G.R. No. 134514 December 8, 1999
Reyna Customs Brokerage ("defendant brokerage" for
INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., petitioner,
vs.
PRUDENTIAL GUARANTEE & ASSURANCE CO., INC., respondent.
When cargo is placed on a vessel at the "shipper's load and count," the arrastre
operator is required only to deliver to the consignee the container van received from
the shipper, not to verify or to compare the contents thereof with those declared by
the shipper. A claim for reimbursement for the loss, damage or misdelivery of goods
must be filed within 15 days from the date the consignee learns of such problem(s).
The Case
For the resolution of the Court is a Petition for Review under Rule 45 of the Rules of
Court assailing the March 10, 1998 Decision and the June 23, 1998 Resolution both
promulgated by the Court of Appeals in CA-GR CV No. 52129 reversing the trial
court's dismissal of the Complaint for the collection of a sum of money filed by
Prudential Guarantee & Insurance Co., Inc. (Prudential) against International
Container Terminal Services, Inc. (ICTSI).
The Facts
The challenged Decision sets forth the facts of this case as follows:
On April 25, 1990, mother vessel "Tao He" loaded and received on board in
San Francisco, California, a shipment of five (5) lots of canned foodstuff
complete and in good order and condition for transport to Manila in favor of
Duel Food Enterprises ("consignee" for brevity). China Ocean Shipping
Company issued the corresponding bill of lading therefor.
Consignee insured the shipment with Prudential Guarantee and Assurance,
Inc. against all risks for P1,921,827.00 under Marine Insurance Policy No.
20RN-3011/90.
On May 30, 1990, the shipment arrived at the Port of Manila and discharged
by [the] vessel MS "Wei He" in favor of International Container Terminal
Services, Inc. for safekeeping.
On June 1, 1990, A. D.
brevity) withdrew the shipment and delivered the same to [the] consignee.
An inspection thereof revealed that 161 cartons were missing valued at
P85,984.40.
Claim for indemnification of the loss having been denied by [ICTSI] and [the]
brokerage, consignee sought payment from [Prudential] under the marine
cargo policy. Consignee received a compromised sum of P66,730.12 in
settlement thereof. As subrogee, [Prudential] instituted the instant complaint
against said defendants [ICTSI and brokerage].
Traversing the complaint, [ICTSI] counters that it observed
extraordinary diligence over the subject shipment while under its
custody; that the loss is not attributable to its fault or its agent,
representative or employee; that consignee failed to file a formal
claim against it in accordance with PPA Administrative Order No. 10-
81; and that the complaint states no cause of action. By way of
crossclaim, it sought reimbursement from defendant brokerage in the
event it is adjudged to pay the loss.
In its Order dated March 3, 1992, the court a quo upon [Prudential's]
motion, declared defendant brokerage in default for failure to file [it's]
answer within the reglementary period. Acting on [ICTSI's] motion,
the court a quo, in its Order dated May 27, 1992, allowed the former
to present its evidence ex-parte against defendant brokerage relative
to the cross claim.
On May 19, 1993, the court a quo rendered a decision dismissing the
complaint against defendant brokerage for lack of evidence.
In its Order of July 12, 1993, the court a quo, upon motion of [ICTSI]
and [Prudential], vacated the decision dated May 19, 1993 and set
the case for hearing to give [ICTSI] an opportunity to cross examine
[Prudential's] witnesses. 1
On November 8, 1995, the trial court 2 rendered a Decision dismissing Prudential's
Complaint against ICTSI in this wise: 3
 Failure on the part of the consignee to comply with the terms and
conditions of the contract with [ICTSI], [Prudential] is not placed in a
better position than the consignee who cannot claim damages against
[ICTSI]. Hence, the complaint is hereby DISMISSED.
Reconsideration was denied by the Regional Trial Court in its Order dated December
27, 1995. 4
Disposing of the appeal, the CA 5 ruled:
WHEREFORE, the decision appealed from is hereby REVERSED and
SET ASIDE and, in lieu thereof, judgment is hereby rendered ordering
[appellee] International [C]ontainer Terminal Services, Inc. (ICTSI) to
pay appellant the sum of P66,730.12 with legal interest from May 13,
1991, until fully paid, plus 10% of . . . said claim by way of attorney's
fee. 6
Reconsideration of the CA Decision was denied in the herein challenged June 23,
1998 Resolution. 7
Ruling of the Court of Appeals
The appellate court found ICTSI negligent in its duty to exercise due diligence over
the shipment. It concluded that the shortage was due to pilferage of the shipment
while the sea vans were stored at the container yard of ICTSI.
It also ruled that the filing of a claim depended on the issuance of a certificate of
loss by ICTSI based on the liability clause printed on the back of the arrastre and
wharfage receipt. Since ICTSI did not issue such a certificate despite being informed
of the shortage, the 15-day period given to the consignee for filing a formal claim
never began. By subrogation, Prudential, as insurer of the consignee, was entitled to
hold the ICTSI liable for the shortage.
Assignment of Errors
Petitioner claims that the appellate court committed reversible errors (1) in ruling
that ICTSI failed to adduce convincing evidence to rebut the finding of the
independent adjuster and (2) in allowing the Complaint despite the failure of the
consignee to file a formal claim within the period stated on the dorsal side of the
arrastre and wharfage receipt. 8
This Court's Ruling
The Petition is meritorious.
First Issue: Proof of Negligence
The legal relationship between an arrastre operator and a consignee is akin to that
between a warehouseman and a depositor. 9 As to both the nature of the functions
and the place of their performance, an arrastre operator's services are clearly not
maritime in character. 10
In a claim for loss filed by a consignee, the burden of proof to show compliance with
the obligation to deliver the goods to the appropriate party devolves upon the
arrastre operator. 11 Since the safekeeping of the goods rests within its knowledge, it
must prove that the losses were not due to its negligence or that of its employees. 12
To discharge this burden, petitioner presented five Arrastre and Wharfage
Bill/Receipts, which also doubled as container yard gate passes, covering the whole
shipment in question. The short-landed shipment was covered by the gate pass
marked "Exhibit 5." 13 The latter bore the signature of a representative of the
consignee, acknowledging receipt of the shipment in good order and condition (Exh.
"5-e"). Thus, we see no reason to dispute the finding of the trial court that "the
evidence adduced by the parties will show that the consignee received the container
vans . . . in good condition (Exhs. 1-6)." 14
By its signature on the gate pass and by its failure to protest on time, the consignee
is deemed to have acknowledged receipt of the goods in good order and condition.
Lamberto Cortez, petitioner's witness, testified that he personally examined the
shipment and identified the gate pass which covered the delivery of the shipment
and which was countersigned by the consignee's representative. He explained the
import of his examination as follows: 15
A: Before I sign this gate pass, sir, the representative of the
consignee [gives] it to me then I write down the items, the goods to be
delivered so that it will be mounted in the truck of the consignee. After
mounting it, it will go to our office then I will check the number of the
container if it is properly padlocked, and if it is okay, I will place there okay
 and I will sign it to be countersigned by the representative of the consignee,
sir.
