (San Miguel Brewery vs. Law Union, 40 Phil., 674.)

It is true that there are authorities which hold that "If a mortgagee procures insurance on his separate
interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect
thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds
applied in reduction of the mortgage debt" (19 R.C.L., p. 405), and that, furthermore, the mortgagee "has still
a right to recover his whole debt of the mortgagor." (King vs. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins.
Co. vs. Boyden 9 Allen, 123; See also Loomis vs. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills
Emery Mfg. Co. vs. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster vs. Equitable Mut. F. Ins. Co., 2
Gray 216.) But these authorities merely represent the minority view (See case note, 3 Lawyers' Report
Annotated, new series, p. 79). "The general rule and the weight of authority is, that the insurer is thereupon
subrogated to the rights of the mortgagee under the mortgage. This is put upon the analogy of the situation
of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.)

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 4 of 23

G.R. No. 119655 May 24, 1996
SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO, VICTORINA M. RORALDO, VIRGILIO M.
RORALDO, MYRNA M. RORALDO and ROSABELLA M. RORALDO, petitioners,
vs.
COURT OF APPEALS and FORTUNE LIFE AND GENERAL INSURANCE CO., INC., respondents.
BELLOSILLO, J.:p
May a fire insurance policy be valid, binding and enforceable upon mere partial payment of premium?
On 22 January 1987 private respondent Fortune Life and General Insurance Co., Inc. (FORTUNE) issued Fire
Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their 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 Violets and the other petitioners sued FORTUNE for damages in the amount of
P600,000.00 representing the total coverage of the fire insurance policy plus 12% interest per annum,
P100,000.00 moral damages, and attorney's fees equivalent to 20% of the total claim.
On 19 July 1990 the trial court ruled for petitioners and adjudged FORTUNE liable for the total value of the
insured building and personal properties in the amount of P600,000.00 plus interest at the legal rate of 6%
per annum from the filing of the complaint until full payment, and attorney's fees equivalent to 20% of the
total amount claimed plus costs of suit.2
On 24 March 1995 the Court of Appeals reversed the court a quo by declaring FORTUNE not to be liable to
plaintiff-appellees therein but ordering defendant-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 in spite of the failure of
petitioners to pay their premium in full.
MASAOY, QMM
We find no merit in the petition; hence, we affirm the Court of Appeals.
Insurance is a contract whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event.4 The consideration is the premium, which
must be paid at the time and in the way and manner specified in the policy, and if not so paid, the policy will
lapse and be forfeited by its own terms.5
The pertinent provisions in the Policy on premium read
THIS POLICY OF INSURANCE WITNISSETH THAT only after payment to the Company in accordance with Policy
Condition No. 2 of the total premiums by the insured as stipulated above for the period aforementioned for
insuring against Loss or Damage by Fire or Lightning as herein appears, the Property herein described . . .
2. This policy including any renewal thereof and/or any endorsement thereon is not in force until the premium
has been fully paid to and duly receipted by the Company in the manner provided herein.
Any supplementary agreement seeking to amend this condition prepared by agent, broker or Company
official, shall be deemed invalid and of no effect.
xxx xxx xxx
Except only in those specific cases where corresponding rules and regulations which are or may hereafter be
in force provide for the payment of the stipulated premiums in periodic installments at fixed percentage, it is
hereby declared, agreed and warranted that this policy shall be deemed effective, valid and binding upon the
Company only when the premiums therefor have actually been paid in full and duly acknowledged in a receipt
signed by any authorized official or representative/agent of the Company in such manner as provided herein.
(emphasis supplied).6
Clearly the Policy provides for payment of premium in full. Accordingly, where the premium has only been
partially paid and the balance paid only after the peril insured against has occurred, the insurance contract
did not take effect and the insured cannot collect at all on the policy. This is fully supported by Sec. 77 of the
Insurance Code which provides
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is exposed to the peril
insured against. Notwithstanding any agreement to the contrary, no policy or contract of insurance issued by
an insurance company is valid and binding unless and until the premium thereof has been paid, except in the
case of a life or an industrial life policy whenever the grace period provision applies (emphasis supplied).
Apparently the crux of the controversy lies in the phrase "unless and until the premium thereof has been
paid." This leads us to the manner of payment envisioned by the law to make the insurance policy operative
and binding. For whatever judicial construction may be accorded the disputed phrase must ultimately yield
to the clear mandate of the law. The principle that where the law does not distinguish the court should
neither distinguish assumes that the legislature made no qualification on the use of a general word or
expression. In Escosura v. San Miguel Brewery, Inc.,7 the Court through Mr. Justice Jesus G. Barrera,
interpreting the phrase "with pay" used in connection with leaves of absence with pay granted to employees,
ruled
. . . the legislative practice seems to be that when the intention is to distinguish between full and partial
payment, the modifying term is used . . .
INSRANCE 2ND BATCH FULLTEXT III-C Page 5 of 23
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 . . . that on April 1, 1960, Fire Insurance Policy No. 9652 was issued by appellee and delivered to
appellant, and that on September 22 of the same year, the latter paid to the former the sum of P3,000.00 on
account of the total premium of P6,051.95 due thereon. There is, consequently, no doubt at all that, as
between the insurer and the insured, there was not only a perfected contract of insurance but a partially
performed one as far as the payment of the agreed premium was concerned. Thereafter the obligation of
the insurer to pay the insured the amount, for which the policy was issued in case the conditions therefor
had been complied with, arose and became binding upon it, while the obligation of the insured to pay the
remainder of the total amount of the premium due became demandable.
The 1967 Phoenix case is not persuasive; neither is it decisive of the instant dispute. For one, the factual
scenario is different. In Phoenix it was the insurance company that sued for the balance of the premium, i.e.,
it recognized and admitted the existence of an insurance contract with the insured. In the case before us,
there is, quite unlike in Phoenix, a specific stipulation that (t)his policy . . . is not in force until the premium
has been fully paid and duly receipted by the Company . . . Resultantly, it is correct to say that in Phoenix a
contract was perfected upon partial payment of the premium since the parties had not otherwise stipulated
that prepayment of the premium in full was a condition precedent to the existence of a contract.
In Phoenix, by accepting the initial payment of P3,000.00 and then later demanding the remainder of the
premium without any other precondition to its enforceability as in the instant case, the insurer in effect had
shown its intention to continue with the existing contract of insurance, as in fact it was enforcing its right to
collect premium, or exact specific performance from the insured. This is not so here. By express agreement
of the parties, no vinculum juris or bond of law was to be established until full payment was effected prior to
the occurrence of the risk insured against.
In Makati Tuscany Condominium Corp. v. Court of Appeals9 the parties mutually agreed that the premiums
could be paid in installments, which in fact they did for three (3) years, hence, this Court refused to invalidate
the insurance policy. In giving effect to the policy, the Court quoted with approval the Court of Appeals
The obligation to pay premiums when due is ordinarily an indivisible obligation to pay the entire premium.
Here, the parties . . . agreed to make the premiums payable in installments, and 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.
MASAOY, QMM
While it may be true that under Section 77 of the Insurance Code, the parties may not agree to make the
insurance contract valid and binding without payment of premiums, there is nothing in said section which
suggests that the parties may not agree to allow payment of the premiums in installment, or to consider the
contract as valid and binding upon
payment of the first premium. Otherwise we would allow the insurer to renege on its liability under the
contract, had a loss incurred (sic) before completion of payment of the entire premium, despite its voluntary
acceptance of partial payments, a result eschewed by basic considerations of fairness and equity . . .
These two (2) cases, Phoenix and Tuscany, adequately demonstrate the waiver, either express or implied, of
prepayment in full by the insurer: impliedly, by suing for the balance of the premium as in Phoenix, and
expressly, by agreeing to make premiums payable in installments as in Tuscany. But contrary to the stance
taken by petitioners, there is no waiver express or implied in the case at bench. Precisely, the insurer and the
insured expressly stipulated that (t)his policy including any renewal thereof and/or any indorsement thereon
is not in force until the premium has been fully paid to and duly receipted by the Company . . . and that this
policy shall be deemed effective, valid and binding upon the Company only when the premiums therefor have
actually been paid in full and duly acknowledged.
Conformably with the aforesaid stipulations explicitly worded and taken in conjunction with Sec. 77 of the
Insurance Code the payment of partial premium by the assured in this particular instance should not be
considered the payment required by the law and the stipulation of the parties. Rather, it must be taken in
the concept of a deposit to be held in trust by the insurer until such time that the full amount has been
tendered and duly receipted for. In other words, as expressly agreed upon in the contract, full payment must
be made before the risk occurs for the policy to be considered effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured according to law ever
resulted from the fractional payment of premium. The insurance contract itself expressly provided that the
policy would be effective only when the premium was paid in full. It would have been altogether different
were it not so stipulated. Ergo, petitioners had absolute freedom of choice whether or not to be insured by
FORTUNE under the terms of its policy and they freely opted to adhere thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of an insurance contract is the
intention of the parties as expressed in the
policy. 10 Courts have no other function but to enforce the same. The rule that 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
INSRANCE 2ND BATCH FULLTEXT III-C Page 6 of 23
A maxim of recognized practicality is the rule that the expressed exception or exemption excludes to impose whatever conditions they deem best upon their obligations not inconsistent with public
others. Exceptio firmat regulim in casibus non exceptis. The express mention of exceptions operates to policy. 17 The validity of these limitations is by law passed upon by the Insurance Commissioner who is
exclude other exceptions; conversely, those which are not within the enumerated exceptions are deemed empowered to approve all forms of policies, certificates or contracts of insurance which insurers intend to
included in the general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and the law issue or deliver. That the policy contract in the case at bench was approved and allowed issuance simply
has not expressly excepted partial payments, there is no valid and binding contract. Hence, in the absence of reaffirms the validity of such policy, particularly the provision in question.
clear waiver of prepayment in full by the insurer, the insured cannot collect on the proceeds of the policy.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of Appeals dated 24 March 1995
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is is AFFIRMED.
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 SO ORDERED.
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 Sees. 77 and 78, no policy of
insurance can ever pretend to be efficacious or effective until premium has been fully paid.

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance business
because by law the insurer must maintain a legal reserve fund to meet its contingent obligations to the
public, hence, the imperative need for its prompt payment and full satisfaction. 16 It must be emphasized
here that all actuarial calculations and various tabulations of probabilities of losses under the risks insured
against are based on the sound hypothesis of prompt payment of premiums. Upon this bedrock insurance
firms are enabled to offer the assurance of security to the public at favorable rates. But once payment of
premium is left to the whim and caprice of the insured, as when the courts tolerate the payment of a mere
P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and the balance to be paid
even after the risk insured against has occurred, as petitioners have done in this case, on the principle that
the strength of the vinculum juris is not measured by any specific amount of premium payment, we will
surely wreak havoc on the business and set to naught what has taken actuarians centuries to devise to arrive
at a fair and equitable distribution of risks and benefits between the insurer and the insured.

The terms of the insurance policy constitute the measure of the insurer's liability. In the absence of statutory
prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 7 of 23

G.R. No. 154514. July 28, 2005
WHITE GOLD MARINE SERVICES, INC., Petitioners,
vs.
PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., Respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No.
60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277.
Both decisions held that there was no violation of the Insurance Code and the respondents do not need
license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels
from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through
Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of
Entry and Acceptance.3Pioneer also issued receipts evidencing payments for the coverage. When White Gold
failed to fully pay its accounts, Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the
latters unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission
claiming that Steamship Mutual violated Sections 1864 and 1875 of the Insurance Code, while Pioneer
violated Sections 299,63007 and 3018 in relation to Sections 302 and 303, thereof.
The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to
secure a license because it was not engaged in the insurance business. It explained that Steamship Mutual
was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the
insurance business. Moreover, Pioneer was already licensed, hence, a separate license solely as agent/broker
of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate
court distinguished between P & I Clubs vis--vis conventional insurance. The appellate court also held that
Pioneer merely acted as a collection agent of Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE
PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR
BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
MASAOY, QMM
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT
RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE
WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.
FOURTH ASSIGNMENT OF ERROR
THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT
REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9
Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance
business in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship
Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license
to do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the
certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its
assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as "an
association composed of shipowners in general who band together for the specific purpose of providing
insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor
of third parties." It stresses that as a P & I Club, Steamship Mutuals primary purpose is to solicit and provide
protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its
agent.
Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance
business in the Philippines. It is merely an association of vessel owners who have come together to provide
mutual protection against liabilities incidental to shipowning.11 Respondents aver Hyopsung is inapplicable in
this case because the issue in Hyopsung was the jurisdiction of the court over Hyopsung.
Is Steamship Mutual engaged in the insurance business?
Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or
"transacting an insurance business". These are:
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely
incidental to any other legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the
doing of an insurance business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner
designed to evade the provisions of this Code.
...
INSRANCE 2ND BATCH FULLTEXT III-C Page 8 of 23
The same provision also provides, the fact that no profit is derived from the making of insurance contracts, compensation from any insurance company doing business in the Philippines or any agent thereof, without
agreements or transactions, or that no separate or direct consideration is received therefor, shall not first procuring a license so to act from the Commissioner, which must be renewed annually on the first day of
preclude the existence of an insurance business.12 January, or within six months thereafter. . .

The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the
act required to be performed, and the exact nature of the agreement in the light of the occurrence,
contingency, or circumstances under which the performance becomes requisite. It is not by what it is
called.13
Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event.14
In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the
losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the coverage of
marine insurance.
Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and
officers. Regrettably, we are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals
affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE.
The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as insurer
and insurance agent, respectively. The petitioners prayer for the revocation of Pioneers Certificate of
Authority and removal of its directors and officers, is DENIED. Costs against respondents.
SO ORDERED.

Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer
and insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a
fund from which all losses and liabilities are paid, and where the profits are divided among themselves, in
proportion to their interest.17 Additionally, mutual insurance associations, or clubs, provide three types of
coverage, namely, protection and indemnity, war risks, and defense costs.18

A P & I Club is "a form of insurance against third party liability, where the third party is anyone other than the
P & I Club and the members."19 By definition then, Steamship Mutual as a P & I Club is a mutual insurance
association engaged in the marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate
of authority mandated by Section 18720 of the Insurance Code. It maintains a resident agent in the
Philippines to solicit insurance and to collect payments in its behalf. We note that Steamship Mutual even
renewed its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to continue doing
business here, Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance
Commission.

Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or
insurance company is allowed to engage in the insurance business without a license or a certificate of
authority from the Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration22 issued by
the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the
certificate of authority23 issued by the same agency. However, a Certification from the Commission states
that Pioneer does not have a separate license to be an agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance
agent for Steamship Mutual. Section 299 of the Insurance Code clearly states:

SEC. 299 . . .

No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of
applications for insurance, or receive for services in obtaining insurance, any commission or other

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 9 of 23

G.R. No. 156167 May 16, 2005 b) Power House - P41,000.00 - 0.551%

GULF RESORTS, INC., petitioner,

c) House Shed - P55,000.00 - 0.540%
vs.
PHILIPPINE CHARTER INSURANCE CORPORATION, respondent.
P100,000.00 - for furniture, fixtures, lines air-con and opera
DECISION
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 206-4568061-
PUNO, J.: 9 (Exh. "H") provided that the policy wording and rates in said policy be copied in the policy to be issued by
defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of March 14, 1990 to
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner GULF
March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. "I"); that in the computation of
RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the
the premium, defendants Policy No. 31944 (Exh. "I"), which is the policy in question, contained on the right-
appellate court decision1 which dismissed its two appeals and affirmed the judgment of the trial court.
hand upper portion of page 7 thereof, the following:
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
companys liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its Rate-Various
earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties within
its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to the two Premium P37,420.60 F/L
swimming pools of petitioner.
2,061.52 Typhoon
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
1,030.76 EC
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said resort
insured originally with the American Home Assurance Company (AHAC-AIU). In the first four insurance
policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. "C", "D", "E" and "F"; 393.00 ES
also Exhs. "1", "2", "3" and "4" respectively), the risk of loss from earthquake shock was extended only to
plaintiffs two swimming pools, thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and Doc. Stamps 3,068.10
two (2) swimming pools only (Exhs. "C-1"; D-1", "E" and "F-1"). "Item 5" in those policies referred to the two
(2) swimming pools only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that subsequently AHAC(AIU) issued in F.S.T. 776.89
plaintiffs favor Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. "G"
also "G-1") and in said policy the earthquake endorsement clause as indicated in Exhibits "C-1", "D-1", Prem. Tax 409.05
Exhibits "E" and "F-1" was deleted and the entry under Endorsements/Warranties at the time of issue read
that plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under TOTAL 45,159.92;
Policy No. 206-4568061-9 (Exh. "H") which carried the entry under "Endorsement/Warranties at Time of
Issue", which read "Endorsement to Include Earthquake Shock (Exh. "6-B-1") in the amount of P10,700.00 that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
and paid P42,658.14 (Exhs. "6-A" and "6-B") as premium thereof, computed as follows: earthquake shock (ES); that in all the six insurance policies (Exhs. "C", "D", "E", "F", "G" and "H"), the
premium against the peril of earthquake shock is the same, that is P393.00 (Exhs. "C" and "1-B"; "2-B" and
Item - P7,691,000.00 - on the Clubhouse only "3-B-1" and "3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C-1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F",
"G" and "H") and in Policy No. 31944 issued by defendant, the shock endorsement provide(sic):
@ .392%;
In consideration of the payment by the insured to the company of the sum included additional premium the
- 1,500,000.00 - on the furniture, etc. contained in the building
Company above-mentioned@ .490%;what is stated in the printed conditions of this policy due to the contrary,
agrees, notwithstanding
that this insurance covers loss or damage to shock to any of the property insured by this Policy occasioned by
- 393,000.00 - on the two swimming pools, only (againstor through
the perilorofinearthquake
consequence of earthquake (Exhs. "1-D", "2-D", "3-A", "4-B", "5-A", "6-D" and "7-C");
shock
only) @ 0.100%
that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that on July 16, 1990 an
earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No. 31944
- 116,600.00 other buildings include as follows:
issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged.2

a) Tilter House - P19,800.00 - 0.551% After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance
Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim, then