Q: In other words, Mr. Witness, you said that this particular shipment
was padlocked?
A: Yes, sir.
xxx xxx xxx
Q: You also stated that the shipment was okay, will you point to that
particular portion of the gate pass?
A: After the physical check-up, I placed there okay, meaning it ha[d]
no damage, sir.
The assailed Decision ruled that the petitioner was negligent as evidenced by the
loss of the original seal and padlock of the container, which were subsequently
replaced with safety wire while the shipment was still stored at the ICTSI
compound. 16
The appellate court cites, as proof of petitioner's negligence, the Survey/Final Report
of the independent adjuster, Tan-Gatue Adjustment Company, Inc. (Exh. "F"). 17 The
Report stated:
The 3,439 cartons comprising [the] balance of the shipment were found and
accepted by consignee's representative in good order.
In our opinion, shortage sustained by the shipment was due to
pilferage whilst the sea vans containing the shipment were stored at
[the] [c]ontainer [y]ard of the [petitioner], [at] North Harbor, Manila
but we cannot categorically state as to when and who undertook [it]
due to the absence of documentary evidence.
The customs safety wire as well as the padlock of Sea Van No. HTMU-
803515-6 where the short (missing) cartons discovered may have
been tampered [with]/opened and returned/re-closed with finesse
which [was] unfortunately not noticed during delivery and prior to
opening at consignee's warehouse.
All the sea vans were reportedly full of contents when examined by
the customs examiner for tax evaluation of contents.
The [ship agents] and arrastre contractors['] representative
reportedly refused the invitation of the consignee to witness the
stripping/withdrawal of the same from the sea vans at their
warehouse averring that the shipment per Bill of Lading was shipped
under ["]Shipper's Load and Count" hence, loss/damage, if any, to
the shipment is not their liability.
We thoroughly investigate[d] this particular case at International
Container Terminal Services, Inc., North Harbor, Manila[,] but up to
this time no person(s) and/or group(s) could be pinpointed liable [for]
the shortage of 161 cartons, hence, the delay [in the] issuance of this
report. 18
The adjuster insists that the shipment was complete when the customs examiner
opened the sea vans for tax evaluation. However, the latter's report was not
presented. Hence, there is no basis for comparing the cartons subjected to customs
examination and those which were delivered to the consignee.
More important, the cosigned goods were shipped under "Shipper's Load and
Count." This means that the shipper was solely responsible for the loading of the
container, while the carrier was oblivious to the contents of the
shipment. 19 Protection against pilferage of the shipment was the consignee's
lookout. The arrastre operator was, like any ordinary depositary, duty-bound to take
good care of the goods received from the vessel and to turn the same over to the
party entitled to their possession, subject to such qualifications as may have validly
been imposed in the contract between the parties. 20 The arrastre operator was not
required to verify the contents of the container received and to compare them with
those declared by the shipper because, as earlier stated, the cargo was at the
shipper's load and count. The arrastre operator was expected to deliver to the
consignee only the container received from the carrier.
Petitioner claims that the absence of a request for a bad order survey belied the
consignee's assertion that the shipment was filched while in ICTSI's custody, and
that such absence did not stop the 15-day period from running. Normally, a request
for a bad order survey is made in case there is an apparent or presumed loss or
damage. The consignee made no such request despite being provided by the
petitioner a form therefor.
The lack of a bad order survey does not toll the prescriptive period for filing a claim
for loss, because the consignee can always file a provisional claim within 15 days
from the time it discovers the loss or damage. Such a claim would place the arrastre
operator on notice that the shipment sustained damage or loss, even if the exact
amount thereof could not be specified at the moment. In this manner, the arrastre
operator can immediately verify its culpability and liability. A provisional claim
seasonably filed is sufficient compliance with the liability clause. 21
From the foregoing discussion, it is clear that the appellate court erred in concluding
that the shortage was due to the negligence of the arrastre operator.
Second Issue:
Period to File a Claim for Loss
Petitioner contends that the appellate court misconstrued the liability clause printed
on the dorsal side of the Arrastre and Wharfage Bill/Receipt. The contentious
provision of this document reads:
"Liability Clause"
The duly authorized representative of herein named CONSIGNEE, and ICTSI
hereby certify to the correctness of the description of the containerized cargo
covered by this CY GATEPASS, the issuance of which constitutes delivery to
and receipt by Consignee of the containerized cargo as described in this CY
GATEPASS, in good order and condition, unless otherwise indicated. This CY
GATEPASS is subject to all terms and conditions defined in the Existing
Management Contract between the PPA & ICTSI[;] PPA Administrative Order
No. 10-81, ICTSI shall, however, be liable to the extent of the local invoice
value of each package but not to exceed P3,500 Philippine currency for
imported cargoes and P1,000 for domestic cargoes (consistent with
Administrative Order 10-81 unless revised), unless the value thereof is
otherwise specified or manifested or communicated in writing together with
the invoice value and supported by a certified packing list to ICTSI by any
interested party/ies before the discharge of the cargo and corresponding port
charges ha[ve] been fully paid. This provision shall only apply upon filing of a
formal claim within 15 days from the date of issuance of the Bad Order
Certificate or certificate of loss, damage or non-delivery by ICTSI. 22
Petitioner argues that the 15-day limitation for filing a claim against the arrastre
operator should run from the time of the delivery of the goods to the consignee, and
that the latter's failure to file a claim within said period is sufficient ground to deny
the claim for loss.
On the other hand, the appellate court overruled the trial court, because the filing of
the claim was dependent upon the issuance of a certificate of loss, damage or
nondelivery. Since the petitioner did not issue such certificate, the 15-day limit, the
CA opined, did not begin to run against the consignee. Private respondent argues
that the clear and unambiguous language of the liability clause does not support
petitioner's construction.
We agree with the petitioner. In order to hold the arrastre operator liable for lost or
damaged goods, the claimant should file with the operator a claim for the value of
said goods "within fifteen (15) days from the date of discharge of the last package
from the carrying vessel . . . ." 23 The filing of the claim for loss within the 15-day
period is in the nature of a prescriptive period for bringing an action and is a
condition precedent to holding the arrastre operator liable. This requirement is a
defense made available to the arrastre operator, who may use or waive it as a
matter of personal discretion. 24
The said requirement is not an empty formality. It gives the arrastre contractor a
reasonable opportunity to check the validity of the claim, while the facts are still
fresh in the minds of the persons who took part in the transaction, and while the
pertinent documents are still available. Such period is sufficient for the consignee to
file a provisional claim after the discharge of the goods from the vessel. 25 For this
reason, we believe that the 15-day limit is reasonable.
We should hasten to add that while a literal reading of the liability clause makes the
time limit run from the moment the shipment is discharged from the carrying vessel,
this Court has chosen to interpret this condition liberally in an endeavor to promote
fairness, equity and justness. 26 A long line of cases has held that the 15-day period
for filing claims should be counted from the date the consignee learns of the loss,
damage or misdelivery of goods. 27
In the case at bar, the consignee had all the time to make a formal claim from the
day it discovered the shortage in the shipment, which was June 4, 1990, as shown
by the records. According to the independent adjuster, the stripping or opening of
the sea vans containing the shipped canned goods was made at the consignee's
place upon receipt of the shipment. After discovering the loss, the consignee asked
the adjuster to investigate the reason for the short-landing of the shipment. By the
time the claim for loss was filed on October 2, 1990, four months had already
elapsed from the date of delivery, June 4, 1990.
Prudential did not explain the delay. It did not even allege or prove that the
discovery of the shortage was made by the consignee only 15-days before October
2, 1990. The latter had to wait for the independent adjuster's survey report dated
September 7, 1990, before filing the claim with the former. By that time, however, it
was clearly too late, as the 15-day period had expired.
In any event, within 15 days from the time the loss was discovered, the consignee
could have filed a provisional claim, which would have constituted substantial
compliance with the rule. 28 Its failure to do so relieved the arrastre operator of any
liability for the nondelivery of the goods. 29 More specifically, the failure to file a
provisional claim bars a subsequent action in court. 30 The rationale behind the time
limit is that, without it, a consignee could too easily concoct or fabricate claims and
deprive the arrastre operator of the best opportunity to probe immediately their
veracity.
WHEREFORE, the Petition is hereby GRANTED. The assailed Decision and Resolution
are SET ASIDE, and the trial court's Decision is REINSTATED. No pronouncement as
to costs. SO ORDERED.
[G.R. No. 125678. March 18, 2002]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS
and JULITA TRINOS, respondents.
DECISION
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a
health care coverage with petitioner Philamcare Health Systems, Inc. In the standard
application form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for high
blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer?
(If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to
March 1, 1989. Accordingly, he was issued Health Care Agreement No.
P010194. Under the agreement, respondents husband was entitled to avail of
hospitalization benefits, whether ordinary or emergency, listed therein.He was also
entitled to avail of out-patient benefits such as annual physical examinations,
preventive health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another
year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1,
1990. The amount of coverage was increased to a maximum sum of P75,000.00 per
disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was
confined at the Manila Medical Center (MMC) for one month beginning March 9,
1990. While her husband was in the hospital, respondent tried to claim the benefits
under the health care agreement. However, petitioner denied her claim saying that
the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history.Doctors at the MMC allegedly
discovered at the time of Ernanis confinement that he was hypertensive, diabetic
and asthmatic, contrary to his answer in the application form. Thus, respondent paid
the hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent
was constrained to bring him back to the Chinese General Hospital where he died on
the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for
reimbursement of her expenses plus moral damages and attorneys fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the
plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late
Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully
paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to
plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to
plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but
deleted all awards for damages and absolved petitioner Reverente.[4]Petitioners
motion for reconsideration was denied.[5] Hence, petitioner brought the instant
petition for review, raising the primary argument that a health care agreement is not
an insurance contract; hence the incontestability clause under the Insurance
Code[6] does not apply.
Petitioner argues that the agreement grants living benefits, such as medical
check-ups and hospitalization which a member may immediately enjoy so long as he
is alive upon effectivity of the agreement until its expiration one-year
thereafter. Petitioner also points out that only medical and hospitalization benefits
are given under the agreement without any indemnification, unlike in an insurance
contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts
which last longer,[7] petitioner argues that the incontestability clause does not apply,
as the same requires an effectivity period of at least two years. Petitioner further
argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the
Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an
agreement whereby one undertakes for a consideration to indemnify another against
loss, damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the
designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.[8]
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the
life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondents husband in obtaining
the health care agreement was his own health. The health care agreement was in
the nature of non-life insurance, which is primarily a contract of indemnity.[9] Once
the member incurs hospital, medical or any other expense arising from sickness,
injury or other stipulated contingent, the health care provider must pay for the same
to the extent agreed upon under the contract.
 Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondents husband to sign an express authorization for any person,
organization or entity that has any record or knowledge of his health to furnish any
and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination.[10]Specifically, the Health Care Agreement
signed by respondents husband states:
We hereby declare and agree that all statement and answers contained herein and
in any addendum annexed to this application are full, complete and true and bind all
parties in interest under the Agreement herein applied for, that there shall be no
contract of health care coverage unless and until an Agreement is issued on this
application and the full Membership Fee according to the mode of payment applied
for is actually paid during the lifetime and good health of proposed Members; that
no information acquired by any Representative of PhilamCare shall be binding upon
PhilamCare unless set out in writing in the application; that any physician is, by
these presents, expressly authorized to disclose or give testimony at anytime relative
to any information acquired by him in his professional capacity upon any question
affecting the eligibility for health care coverage of the Proposed Membersand that
the acceptance of any Agreement issued on this application shall be a ratification of
any correction in or addition to this application as stated in the space for Home
Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant
for authorization to inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or
knowledge of my health and/or that of __________ to give to the PhilamCare Health
Systems, Inc. any and all information relative to any hospitalization, consultation,
treatment or any other medical advice or examination. This authorization is in
connection with the application for health care coverage only. A photographic copy
of this authorization shall be as valid as the original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement
which reads:
Failure to disclose or misrepresentation of any material information by the member
in the application or medical examination, whether intentional or unintentional, shall
automatically invalidate the Agreement from the very beginning and liability of
Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or
misrepresented information is deemed material if its revelation would have resulted
in the declination of the applicant by Philamcare or the assessment of a higher
Membership Fee for the benefit or benefits applied for.[13]
The answer assailed by petitioner was in response to the question relating to
the medical history of the applicant. This largely depends on opinion rather than
fact, especially coming from respondents husband who was not a medical
doctor. Where matters of opinion or judgment are called for, answers made in good
faith and without intent to deceive will not avoid a policy even though they are
untrue.[14] Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or
judgment of the insured will not avoid the policy if there is no actual fraud in
inducing the acceptance of the risk, or its acceptance at a lower rate of premium,
and this is likewise the rule although the statement is material to the risk, if the
statement is obviously of the foregoing character, since in such case the insurer is
not justified in relying upon such statement, but is obligated to make further
inquiry. There is a clear distinction between such a case and one in which the
insured is fraudulently and intentionally states to be true, as a matter of expectation
or belief, that which he then knows, to be actually untrue, or the impossibility of
which is shown by the facts within his knowledge, since in such case the intent to
deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.[16] Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to
establish such defense by satisfactory and convincing evidence rests upon the
provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to answer the same to the
extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement
or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured
party to rescind a contract of insurance. The right to rescind should be exercised
previous to the commencement of an action on the contract.[17] In this case, no
rescission was made. Besides, the cancellation of health care agreements as in
insurance policies require the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one
or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code
and upon request of insured, to furnish facts on which cancellation is based.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of
insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his
obligation.[19] Being a contract of adhesion, the terms of an insurance contract are to
be construed strictly against the party which prepared the contract the insurer.[20] By
reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured, especially to avoid forfeiture.[21] This
is equally applicable to Health Care Agreements. The phraseology used in medical or
hospital service contracts, such as the one at bar, must be liberally construed in
favor of the subscriber, and if doubtful or reasonably susceptible of two
interpretations the construction conferring coverage is to be adopted, and
exclusionary clauses of doubtful import should be strictly construed against the
provider.[22]
Anent the incontestability of the membership of respondents husband, we quote
with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health
Systems Inc. had twelve months from the date of issuance of the Agreement within
which to contest the membership of the patient if he had previous ailment of
asthma, and six months from the issuance of the agreement if the patient was sick
of diabetes or hypertension. The periods having expired, the defense of concealment
or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased
member considering that at the time of their marriage, the deceased was previously
married to another woman who was still alive. The health care agreement is in the
nature of a contract of indemnity. Hence, payment should be made to the party who
incurred the expenses. It is not controverted that respondent paid all the hospital
and medical expenses. She is therefore entitled to reimbursement. The records
adequately prove the expenses incurred by respondent for the deceaseds
hospitalization, medication and the professional fees of the attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED. SO
ORDERED.