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 10 of 23

assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and Surveyors,
Inc.3 On July 30, 1990, respondent, through its adjuster, requested petitioner to submit various documents in
support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R.
de Leon,4 rendered a preliminary report5 finding extensive damage caused by the earthquake to the
clubhouse and to the two swimming pools. Mr. de Leon stated that "except for the swimming pools, all
affected items have no coverage for earthquake shocks."6 On August 11, 1990, petitioner filed its formal
demand7 for settlement of the damage to all its properties in the Agoo Playa Resort. On August 23, 1990,
respondent denied petitioners claim on the ground that its insurance policy only afforded earthquake shock
coverage to the two swimming pools of the resort.8 Petitioner and respondent failed to arrive at a
settlement.9 Thus, on January 24, 1991, petitioner filed a complaint10 with the regional trial court of Pasig
praying for the payment of the following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest thereon,
as computed under par. 29 of the policy (Annex "B") until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account of
defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.11
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims.12
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of
earthquake shock, the same premium it paid against earthquake shock only on the two swimming pools in all
the policies issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the Court must
consequently agree with the position of defendant that the endorsement rider (Exhibit "7-C") means that
only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the language
used in an insurance contract or application is such as to create ambiguity the same should be resolved
against the party responsible therefor, i.e., the insurance company which prepared the contract. To the mind
of [the] Court, the language used in the policy in litigation is clear and unambiguous hence there is no need
for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had earthquake shock
coverage and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant having
admitted that the damage to the swimming pools was appraised by defendants adjuster at P386,000.00,
defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is
liable only for the damage caused to the two (2) swimming pools and that defendant has made known to
plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of the other
damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the
action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the plaintiffs
MASAOY, QMM
right to come to Court in the honest belief that their Complaint is meritorious. The prayer, therefore, of
defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED
EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2) swimming pools, with
interest at 6% per annum from the date of the filing of the Complaint until defendants obligation to plaintiff
is fully paid.
No pronouncement as to costs.13
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
Appeals based on the following assigned errors:14
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR THE DAMAGE
TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS PROVISIONS, THE
CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES
SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER UNDER
DEFENDANT-APPELLEES POLICY (NO. 31944; EXH "I") BY LIMITING ITSELF TO A CONSIDERATION OF THE SAID
POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO THE DAMAGES
CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it attorneys
fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that the
last two (2) insurance contracts (Exhs. "G" and "H"), which the plaintiff-appellant had with AHAC (AIU) and
upon which the subject insurance contract with Philippine Charter Insurance Corporation is said to have
been based and copied (Exh. "I"), covered an extended earthquake shock insurance on all the insured
properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the
imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting
to P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused on
the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable only, it then
cannot be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the award
thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not be
disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover, being the award
thereof an exception rather than a rule, it is necessary for the court to make findings of facts and law that
would bring the case within the exception and justify the grant of such award (Country Bankers Insurance
Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002).
INSRANCE 2ND BATCH FULLTEXT III-C Page 11 of 23
Therefore, holding that the plaintiff-appellants action is not baseless and highly speculative, We find that the
Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial
Court hereby AFFIRMED in toto. No costs.15
Petitioner filed the present petition raising the following issues:16
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS INSURANCE POLICY
NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED
THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR DAMAGES WITH
INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not
only the swimming pools. It used the words "any property insured by this policy," and it should be
interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the
body of the insurance policy itself, which states that it is "[s]ubject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment
Agreement On Long Term Policies."17
Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake
shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted
the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the
insurance policy, because the rider is the more deliberate expression of the agreement of the contracting
parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and
against respondent. It was respondent which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools
from the coverage for the risk of fire. It should not be used to limit the respondents liability for earthquake
shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under the
extended coverage. The premium for the earthquake shock coverage was already included in the premium
paid for the policy.
MASAOY, QMM
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake
shock coverage to all insured properties. When it secured an insurance policy from respondent, petitioner
told respondent that it wanted an exact replica of its latest insurance policy from American Home Assurance
Company (AHAC-AIU), which covered all the resorts properties for earthquake shock damage and
respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that it was covered
for earthquake shock. Respondents insurance adjuster, Bayne Adjusters and Surveyors, Inc., likewise
requested petitioner to submit the necessary documents for its building claims and other repair costs. Thus,
under the doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to petitioner
covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the Revised
Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the
facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:18
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage
against earthquake shock to petitioners insured properties other than on the two swimming pools.
Petitioner admitted that from 1984 to 1988, only the two swimming pools were insured against earthquake
shock. From 1988 until 1990, the provisions in its policy were practically identical to its earlier policies, and
there was no increase in the premium paid. AHAC-AIU, in a letter19 by its representative Manuel C. Quijano,
categorically stated that its previous policy, from which respondents policy was copied, covered only
earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy only
covered earthquake shock damage on the two swimming pools. The amount was the same amount paid by
petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No additional
premium was paid to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the
two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of
petitioners properties. As per its agreement with petitioner, respondent copied its policy from the AHAC-AIU
policy provided by petitioner. Although the first five policies contained the said qualification in their riders
title, in the last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda III,
stated that such deletion was a mere inadvertence. This inadvertence did not make the policy incomplete,
nor did it broaden the scope of the endorsement whose descriptive title was merely enumerated. Any
ambiguity in the policy can be easily resolved by looking at the other provisions, specially the enumeration of
the items insured, where only the two swimming pools were noted as covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase "Item 5
P393,000.00 on the two swimming pools only (against the peril of earthquake shock only)" meant that
only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two swimming pools as "Item 3."
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the
properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for
coverage of the swimming pools against earthquake shock. No other premium was paid for earthquake
shock coverage on the other properties. In addition, the use of the qualifier "ANY" instead of "ALL" to
describe the property covered was done deliberately to enable the parties to specify the properties included
for earthquake coverage.
INSRANCE 2ND BATCH FULLTEXT III-C Page 12 of 23
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in
the earthquake shock coverage. Petitioners own evidence shows that it only required respondent to follow
the exact provisions of its previous policy from AHAC-AIU. Respondent complied with this requirement.
Respondents only deviation from the agreement was when it modified the provisions regarding the
replacement cost endorsement. With regard to the issue under litigation, the riders of the old policy and the
policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The adjusters letter
notifying petitioner to present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase "Item 5 Only" after the
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect the
parties clear intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any
deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be
considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only)20
Second, under the breakdown for premium payments,21 it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.0022]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in consequence, directly or
indirectly of any of the following occurrences, namely:--
(a) Earthquake, volcanic eruption or other convulsion of nature. 23
Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To Include the Perils of
Explosion, Aircraft, Vehicle and Smoke)," stated, viz:
MASAOY, QMM
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF FIVE
MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x POLICY
HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE
PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .
additional premium the Company agrees, notwithstanding what is stated in the printed conditions of this
Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire) to any of
the property insured by this Policy occasioned by or through or in consequence of Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby
expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply also to
loss or damage occasioned by or through or in consequence of Earthquake.24
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the earthquake
shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance
with each other.25 All its parts are reflective of the true intent of the parties. The policy cannot be construed
piecemeal. Certain stipulations cannot be segregated and then made to control; neither do particular words
or phrases necessarily determine its character. Petitioner cannot focus on the earthquake shock
endorsement to the exclusion of the other provisions. All the provisions and riders, taken and interpreted
together, indubitably show the intention of the parties to extend earthquake shock coverage to the two
swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event. Thus, an insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of
persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.26 (Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against a
specified peril.27 In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as the
risk attaches.28 In the subject policy, no premium payments were made with regard to earthquake shock
coverage, except on the two swimming pools. There is no mention of any premium payable for the other
INSRANCE 2ND BATCH FULLTEXT III-C Page 13 of 23
resort properties with regard to earthquake shock. This is consistent with the history of petitioners previous
insurance policies from AHAC-AIU. As borne out by petitioners witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the period
from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two swimming
pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a provision
here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming pools
only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to your
instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give
written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must extend to
all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect of
extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake
tremor in La Union?
MASAOY, QMM
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your
instructions that all properties must be covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit
"G"?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no more
limitation referring to the two swimming pools only, I was contented already that the previous limitation
pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase "Subject to: Other Insurance Clause, Typhoon
Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual
Payment Agreement on Long Term Policies"29 to the insurance policy as proof of the intent of the parties to
extend the coverage for earthquake shock. However, this phrase is merely an enumeration of the descriptive
titles of the riders, clauses, warranties or endorsements to which the policy is subject, as required under
Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the coverage to
the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the
testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III30
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by counsel for
defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6) policies issued by
your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an
earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in
Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock as
provided for in each of the six (6) policies?
xxx
WITNESS:
INSRANCE 2ND BATCH FULLTEXT III-C Page 14 of 23
The extent of the coverage is only up to the two (2) swimming pools, sir. other as stated in the policy. As I see, there is no increase in the amount of the premium. I must say that the
coverage was not broaden (sic) to include the other items.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
COURT:
A. Yes, sir.
They are the same, the premium rates?
ATTY. MEJIA:
WITNESS:
What is your basis for stating that the coverage against earthquake shock as provided for in each of the six
(6) policies extend to the two (2) swimming pools only? They are the same in the sence (sic), in the amount of the coverage. If you are going to do some computation
based on the rates you will arrive at the same premiums, your Honor.
WITNESS:
CROSS-EXAMINATION OF JUAN BARANDA III
Because it says here in the policies, in the enumeration "Earthquake Shock Endorsement, in the Clauses and TSN, September 7, 1992
Warranties: Item 5 only (Earthquake Shock Endorsement)," sir. pp. 4-6
ATTY. MEJIA: ATTY. ANDRES:
Witness referring to Exhibit C-1, your Honor. Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS: WITNESS:

We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we do No, we dont, sir.
cover earthquake shock. For building we covered it for full earthquake coverage which includes earthquake
shock Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was placed, is it not?

COURT: A. Yes, sir.

As far as earthquake shock endorsement you do not have a specific coverage for other things other than ATTY. ANDRES:
swimming pool? You are covering building? They are covered by a general insurance?
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during your
WITNESS: direct-examination, the phrase "Item no. 5 only" meaning to (sic) the two (2) swimming pools was deleted
from the policies issued by AIU, is it not?
Earthquake shock coverage could not stand alone. If we are covering building or another we can issue
earthquake shock solely but that the moment I see this, the thing that comes to my mind is either insuring a xxx
swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.
ATTY. ANDRES:
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992 As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for the
pp. 23-25 policies?

Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive WITNESS:
[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G and H
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
respectively entend the coverage against earthquake shock to all the properties indicated in the respective
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued with
schedules attached to said policies, what can you say about that testimony of plaintiffs witness?
no specific attachments, premium rates and so on. It was inadvertent, sir.
WITNESS:
The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the
that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it, if earthquake shock endorsement included all its properties in the resort. Respondent only insured the
we are going to look at the premium there has been no change with respect to the rates. Everytime (sic) properties as intended by the petitioner. Petitioners own witness testified to this agreement, viz:
there is a renewal if the intention of the insurer was to include the earthquake shock, I think there is a
substantial increase in the premium. We are not only going to consider the two (2) swimming pools of the

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 15 of 23

CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty. Omlas
(sic) to copy from Exhibit "H" for purposes of procuring the policy from Philippine Charter Insurance
Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this American
Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit "H" of course?
A. Yes, sir, to Exhibit "H".
Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging will be
limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
coverage of Exhibits "I" and "H" sometime in the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as
scope of coverage of Exhibits "I" and "H" respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy wordings
and rates were copied from the insurance policy I sent them but it was only when this case erupted that we
discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time
between those indicated in Exhibit "I" and those indicated in Exhibit "H" respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00
on the two (2) swimming pools only against the peril of earthquake shock which I understood before that
this provision will have to be placed here because this particular provision under the peril of earthquake
shock only is requested because this is an insurance policy and therefore cannot be insured against fire, so
this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty.
Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors, Inc.,
MASAOY, QMM
respondent never meant to lead petitioner to believe that the endorsement for earthquake shock covered
properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the policy
issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake shock.
Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out in the policy
and he confirmed to me indeed only Item 3 which were the two swimming pools have coverage for
earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming
pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I found out that under
Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in parenthesis
(against the peril[s] of earthquake shock only), and secondly, when I examined the summary of premium
payment only Item 3 which refers to the swimming pools have a computation for premium payment for
earthquake shock and all the other items have no computation for payment of premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the general
rule that insurance contracts are contracts of adhesion which should be liberally construed in favor of the
insured and strictly against the insurer company which usually prepares it.31 A contract of adhesion is one
wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely
affixes his signature or his "adhesion" thereto. Through the years, the courts have held that in these type of
contracts, the parties do not bargain on equal footing, the weaker party's participation being reduced to the
alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the
courts of justice must protect.32 Consequently, any ambiguity therein is resolved against the insurer, or
construed liberally in favor of the insured.33
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.34 Thus, we have called on lower courts to remain
careful in scrutinizing the factual circumstances behind each case to determine the efficacy of the claims of
contending parties. In Development Bank of the Philippines v. National Merchandising Corporation, et
al.,35 the parties, who were acute businessmen of experience, were presumed to have assented to the
assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did
not know the provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatimthe provisions and terms of its latest insurance policy from AHAC-AIU. The
testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is
reflective of petitioners knowledge, viz:
INSRANCE 2ND BATCH FULLTEXT III-C Page 16 of 23
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36
TSN, September 23, 1991
pp. 20-21

Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo Playa?

A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we had
with American Home Assurance Corporation.

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American Home
Insurance policy are to be incorporated in the PCIC policy?

A. Yes, sir.

Q. What steps did you take?

A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that the
policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9 in
drafting its Insurance Policy No. 31944. It is true that there was variance in some terms, specifically in the
replacement cost endorsement, but the principal provisions of the policy remained essentially similar to
AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this case
as the parties intent to limit the coverage of the policy to the two swimming pools only is not ambiguous.37

IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is dismissed.
No costs.

SO ORDERED.