[G.R. No. 112360. July 18, 2000]
RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF
APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court seeking to annul and set aside the July 15, 1993 Decision[1] and
October 22, 1993 Resolution[2] of the Court of Appeals[3] in CA-G.R. CV NO.
28779, which modified the Ruling[4] of the Regional Trial Court of Pasig,
Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance)
issued Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills,
Inc. (Transworld), initially for One Million (P1,000,000.00) Pesos and
eventually increased to One Million Five Hundred Thousand (P1,500,000.00)
Pesos, covering the period from August 14, 1980 to March 13, 1981.
 Pertinent portions of subject policy on the buildings insured, and location
thereof, read:
"On stocks of finished and/or unfinished products, raw materials and
supplies of every kind and description, the properties of the Insureds
and/or held by them in trust, on commission or on joint account with
others and/or for which they (sic) responsible in case of loss whilst
contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound at MAGDALO STREET, BARRIO UGONG,
PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with mezzanine
portions is constructed of reinforced concrete and hollow blocks
and/or concrete under galvanized iron roof and occupied as hosiery
mills, garment and lingerie factory, transistor-stereo assembly plant,
offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under
galvanized iron roof occupied as canteen and guardhouse, partly by
building of two and partly one storey constructed of concrete below,
timber above undergalvanized iron roof occupied as garage and
quarters and partly by open space and/or tracking/ packing, beyond
which is the aforementioned Magdalo Street; on its right and left by
driveway, thence open spaces, and at the rear by open spaces.'"[5]
The same pieces of property insured with the petitioner were also insured
with New India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing
the middle portion of its four-span building and partly gutting the left and
right sections thereof. A two-storey building (behind said four-span building)
where fun and amusement machines and spare parts were stored, was also
destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company
and New India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages, docketed
as Civil Case No. 46106 before Branch 161 of the then Court of First Instance
of Rizal; praying for judgment ordering Rizal Insurance and New India to pay
the amount of P2,747, 867.00 plus legal interest, P400,000.00 as attorney's
fees, exemplary damages, expenses of litigation of P50,000.00 and costs of
suit.[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued upon
covered only the contents of the four-span building, which was partly burned,
and not the damage caused by the fire on the two-storey annex building.[7]
On January 4, 1990, the trial court rendered its decision; disposing as
follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay
Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00
representing the actual value of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent,
Transworld Knitting Mills, Inc., went to the Court of Appeals, which came out
with its decision of July 15, 1993 under attack, the decretal portion of which
reads:
"WHEREFORE, and upon all the foregoing, the decision of the court
below is MODIFIED in that defendant New India Assurance Company
has and is hereby required to pay plaintiff-appellant the amount of
P1,818,604.19 while the other Rizal Surety has to pay the plaintiff-
appellant P470,328.67, based on the actual losses sustained by
plaintiff Transworld in the fire, totalling P2,790,376.00 as against the
amounts of fire insurance coverages respectively extended by New
 India in the amount of P5,800,000.00 and Rizal Surety and Insurance
Company in the amount of P1,500,000.00.
No costs.
SO ORDERED."[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals
New India appealed to this Court theorizing inter alia that the private
respondent could not be compensated for the loss of the fun and amusement
machines and spare parts stored at the two-storey building because it
(Transworld) had no insurable interest in said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-
111118 (New India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a
Motion for Reconsideration before the Court of Appeals, and on October 22,
1993, the Court of Appeals reconsidered its decision of July 15, 1993, as
regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only
insofar as the imposition of legal interest is concerned, that, on the
assessment against New India Assurance Company on the amount of
P1,818,604.19 and that against Rizal Surety & Insurance Company on
the amount of P470,328.67, from May 26, 1982 when the complaint
was filed until payment is made. The rest of the said decision is
retained in all other respects.
SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to
this Court via the present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE
ANNEX BUILDING WHERE THE BULK OF THE BURNED PROPERTIES
WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE
INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED
IN NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL
SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY
SHOW THAT THE PREMISES OCCUPIED BY TRANSWORLD, WHERE
THE INSURED PROPERTIES WERE LOCATED, SUSTAINED PARTIAL
DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH
MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN
NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL
AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS
ATTORNEY'S FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS.
4 and 11, CIVIL CODE).[11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon
protected only the contents of the main building (four-span),[12] and did not
include those stored in the two-storey annex building. On the other hand, the
private respondent theorized that the so called "annex" was not an annex but
was actually an integral part of the four-span building[13] and therefore, the
goods and items stored therein were covered by the same fire insurance
policy.
Resolution of the issues posited here hinges on the proper interpretation of
the stipulation in subject fire insurance policy regarding its coverage, which
reads:
"xxx contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic)
within own Compound xxx"
Therefrom, it can be gleaned unerringly that the fire insurance policy in
question did not limit its coverage to what were stored in the four-span
building. As opined by the trial court of origin, two requirements must concur
in order that the said fun and amusement machines and spare parts would
be deemed protected by the fire insurance policy under scrutiny, to wit:
 "First, said properties must be contained and/or stored in the areas
occupied by Transworld and second, said areas must form part of the
building described in the policy xxx"[14]
'Said building of four-span lofty one storey in height
with mezzanine portions is constructed of reinforced
concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo
assembly plant, offices, ware house and caretaker's
quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by
the Court of Appeals are conclusive on the parties and not reviewable by this
Court, and the same carry even more weight when the Court of Appeals has
affirmed the findings of fact arrived at by the lower court.[15]
In the case under consideration, both the trial court and the Court of Appeals
found that the so called "annex " was not an annex building but an integral
and inseparable part of the four-span building described in the policy and
consequently, the machines and spare parts stored therein were covered by
the fire insurance in dispute. The letter-report of the Manila Adjusters and
Surveyor's Company, which petitioner itself cited and invoked, describes the
"annex" building as follows:
"Two-storey building constructed of partly timber and partly concrete
hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the lofty
storey building and thence by property fence wall."[16]
Verily, the two-storey building involved, a permanent structure which adjoins
and intercommunicates with the "first right span of the lofty storey
building",[17] formed part thereof, and meets the requisites for compensability
under the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was already
existing when subject fire insurance policy contract was entered into on
January 12, 1981, having been constructed sometime in 1978,[18] petitioner
should have specifically excluded the said two-storey building from the
coverage of the fire insurance if minded to exclude the same but if did not,
and instead, went on to provide that such fire insurance policy covers the
products, raw materials and supplies stored within the premises of
respondent Transworld which was an integral part of the four-span building
occupied by Transworld, knowing fully well the existence of such building
adjoining and intercommunicating with the right section of the four-span
building.
After a careful study, the Court does not find any basis for disturbing what
the lower courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building
insured thereby. Article 1377 of the New Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against
the petitioner, Rizal Surety Insurance Company, whose lawyer or managers
drafted the fire insurance policy contract under scrutiny. Citing the aforecited
provision of law in point, the Court in Landicho vs. Government Service
Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of
which it is settled that the 'terms in an insurance policy, which are
ambiguous, equivocal, or uncertain x x x are to be construed strictly
and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or payment
to the insured, especially where forfeiture is involved' (29 Am. Jur.,
181), and the reason for this is that the 'insured usually has no voice
in the selection or arrangement of the words employed and that the
language of the contract is selected with great care and deliberation
by experts and legal advisers employed by, and acting exclusively in
the interest of, the insurance company.' (44 C.J.S., p. 1174).""[20]
Equally relevant is the following disquisition of the Court in Fieldmen's
Insurance Company, Inc. vs. Vda. De Songco,[21] to wit:
 "'This rigid application of the rule on ambiguities has become
necessary in view of current business practices. The courts cannot
ignore that nowadays monopolies, cartels and concentration of
capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to
'take it or leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats [sic] d'adhesion), in contrast to these entered
into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are prime
example) obviously call for greater strictness and vigilance on the part
of courts of justice with a view to protecting the weaker party from
abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain,
13 Dec. 1934, 27 February 1942.)'"[22]
The issue of whether or not Transworld has an insurable interest in the fun
and amusement machines and spare parts, which entitles it to be indemnified
for the loss thereof, had been settled in G.R. No. L-111118, entitled New
India Assurance Company, Ltd., vs. Court of Appeals, where the appeal of
New India from the decision of the Court of Appeals under review, was
denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises,
precludes the relitigation of a particular fact or issue in another action
between the same parties based on a different claim or cause of action. "xxx
the judgment in the prior action operates as estoppel only as to those
matters in issue or points controverted, upon the determination of which the
finding or judgment was rendered. In fine, the previous judgment is
conclusive in the second case, only as those matters actually and directly
controverted and determined and not as to matters merely involved
therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and
Company (Phils.), Inc. vs. Court of Appeals,[24] held that the issue of
negligence of the shipping line, which issue had already been passed upon in
a case filed by one of the insurers, is conclusive and can no longer be
relitigated in a similar case filed by another insurer against the same shipping
line on the basis of the same factual circumstances. Ratiocinating further, the
Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai
Maru') had been negligent, or so negligent as to have proximately
caused the collision between them, was an issue that was actually,
directly and expressly raised, controverted and litigated in C.A.-G.R.
No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and
held the 'Don Carlos' to have been negligent rather than the 'Yotai
Maru' and, as already noted, that Decision was affirmed by this Court
in G.R. No. L-48839 in a Resolution dated 6 December 1987. The
Reyes Decision thus became final and executory approximately two
(2) years before the Sison Decision, which is assailed in the case at
bar, was promulgated. Applying the rule of conclusiveness of
judgment, the question of which vessel had been negligent in the
collision between the two (2) vessels, had long been settled by this
Court and could no longer be relitigated in C.A.-G.R. No. 61206-R.
Private respondent Go Thong was certainly bound by the ruling or
judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the
Decision of this Court affirming the Reyes Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering
that private respondent's insurable interest in, and compensability for the
loss of subject fun and amusement machines and spare parts, had been
adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV NO.
28779, and by this Court in G.R. No. L-111118, in a Resolution, dated
February 2, 1994, the same can no longer be relitigated and passed upon in
the present case. Ineluctably, the petitioner, Rizal Surety Insurance
Company, is bound by the ruling of the Court of Appeals and of this Court
that the private respondent has an insurable interest in the aforesaid fun and
amusement machines and spare parts; and should be indemnified for the
loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by
Transworld for which petitioner Rizal Insurance is liable.[26]
 All things studiedly considered and viewed in proper perspective, the Court is
of the irresistible conclusion, and so finds, that the Court of Appeals erred not
in holding the petitioner, Rizal Surety Insurance Company, liable for the
destruction and loss of the insured buildings and articles of the private
respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated
October 22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are
AFFIRMED in toto. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.
BLUE CROSS HEALTH CARE, G.R. No. 169737 INC.,Petitioner,
-versus-
NEOMI* and DANILO OLIVARES,
Respondents. Promulgated: February 12, 2008
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
This is a petition for review on certiorari[1] of a decision[2] and resolution[3] of the
Court of Appeals (CA) dated July 29, 2005 and September 21, 2005, respectively, in
CA-G.R. SP No. 84163 which affirmed the decision of the Regional Trial Court (RTC),
Makati City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153,[4] which in
turn reversed the decision of the Metropolitan Trial Court (MeTC), Makati City,
Branch 66 dated August 5, 2003 in Civil Case No. 80867.[5]
Respondent Neomi T. Olivares applied for a health care program with petitioner Blue
Cross Health Care, Inc., a health maintenance firm. For the period October 16, 2002
to October 15, 2003,[6] she paid the amount of P11,117. For the same period, she
also availed of the additional service of limitless consultations for an additional
amount of P1,000. She paid these amounts in full on October 17, 2002. The
application was approved on October 22, 2002. In the health care agreement,
ailments due to pre-existing conditions were excluded from the coverage.[7]
On November 30, 2002, or barely 38 days from the effectivity of her health
insurance, respondent Neomi suffered a stroke and was admitted at the Medical City
which was one of the hospitals accredited by petitioner. During her confinement, she
underwent several laboratory tests. On December 2, 2002, her attending physician,
Dr. Edmundo Saniel,[8] informed her that she could be discharged from the hospital.