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 17 of 23

G.R. No. 175666 July 29, 2013
MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.
vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business from or provide
insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly investigate
those they insure within two years from effectivity of the policy and while the insured is still alive. If they do
not, they will be obligated to honor claims on the policies they issue, regardless of fraud, concealment or
misrepresentation. The law assumes that they will do just that and not sit on their laurels, indiscriminately
soliciting and accepting insurance business from any Tom, Dick and Harry.
Assailed in this Petition for Review on Certiorari1 are the September 28, 2005 Decision2 of the Court of
Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 Resolution3 denying the petitioners Motion
for Reconsideration.4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life Insurance
Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her niece,5 as her beneficiary.
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of 100,000.00, in Soteros favor
on August 30, 1993, after the requisite medical examination and payment of the insurance premium.6
On April 10, 1996,7 when the insurance policy had been in force for more than two years and seven months,
Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996. Petitioner conducted an
investigation into the claim,8 and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to pay the insurance premiums on Insurance Policy No.
747411;
4. Sotero did not sign the July 3, 1993 application for insurance;9 and
5. Respondent was the one who filed the insurance application, and x x x designated herself as the
beneficiary.10
For the above reasons, petitioner denied respondents claim on April 16, 1997 and refunded the premiums
paid on the policy.11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy, which was
docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial Court. The main
thesis of the Complaint was that the policy was obtained by fraud, concealment and/or misrepresentation
under the Insurance Code,12 which thus renders it voidable under Article 139013 of the Civil Code.
MASAOY, QMM
Respondent filed a Motion to Dismiss14 claiming that petitioners cause of action was barred by prescription
pursuant to Section 48 of the Insurance Code, which provides as follows:
Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this chapter,
such right must be exercised previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured shall have been in force during the
lifetime of the insured for a period of two years from the date of its issue or of its last reinstatement, the
insurer cannot prove that the policy is void ab initio or is rescindible by reason of the fraudulent concealment
or misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioners investigator testified in court, stating among
others that the insurance underwriter who solicited the insurance is a cousin of respondents husband,
Dindo Aban,15 and that it was the respondent who paid the annual premiums on the policy.16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an Order17 granting respondents Motion to Dismiss, thus:
WHEREFORE, defendant CRESENCIA P. ABANs Motion to Dismiss is hereby granted. Civil Case No. 97-867 is
hereby dismissed.
SO ORDERED.18
In dismissing the case, the trial court found that Sotero, and not respondent, was the one who procured the
insurance; thus, Sotero could legally take out insurance on her own life and validly designate as she did
respondent as the beneficiary. It held further that under Section 48, petitioner had only two years from the
effectivity of the policy to question the same; since the policy had been in force for more than two years,
petitioner is now barred from contesting the same or seeking a rescission or annulment thereof.
Petitioner moved for reconsideration, but in another Order19 dated October 20, 1998, the trial court stood its
ground.
Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner questioned the
dismissal of Civil Case No. 97-867, arguing that the trial court erred in applying Section 48 and declaring that
prescription has set in. It contended that since it was respondent and not Sotero who obtained the
insurance, the policy issued was rendered void ab initio for want of insurable interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed Decision, which contained the following decretal portion:
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying Section 48 to petitioners case, the CA held that petitioner
may no longer prove that the subject policy was void ab initio or rescindible by reason of fraudulent
concealment or misrepresentation after the lapse of more than two years from its issuance. It ratiocinated
that petitioner was equipped with ample means to determine, within the first two years of the policy,
whether fraud, concealment or misrepresentation was present when the insurance coverage was obtained.
INSRANCE 2ND BATCH FULLTEXT III-C Page 18 of 23
If it failed to do so within the statutory two-year period, then the insured must be protected and allowed to
claim upon the policy.
Petitioner moved for reconsideration,21 but the CA denied the same in its November 9, 2006
Resolution.22 Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I reveals that it was respondent, posing as Sotero, who obtained the insurance, this claim is no longer feasible
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF THE TRIAL COURT DISMISSING THE
COMPLAINT ON THE GROUND OF PRESCRIPTION IN CONTRAVENTION (OF) PERTINENT LAWS AND
APPLICABLE JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION OF THE INCONTESTABILITY
PROVISION IN THE INSURANCE CODE BY THE TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONERS MOTION FOR RECONSIDERATION.23
Petitioners Arguments
In praying that the CA Decision be reversed and that the case be remanded to the trial court for the conduct
of further proceedings, petitioner argues in its Petition and Reply24 that Section 48 cannot apply to a case
where the beneficiary under the insurance contract posed as the insured and obtained the policy under
fraudulent circumstances. It adds that respondent, who was merely Soteros niece, had no insurable interest
in the life of her aunt.
Relying on the results of the investigation that it conducted after the claim for the insurance proceeds was
filed, petitioner insists that respondents claim was spurious, as it appeared that Sotero did not actually apply
for insurance coverage, was unlettered, sickly, and had no visible source of income to pay for the insurance
premiums; and that respondent was an impostor, posing as Sotero and fraudulently obtaining insurance in
the latters name without her knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given rise to rights
and obligations; as such, the action for the declaration of its nullity or inexistence does not prescribe.25
Respondents Arguments
Respondent, on the other hand, essentially argues in her Comment26 that the CA is correct in applying
Section 48. She adds that petitioners new allegation in its Petition that the policy is void ab initio merits no
attention, having failed to raise the same below, as it had claimed originally that the policy was merely
voidable.
On the issue of insurable interest, respondent echoes the CAs pronouncement that since it was Sotero who
obtained the insurance, insurable interest was present. Under Section 10 of the Insurance Code, Sotero had
MASAOY, QMM
insurable interest in her own life, and could validly designate anyone as her beneficiary. Respondent submits
that the CAs findings of fact leading to such conclusion should be respected.
Our Ruling
The Court denies the Petition.
The Court will not depart from the trial and appellate courts finding that it was Sotero who obtained the
insurance for herself, designating respondent as her beneficiary. Both courts are in accord in this respect,
and the Court is loath to disturb this. While petitioner insists that its independent investigation on the claim
in the wake of the courts finding that it was Sotero who obtained the insurance for herself. This finding of
fact binds the Court.
With the above crucial finding of fact that it was Sotero who obtained the insurance for herself
petitioners case is severely weakened, if not totally disproved. Allegations of fraud, which are predicated on
respondents alleged posing as Sotero and forgery of her signature in the insurance application, are at once
belied by the trial and appellate courts finding that Sotero herself took out the insurance for herself.
"Fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the
contract."27 In the absence of proof of such fraudulent intent, no right to rescind arises.
Moreover, the results and conclusions arrived at during the investigation conducted unilaterally by petitioner
after the claim was filed may simply be dismissed as self-serving and may not form the basis of a cause of
action given the existence and application of Section 48, as will be discussed at length below.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under the
provision, an insurer is given two years from the effectivity of a life insurance contract and while the
insured is alive to discover or prove that the policy is void ab initio or is rescindible by reason of the
fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period lapses,
or when the insured dies within the period, the insurer must make good on the policy, even though the
policy was obtained by fraud, concealment, or misrepresentation. This is not to say that insurance fraud
must be rewarded, but that insurers who recklessly and indiscriminately solicit and obtain business must be
penalized, for such recklessness and lack of discrimination ultimately work to the detriment of bona fide
takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives insurers
enough time to inquire whether the policy was obtained by fraud, concealment, or misrepresentation; on
the other hand, it forewarns scheming individuals that their attempts at insurance fraud would be timely
uncovered thus deterring them from venturing into such nefarious enterprise. At the same time, legitimate
policy holders are absolutely protected from unwarranted denial of their claims or delay in the collection of
insurance proceeds occasioned by allegations of fraud, concealment, or misrepresentation by insurers,
claims which may no longer be set up after the two-year period expires as ordained under the law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the insured are given
the assurance that any dishonest scheme to obtain life insurance would be exposed, and attempts at unduly
denying a claim would be struck down. Life insurance policies that pass the statutory two-year period are
essentially treated as legitimate and beyond question, and the individuals who wield them are made secure
by the thought that they will be paid promptly upon claim. In this manner, Section 48 contributes to the
stability of the insurance industry.
INSRANCE 2ND BATCH FULLTEXT III-C Page 19 of 23
Section 48 prevents a situation where the insurer knowingly continues to accept annual premium payments
on life insurance, only to later on deny a claim on the policy on specious claims of fraudulent concealment
and misrepresentation, such as what obtains in the instant case. Thus, instead of conducting at the first
instance an investigation into the circumstances surrounding the issuance of Insurance Policy No. 747411
which would have timely exposed the supposed flaws and irregularities attending it as it now professes,
petitioner appears to have turned a blind eye and opted instead to continue collecting the premiums on the
policy. For nearly three years, petitioner collected the premiums and devoted the same to its own profit. It
cannot now deny the claim when it is called to account. Section 48 must be applied to it with full force and
effect.
The Court therefore agrees fully with the appellate courts pronouncement that
the "incontestability clause" is a provision in law that after a policy of life insurance made payable on the
death of the insured shall have been in force during the lifetime of the insured for a period of two (2) years
from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is void ab initio
or is rescindible by reason of fraudulent concealment or misrepresentation of the insured or his agent.
The purpose of the law is to give protection to the insured or his beneficiary by limiting the rescinding of the
contract of insurance on the ground of fraudulent concealment or misrepresentation to a period of only two
(2) years from the issuance of the policy or its last reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or
misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums as
long as the insured is still alive, only to raise the issue of fraudulent concealment or misrepresentation when
the insured dies in order to defeat the right of the beneficiary to recover under the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given the
stability to recover under the policy when the insured dies. The provision also makes clear when the two-
year period should commence in case the policy should lapse and is reinstated, that is, from the date of the
last reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how patent or well-founded,
will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance companies to avoid
liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are concerned if the
insurance has been in force for at least two years during the insureds lifetime. The phrase "during the
lifetime" found in Section 48 simply means that the policy is no longer considered in force after the insured
has died. The key phrase in the second paragraph of Section 48 is "for a period of two years."
Well-settled is the rule that it is the plaintiff-appellants burden to show that the factual findings of the trial
court are not based on substantial evidence or that its conclusions are contrary to applicable law and
jurisprudence. The plaintiff-appellant failed to discharge that burden.28
Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the cousin of
respondents husband, and thus insinuates that both connived to commit insurance fraud. If this were truly
the case, then petitioner would have discovered the scheme earlier if it had in earnest conducted an
investigation into the circumstances surrounding the Sotero policy. But because it did not and it investigated
the Sotero account only after a claim was filed thereon more than two years later, naturally it was unable to
detect the scheme. For its negligence and inaction, the Court cannot sympathize with its plight. Instead, its
case precisely provides the strong argument for requiring insurers to diligently conduct investigations on
each policy they issue within the two-year period mandated under Section 48, and not after claims for
insurance proceeds are filed with them.
Besides, if insurers cannot vouch for the integrity and honesty of their insurance agents/salesmen and the
insurance policies they issue, then they should cease doing business. If they could not properly screen their
agents or salesmen before taking them in to market their products, or if they do not thoroughly investigate
the insurance contracts they enter into with their clients, then they have only themselves to blame.
Otherwise said, insurers cannot be allowed to collect premiums on insurance policies, use these amounts
collected and invest the same through the years, generating profits and returns therefrom for their own
benefit, and thereafter conveniently deny insurance claims by questioning the authority or integrity of their
own agents or the insurance policies they issued to their premium-paying clients. This is exactly one of the
schemes which Section 48 aims to prevent.
Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping that the
inevitable may be put off for years or even decades by the pendency of these unnecessary court cases. In
the meantime, they benefit from collecting the interest and/or returns on both the premiums previously paid
by the insured and the insurance proceeds which should otherwise go to their beneficiaries. The business of
insurance is a highly regulated commercial activity in the country,29 and is imbued with public interest.30 "An
insurance contract is a contract of adhesion which must be construed liberally in favor of the insured and
strictly against the insurer in order to safeguard the formers interest."31
WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the November 9, 2006
Resolution of the Court of Appeals in CA-G.R. CV No. 62286 are AFFIRMED.
SO ORDERED.

As borne by the records, the policy was issued on August 30, 1993, the insured died on April 10, 1996, and
the claim was denied on April 16, 1997. The insurance policy was thus in force for a period of 3 years, 7
months, and 24 days. Considering that the insured died after the two-year period, the plaintiff-appellant is,
therefore, barred from proving that the policy is void ab initio by reason of the insureds fraudulent
concealment or misrepresentation or want of insurable interest on the part of the beneficiary, herein
defendant-appellee.

MASAOY, QMM INSRANCE 2ND BATCH FULLTEXT III-C Page 20 of 23

G.R. No. 190702, February 27, 2017
JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND SURETY CORPORATION, Respondent.
DECISION
JARDELEZA, J.:
This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA) September 11, 2009
Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225. The CA reversed the September 24,
2003 Decision4 of the Regional Trial Court (RTC) in Civil Case No. 97-85464. The RTC granted Jaime T.
Gaisano's (petitioner) claim on the proceeds of the comprehensive commercial vehicle policy issued by
Development Insurance and Surety Corporation (respondent), viz.:ChanRoblesVirtualawlibrary
IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-appellant ordered
to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent per annum from the date of
the denial of the claim on October 9, 1996 until payment.
SO ORDERED.5chanroblesvirtuallawlibrary
I to allow a recovery on the policy while allowing respondent to retain the premium paid.27 Thus, petitioner
The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero with plate
number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in the insurance
business.6 On September 27, 1996, respondent issued a comprehensive commercial vehicle policy7 to
petitioner in the amount of P1,500,000.00 over the vehicle for a period of one year commencing on
September 27, 1996 up to September 27, 1997.8 Respondent also issued two other commercial vehicle
policies to petitioner covering two other motor vehicles for the same period.9
To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific Underwriters
Agency (Trans-Pacific), issued a statement of account to petitioner's company, Noah's Ark Merchandising
(Noah's Ark).10 Noah's Ark immediately processed the payments and issued a Far East Bank check dated
September 27, 1996 payable to Trans-Pacific on the same day.11 The check bearing the amount of
P140,893.50 represents payment for the three insurance policies, with P55,620.60 for the premium and
other charges over the vehicle.12 However, nobody from Trans-Pacific picked up the check that day
(September 27) because its president and general manager, Rolando Herradura, was celebrating his birthday.
Trans-Pacific informed Noah's Ark that its messenger would get the check the next day, September 28.13
In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing manager
Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in the vicinity of SM
Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the Philippine National Police Traffic
Management Command at Camp Crame in Quezon City.14 Despite search and retrieval efforts, the vehicle
was not recovered.15
Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It issued an official
receipt numbered 124713 dated September 28, 1996, acknowledging the receipt of P55,620.60 for the
premium and other charges over the vehicle.16 The check issued to Trans-Pacific for P140,893.50 was
deposited with Metrobank for encashment on October 1, 1996.17
MASAOY, QMM
On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner reported the
loss and filed a claim with respondent for the insurance proceeds of P1,500,000.00.18 After investigation,
respondent denied petitioner's claim on the ground that there was no insurance contract.19 Petitioner,
through counsel, sent a final demand on July 7, 1997.20 Respondent, however, refused to pay the insurance
proceeds or return the premium paid on the vehicle.
On October 9, 1997, petitioner filed a complaint for collection of sum of money and damages21 with the RTC
where it sought to collect the insurance proceeds from respondent. In its Answer,22 respondent asserted that
the non-payment of the premium rendered the policy ineffective. The premium was received by the
respondent only on October 2, 1996, and there was no known loss covered by the policy to which the
payment could be applied.23
In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered the premium
paid as of September 27, even if the check was received only on September 28 because (1) respondent's
agent, Trans-Pacific, acknowledged payment of the premium on that date, September 27, and (2) the check
that petitioner issued was honored by respondent in acknowledgment of the authority of the agent to
receive it.25 Instead of returning the premium, respondent sent a checklist of requirements to petitioner and
assigned an underwriter to investigate the claim.26 The RTC ruled that it would be unjust and inequitable not
was awarded an indemnity of P1,500,000.00 and attorney's fees of P50,000.00.28
After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records were
forwarded to the CA.31
The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance contract
becomes valid and binding only after the premium is paid pursuant to Section 77 of the Insurance Code
(Presidential Decree No. 612, as amended by Republic Act No. 10607).33 It found that the premium was not
yet paid at the time of the loss on September 27, but only a day after or on September 28, 1996, when the
check was picked up by Trans-Pacific.34 It also found that none of the exceptions to Section 77 obtains in this
case.35 Nevertheless, the CA ordered respondent to return the premium it received in the amount of
P55,620.60, with interest at the rate of 6% per annum from the date of the denial of the claim on October 9,
1996 until payment.36
Hence petitioner filed this petition. He argues that there was a valid and binding insurance contract between
him and respondent.37 He submits that it comes within the exceptions to the rule in Section 77 of the
Insurance Code that no contract of insurance becomes binding unless and until the premium thereof has
been paid. The prohibitive tenor of Section 77 does not apply because the parties stipulated for the payment
of premiums.38 The parties intended the contract of insurance to be immediately effective upon issuance,
despite non-payment of the premium, because respondent trusted petitioner.39He adds that respondent
waived its right to a pre-payment in full of the terms of the policy, and is in estoppel.40
Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only to the return
of the premiums paid, then he should be able to recover the full amount of P140,893.50, and not merely
P55,620.60.41 The insurance policy covered three vehicles yet respondent's intention was merely to
disregard the contract for only the lost vehicle.42 According to petitioner, the principle of mutuality of
contracts is violated, at his expense, if respondent is allowed to be excused from performance on the
insurance contract only for one vehicle, but not as to the two others, just because no loss is suffered as to
the two. To allow this "would be to place exclusively in the hands of one of the contracting parties the right
INSRANCE 2ND BATCH FULLTEXT III-C Page 21 of 23
to decide whether the contract should stand or not x x x."43
For failure of respondent to tile its comment to the petition, we declared respondent to have waived its right
to file a comment in our June 15, 2011 Resolution.44
The lone issue here is whether there is a binding insurance contract between petitioner and respondent.
II
We deny the petition.
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.45 Just like any other contract, it requires a
cause or consideration. The consideration is the premium, which must be paid at the time and in the way
and manner specified in the policy.46 If not so paid, the policy will lapse and be forfeited by its own terms.47
The law, however, limits the parties' autonomy as to when payment of premium may be made for the
contract to take effect. The general rule in insurance laws is that unless the premium is paid, the insurance
policy is not valid and binding.48 Section 77 of the Insurance Code, applicable at the time of the issuance of
the policy, provides:ChanRoblesVirtualawlibrary
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.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in an insurance
contract, both the insured and insurer undertake risks. On one hand, there is the insured, a member of a
group exposed to a particular peril, who contributes premiums under the risk of receiving nothing in return
in case the contingency does not happen; on the other, there is the insurer, who undertakes to pay the
entire sum agreed upon in case the contingency happens. This risk-distributing mechanism operates under a