She incurred hospital expenses amounting to P34,217.20. Consequently, she
requested from the representative of petitioner at Medical City a letter of
authorization in order to settle her medical bills. But petitioner refused to issue the
letter and suspended payment pending the submission of a certification from her
attending physician that the stroke she suffered was not caused by a pre-existing
condition.[9]
She was discharged from the hospital on December 3, 2002. On December 5,
2002, she demanded that petitioner pay her medical bill. When petitioner still
refused, she and her husband, respondent Danilo Olivares, were constrained to
settle the bill.[10] They thereafter filed a complaint for collection of sum of money
against petitioner in the MeTC on January 8, 2003.[11] In its answer dated January
24, 2003, petitioner maintained that it had not yet denied respondents' claim as it
was still awaiting Dr. Saniel's report.
In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13,
2003. [Respondent] Neomi T. Olivares called by phone on January 29,
2003. She stated that she is invoking patient-physician confidentiality.
That she no longer has any relationship with [petitioner]. And that I
should not release any medical information concerning her neurologic
 status to anyone without her approval. Hence, the same day I
instructed my secretary to inform your office thru Ms. Bernie
regarding [respondent's] wishes.
xxx xxx xxx [12]
In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of
cause of action. It held:
xxx the best person to determine whether or not the stroke she
suffered was not caused by pre-existing conditions is her attending
physician Dr. Saniel who treated her and conducted the test during
her confinement. xxx But since the evidence on record reveals that it
was no less than [respondent Neomi] herself who prevented her
attending physician from issuing the required certification, petitioner
cannot be faulted from suspending payment of her claim, for until
and unless it can be shown from the findings made by her attending
physician that the stroke she suffered was not due to pre-existing
conditions could she demand entitlement to the benefits of her
policy.[13]
On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling
of the MeTC and ordered petitioner to pay respondents the following amounts:
(1) P34,217.20 representing the medical bill in Medical City and P1,000 as
reimbursement for consultation fees, with legal interest from the filing of the
complaint until fully paid; (2) P20,000 as moral damages; (3) P20,000 as exemplary
damages; (4) P20,000 as attorney's fees and (5) costs of suit.[14] The RTC held that
it was the burden of petitioner to prove that the stroke of respondent Neomi was
excluded from the coverage of the health care program for being caused by a pre-
existing condition. It was not able to discharge that burden.[15]
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court
in the CA. In a decision promulgated on July 29, 2005, the CA affirmed the decision
of the RTC. It denied reconsideration in a resolution promulgated on September 21,
2005. Hence this petition which raises the following issues: (1) whether petitioner
was able to prove that respondent Neomi's stroke was caused by a pre-existing
condition and therefore was excluded from the coverage of the health care
agreement and (2) whether it was liable for moral and exemplary damages and
attorney's fees.
The health care agreement defined a pre-existing condition as:
x x x a disability which existed before the commencement date of
membership whose natural history can be clinically determined,
whether or not the Member was aware of such illness or condition.
Such conditions also include disabilities existing prior to reinstatement
date in the case of lapse of an Agreement. Notwithstanding, the
following disabilities but not to the exclusion of others are considered
pre-existing conditions including their complications when occurring
during the first year of a Members coverage:
I. Tumor of Internal Organs
II. Hemorrhoids/Anal Fistula
III. Diseased tonsils and sinus conditions requiring
surgery
IV. Cataract/Glaucoma
 V. Pathological Abnormalities of nasal septum or
turbinates

VI. Goiter and other thyroid disorders

Under this provision, disabilities which existed before the commencement of
VII. Hernia/Benign prostatic hypertrophy the agreement are excluded from its coverage if they become manifest within one
year from its effectivity. Stated otherwise, petitioner is not liable for pre-existing
VIII. Endometriosis conditions if they occur within one year from the time the agreement takes effect.
IX. Asthma/Chronic Obstructive Lung disease

X. Epilepsy Petitioner argues that respondents prevented Dr. Saniel from submitting his
report regarding the medical condition of Neomi. Hence, it contends that the
XI. Scholiosis/Herniated disc and other Spinal
presumption that evidence willfully suppressed would be adverse if produced should
column abnormalities
apply in its favor.[17]
XII. Tuberculosis

XIII. Cholecysitis
Respondents counter that the burden was on petitioner to prove that Neomi's
XIV. Gastric or Duodenal ulcer stroke was excluded from the coverage of their agreement because it was due to a
pre-existing condition. It failed to prove this.[18]
XV. Hallux valgus

XVI. Hypertension and other Cardiovascular diseases

We agree with respondents.
XVII. Calculi

XVIII. Tumors of skin, muscular tissue, bone or any form

of blood dyscracias In Philamcare Health Systems, Inc. v. CA,[19] we ruled that a health care
agreement is in the nature of a non-life insurance.[20] It is an established rule in
XIX. Diabetes Mellitus insurance contracts that when their terms contain limitations on liability, they should
be construed strictly against the insurer. These are contracts of adhesion the terms
XX. Collagen/Auto-Immune disease of which must be interpreted and enforced stringently against the insurer which
prepared the contract. This doctrine is equally applicable to health care
agreements.[21]
After the Member has been continuously covered for 12 months, this
pre-existing provision shall no longer be applicable except for illnesses
specifically excluded by an endorsement and made part of this Petitioner never presented any evidence to prove that respondent Neomi's stroke
Agreement.[16] was due to a pre-existing condition. It merely speculated that Dr. Saniel's report
would be adverse to Neomi, based on her invocation of the doctor-patient privilege.
This was a disputable presumption at best.
Section 3 (e), Rule 131 of the Rules of Court states:
Sec. 3. Disputable presumptions. ― The following presumptions are
satisfactory if uncontradicted, but may be contradicted and overcome
by other evidence:
xxx xxx xxx
(e) That evidence willfully suppressed would be adverse if produced.
Suffice it to say that this presumption does not apply if (a) the evidence is at the
disposal of both parties; (b) the suppression was not willful; (c) it is merely
corroborative or cumulative and (d) the suppression is an exercise of a
privilege.[22] Here, respondents' refusal to present or allow the presentation of Dr.
Saniel's report was justified. It was privileged communication between physician and
patient.
Furthermore, as already stated, limitations of liability on the part of the insurer or
health care provider must be construed in such a way as to preclude it from evading
its obligations. Accordingly, they should be scrutinized by the courts with extreme
jealousy[23] and care and with a jaundiced eye.[24] Since petitioner had the
burden of proving exception to liability, it should have made its own assessment of
whether respondent Neomi had a pre-existing condition when it failed to obtain the
attending physician's report. It could not just passively wait for Dr. Saniel's report to
bail it out. The mere reliance on a disputable presumption does not meet the strict
standard required under our jurisprudence.
Next, petitioner argues that it should not be held liable for moral and
exemplary damages, and attorney's fees since it did not act in bad faith in denying
respondent Neomi's claim. It insists that it waited in good faith for Dr. Saniel's report
and that, based on general medical findings, it had reasonable ground to believe
that her stroke was due to a pre-existing condition, considering it occurred only 38
days after the coverage took effect.[25]
We disagree.
The RTC and CA found that there was a factual basis for the damages
adjudged against petitioner. They found that it was guilty of bad faith in denying a
claim based merely on its own perception that there was a pre-existing condition:
[Respondents] have sufficiently shown that [they] were forced to
engage in a dispute with [petitioner] over a legitimate claim while
[respondent Neomi was] still experiencing the effects of a stroke and
forced to pay for her medical bills during and after her hospitalization
despite being covered by [petitioners] health care program, thereby
suffering in the process extreme mental anguish, shock, serious
anxiety and great stress. [They] have shown that because of the
refusal of [petitioner] to issue a letter of authorization and to pay
[respondent Neomi's] hospital bills, [they had] to engage the services
of counsel for a fee of P20,000.00. Finally, the refusal of petitioner
to pay respondent Neomi's bills smacks of bad faith, as its
refusal [was] merely based on its own perception that a stroke is a
pre-existing condition. (emphasis supplied)
This is a factual matter binding and conclusive on this Court.[26] We see no
reason to disturb these findings.
WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision
and September 21, 2005 resolution of the Court of Appeals in CA-G.R. SP No. 84163
are AFFIRMED.
 Treble costs against petitioner. SO ORDERED. took place while the armored car was traveling along Taft Avenue in Pasay
City;

3. The said armored car was driven by Benjamin Magalong Y de Vera,

escorted by Security Guard Saturnino Atiga Y Rosete. Driver Magalong was
assigned by PRC Management Systems with the plaintiff by virtue of an
Agreement executed on August 7, 1983, a duplicate original copy of which is
G.R. No. 115278 May 23, 1995 hereto attached as Exhibit "B";
FORTUNE INSURANCE AND SURETY CO., INC., petitioner,
4. The Security Guard Atiga was assigned by Unicorn Security Services, Inc.
vs.
with the plaintiff by virtue of a contract of Security Service executed on
COURT OF APPEALS and PRODUCERS BANK OF THE
October 25, 1982, a duplicate original copy of which is hereto attached as
PHILIPPINES, respondents.
Exhibit "C";

5. After an investigation conducted by the Pasay police authorities, the driver

The fundamental legal issue raised in this petition for review on certiorari is whether
Magalong and guard Atiga were charged, together with Edelmer Bantigue Y
the petitioner is liable under the Money, Security, and Payroll Robbery policy it
Eulalio, Reynaldo Aquino and John Doe, with violation of P.D. 532 (Anti-
issued to the private respondent or whether recovery thereunder is precluded under
Highway Robbery Law) before the Fiscal of Pasay City. A copy of the
the general exceptions clause thereof. Both the trial court and the Court of Appeals
complaint is hereto attached as Exhibit "D";
held that there should be recovery. The petitioner contends otherwise.
6. The Fiscal of Pasay City then filed an information charging the aforesaid
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro
persons with the said crime before Branch 112 of the Regional Trial Court of
Manila, by private respondent Producers Bank of the Philippines (hereinafter
Pasay City. A copy of the said information is hereto attached as Exhibit "E."
Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter
The case is still being tried as of this date;
Fortune) of a complaint for recovery of the sum of P725,000.00 under the policy
issued by Fortune. The sum was allegedly lost during a robbery of Producer's 7. Demands were made by the plaintiff upon the defendant to pay the
armored vehicle while it was in transit to transfer the money from its Pasay City amount of the loss of P725,000.00, but the latter refused to pay as the loss is
Branch to its head office in Makati. The case was docketed as Civil Case No. 1817 excluded from the coverage of the insurance policy, attached hereto as
and assigned to Branch 146 thereof. Exhibit "A," specifically under page 1 thereof, "General Exceptions" Section
(b), which is marked as Exhibit "A-1," and which reads as follows:
After joinder of issues, the parties asked the trial court to render judgment based on
the following stipulation of facts: GENERAL EXCEPTIONS
1. The plaintiff was insured by the defendants and an insurance policy was The company shall not be liable under this policy in report of
issued, the duplicate original of which is hereto attached as Exhibit "A";
xxx xxx xxx
2. An armored car of the plaintiff, while in the process of transferring cash in
the sum of P725,000.00 under the custody of its teller, Maribeth Alampay, (b) any loss caused by any dishonest, fraudulent or criminal act of the
from its Pasay Branch to its Head Office at 8737 Paseo de Roxas, Makati, insured or any officer, employee, partner, director, trustee or
Metro Manila on June 29, 1987, was robbed of the said cash. The robbery
 authorized representative of the Insured whether acting alone or in
conjunction with others. . . .
8. The plaintiff opposes the contention of the defendant and contends
that Atiga and Magalong are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the robbery.1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The
dispositive portion thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and
against defendant, and
(a) orders defendant to pay plaintiff the net amount of
P540,000.00 as liability under Policy No. 0207 (as mitigated by the
P40,000.00 special clause deduction and by the recovered sum of
P145,000.00), with interest thereon at the legal rate, until fully paid;
(b) orders defendant to pay plaintiff the sum of P30,000.00 as
and for attorney's fees; and
(c) orders defendant to pay costs of suit.
All other claims and counterclaims are accordingly dismissed forthwith.
SO ORDERED. 2
The trial court ruled that Magalong and Atiga were not employees or representatives
of Producers. It Said:
The Court is satisfied that plaintiff may not be said to have selected and
engaged Magalong and Atiga, their services as armored car driver and as
security guard having been merely offered by PRC Management and by
Unicorn Security and which latter firms assigned them to plaintiff. The wages
and salaries of both Magalong and Atiga are presumably paid by their
respective firms, which alone wields the power to dismiss them. Magalong
and Atiga are assigned to plaintiff in fulfillment of agreements to provide
driving services and property protection as such — in a context which does
not impress the Court as translating into plaintiff's power to control the
conduct of any assigned driver or security guard, beyond perhaps entitling
plaintiff to request are replacement for such driver guard. The finding is
accordingly compelled that neither Magalong nor Atiga were plaintiff's
"employees" in avoidance of defendant's liability under the policy, particularly
the general exceptions therein embodied.