system where, by prompt payment of the premiums, the insurer is able to meet its legal obligation to
maintain a legal reserve fund needed to meet its contingent obligations to the public. The premium,
therefore, is the elixir vitae or source of life of the insurance business:ChanRoblesVirtualawlibrary
In the desire to safeguard the interest of the assured, it must not be ignored that the contract of insurance is
primarily a risk-distributing device, a mechanism by which all members of a group exposed to a particular risk
contribute premiums to an insurer. From these contributory funds are paid whatever losses occur due to
exposure to the peril insured against. Each party therefore takes a risk: the insurer, that of being compelled
upon the happening of the contingency to pay the entire sum agreed upon, and the insured, that of parting
with the amount required as premium. without receiving anything therefor in case the contingency does not
happen. To ensure payment tor these losses, the law mandates all insurance companies to maintain a legal
reserve fund in favor of those claiming under their policies. 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 willfully 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? x x x
MASAOY, QMM
xxx
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. 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 other the assurance of security to the public at favorable rates. x x x50 (Citations omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's agent, Trans-
Pacific, only on September 28, 1996. No payment of premium had thus been made at the time of the loss of
the vehicle on September 27, 1996. While petitioner claims that Trans-Pacific was informed that the check
was ready for pick-up on September 27, 1996, the notice of the availability of the check, by itself, does not
produce the effect of payment of the premium. Trans-Pacific could not be considered in delay in accepting
the check because when it informed petitioner that it will only be able to pick-up the check the next day,
petitioner did not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there
was no payment of premium yet to make the insurance policy effective.
There are, of course, exceptions to the rule that no insurance contract takes effect unless premium is paid.
In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we said:ChanRoblesVirtualawlibrary
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:ChanRoblesVirtualawlibrary
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, 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:ChanRoblesVirtualawlibrary
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 insurer's intention to honor the
policies it issued to petitioner. Certainly, basic principles of equity and fairness would not allow the insurer to
continue collecting and accepting the premiums, although paid on installments, and later deny liability on
the lame excuse that the premiums were not prepaid in full.
INSRANCE 2ND BATCH FULLTEXT III-C Page 22 of 23
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:ChanRoblesVirtualawlibrary
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 docs not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good customs, public
order or public policy (De Leon,' The Insurance Code, p. 175). So is an understanding to allow insured to pay
premiums in installments not so prescribed. At the very least, both parties should be deemed in estoppel to
question the arrangement they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has provided a
fourth exception to Section 77, namely, that the insurer may grant credit extension for the payment of the
premium. This simply means that if the insurer has granted the insured a credit term for the payment of the
premium and loss occurs before the expiration of the term, recovery on the policy should be allowed even
though the premium is paid after the loss but within the credit term.
xxx
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
77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life or industrial
life policy, whenever the grace period provision applies, as expressly provided by Section 77 itself; (2) where
the insurer acknowledged in the policy or contract of insurance itself the receipt of premium, even if
premium has not been actually paid, as expressly provided by Section 78 itself; (3) where the parties agreed
that premium payment shall be in installments and partial payment has been made at the time of loss, as
held in Makati Tuscany Condominium Corp. v. Court of Appeals;53 (4) where the insurer granted the insured a
credit term for the payment of the premium, and loss occurs before the expiration of the term, as held
in Makati Tuscany Condominium Corp.; and (5) where the insurer is in estoppel as when it has consistently
granted a 60 to 90-day credit term for the payment of premiums.
The insurance policy in question does not fall under the first to third exceptions laid out in UCPB General
Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the policy does not contain an
acknowledgment of the receipt of premium but merely a statement of account on its face;54 and (3) no
payment of an installment was made at the time of loss on September 27.
Petitioner argues that his case falls under the fourth and fifth exceptions because the parties intended the
contract of insurance to be immediately effective upon issuance, despite non-payment of the premium. This
waiver to a pre-payment in full of the premium places respondent in estoppel.
MASAOY, QMM
We do not agree with petitioner.
The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati Tuscany
Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations where the insurers
have consistently granted the insured a credit extension or term for the payment of the premium. Here,
however, petitioner failed to establish the fact of a grant by respondent of a credit term in his favor, or that
the grant has been consistent. While there was mention of a credit agreement between Trans-Pacific and
respondent, such arrangement was not proven and was internal between agent and principal.55 Under the
principle of relativity of contracts, contracts bind the parties who entered into it. It cannot favor or prejudice
a third person, even if he is aware of the contract and has acted with knowledge.56
We cannot sustain petitioner's claim that the parties agreed that the insurance contract is immediately
effective upon issuance despite non payment of the premiums. Even if there is a waiver of pre-payment of
premiums, that in itself does not become an exception to Section 77, unless the insured clearly gave a credit
term or extension. This is the clear import of the fourth exception in the UCPB General Insurance Co., Inc. To
rule otherwise would render nugatory the requirement in Section 77 that "[n]otwithstanding 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, x x x." Moreover, the policy itself
states:ChanRoblesVirtualawlibrary
WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be the basis of this
Contract and deemed incorporated herein, has applied to the company for the insurance hereinafter
contained, subject to the payment of the Premium as consideration for such insurance.57 (Emphasis supplied.)
The policy states that the insured's application for the insurance is subject to the payment of the premium.
There is no waiver of pre-payment, in full or in installment, of the premiums under the policy. Consequently,
respondent cannot be placed in estoppel.
Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance policy became
effective for lack of premium payment.
The consequence of this declaration is that petitioner is entitled to a return of the premium paid for the
vehicle in the amount of P55,620.60 under the principle of unjust enrichment. There is unjust enrichment
when a person unjustly retains a benefit to the loss of another, or when a person retains money or property
of another against the fundamental principles of justice, equity and good conscience.58 Petitioner cannot
claim the full amount of P140,893.50, which includes the payment of premiums for the two other vehicles.
These two policies are not affected by our ruling on the policy subject of this case because they were issued
as separate and independent contracts of insurance.59We, however, find that the award shall earn legal
interest of 6% from the time of extrajudicial demand on July 7, 1997.60
WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11, 2009 and the
Resolution dated November 24, 2009 are AFFIRMED with the MODIFICATION that respondent should return
the amount of P55,620.60 with the legal interest computed at the rate of 6% per annumreckoned from July
7, 1997 until finality of this judgment. Thereafter, the total amount shall earn interest at the rate of 6% per
annum from the finality of this judgment until its full satisfaction.
SO ORDERED.chanroblesvirtuallawlibrary
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