Neither is the Court prepared to accept the proposition that driver Magalong
and guard Atiga were the "authorized representatives" of plaintiff. They were
merely an assigned armored car driver and security guard, respectively, for
the June 29, 1987 money transfer from plaintiff's Pasay Branch to its Makati
Head Office. Quite plainly — it was teller Maribeth Alampay who had
"custody" of the P725,000.00 cash being transferred along a specified money
route, and hence plaintiff's then designated "messenger" adverted to in the
policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case as
CA-G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in
toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and
Atiga were neither employees nor authorized representatives of Producers and
ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in favor of the
insured and strictly against the insurance company (New Life Enterprises vs.
Court of Appeals, 207 SCRA 669; Sun Insurance Office, Ltd. vs. Court of
Appeals, 211 SCRA 554). Contracts of insurance, like other contracts, are to
be construed according to the sense and meaning of the terms which the
parties themselves have used. If such terms are clear and unambiguous, they
must be taken and understood in their plain, ordinary and popular sense
(New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs.
Court of Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted stipulation is
plain, ordinary and simple. No other interpretation is necessary. The word
"employee" must be taken to mean in the ordinary sense.
The Labor Code is a special law specifically dealing with/and specifcally
designed to protect labor and therefore its definition as to employer-
employee relationships insofar as the application/enforcement of said Code is
 concerned must necessarily be inapplicable to an insurance contract which
defendant-appellant itself had formulated. Had it intended to apply the Labor
Code in defining what the word "employee" refers to, it must/should have so
stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of
plaintiff-appellee bank because it has no power to hire or to dismiss said
driver and security guard under the contracts (Exhs. 8 and C) except only to
ask for their replacements from the contractors.5
On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that
the trial court and the Court of Appeals erred in holding it liable under the insurance
policy because the loss falls within the general exceptions clause considering that
driver Magalong and security guard Atiga were Producers' authorized representatives
or employees in the transfer of the money and payroll from its branch office in Pasay
City to its head office in Makati.
According to Fortune, when Producers commissioned a guard and a driver to
transfer its funds from one branch to another, they effectively and necessarily
became its authorized representatives in the care and custody of the money.
Assuming that they could not be considered authorized representatives, they were,
nevertheless, employees of Producers. It asserts that the existence of an employer-
employee relationship "is determined by law and being such, it cannot be the subject
of agreement." Thus, if there was in reality an employer-employee relationship
between Producers, on the one hand, and Magalong and Atiga, on the other, the
provisions in the contracts of Producers with PRC Management System for Magalong
and with Unicorn Security Services for Atiga which state that Producers is not their
employer and that it is absolved from any liability as an employer, would not
obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four
standards: (1) the manner of selection and engagement of the putative employee;
(2) the mode of payment of wages; (3) the presence or absence of a power to
dismiss; and (4) the presence and absence of a power to control the putative
employee's conduct. Of the four, the right-of-control test has been held to be the
decisive factor. 6 It asserts that the power of control over Magalong and Atiga was
vested in and exercised by Producers. Fortune further insists that PRC Management
System and Unicorn Security Services are but "labor-only" contractors under Article
106 of the Labor Code which provides:
Art. 106. Contractor or subcontractor. — There is "labor-only" contracting
where the person supplying workers to an employer does not have
substantial capital or investment in the form of tools, equipment,
machineries, work premises, among others, and the workers recruited and
placed by such persons are performing activities which are directly related to
the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who
shall be responsible to the workers in the same manner and extent as if the
latter were directly employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers,
following the ruling in International Timber Corp. vs. NLRC 7 that a finding that a
contractor is a "labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the project and the
employees of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its
employees since it had nothing to do with their selection and engagement, the
payment of their wages, their dismissal, and the control of their conduct. Producers
argued that the rule in International Timber Corp. is not applicable to all cases but
only when it becomes necessary to prevent any violation or circumvention of the
Labor Code, a social legislation whose provisions may set aside contracts entered
into by parties in order to give protection to the working man.
Producers further asseverates that what should be applied is the rule in American
President Lines vs. Clave, 8 to wit:
In determining the existence of employer-employee relationship, the
following elements are generally considered, namely: (1) the selection and
engagement of the employee; (2) the payment of wages; (3) the power of
dismissal; and (4) the power to control the employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which
assigned Magalong as the driver of Producers' armored car and was responsible for
his faithful discharge of his duties and responsibilities, and since Producers paid the
monthly compensation of P1,400.00 per driver to PRC Management Systems and not
to Magalong, it is clear that Magalong was not Producers' employee. As to Atiga,
Producers relies on the provision of its contract with Unicorn Security Services which
provides that the guards of the latter "are in no sense employees of the CLIENT."
There is merit in this petition.
It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Section 174 of the
Insurance Code provides:
Sec. 174. Casualty insurance is insurance covering loss or liability arising
from accident or mishap, excluding certain types of loss which by law or
custom are considered as falling exclusively within the scope of insurance
such as fire or marine. It includes, but is not limited to, employer's liability
insurance, public liability insurance, motor vehicle liability insurance, plate
glass insurance, burglary and theft insurance, personal accident and health
insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance
Code contains no other provisions applicable to casualty insurance or to robbery
insurance in particular. These contracts are, therefore, governed by the general
provisions applicable to all types of insurance. Outside of these, the rights and
obligations of the parties must be determined by the terms of their contract, taking
into consideration its purpose and always in accordance with the general principles
of insurance law. 9
It has been aptly observed that in burglary, robbery, and theft insurance, "the
opportunity to defraud the insurer — the moral hazard — is so great that insurers
have found it necessary to fill up their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the insurer assume the risk of all losses
due to the hazards insured against." 10 Persons frequently excluded under such
provisions are those in the insured's service and employment. 11 The purpose of the
exception is to guard against liability should the theft be committed by one having
unrestricted access to the property. 12 In such cases, the terms specifying the
excluded classes are to be given their meaning as understood in common
speech. 13 The terms "service" and "employment" are generally associated with the
idea of selection, control, and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein should
be resolved against the insurer, 15 or it should be construed liberally in favor of the
insured and strictly against the insurer. 16 Limitations of liability should be regarded
with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its
obligation. 17 It goes without saying then that if the terms of the contract are clear
and unambiguous, there is no room for construction and such terms cannot be
enlarged or diminished by judicial construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions
specified therein. 19 It is settled that the terms of the policy constitute the measure
of the insurer's liability. 20 In the absence of statutory prohibition to the contrary,
insurance companies have the same rights as individuals to limit their liability and to
impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.
With the foregoing principles in mind, it may now be asked whether Magalong and
Atiga qualify as employees or authorized representatives of Producers under
paragraph (b) of the general exceptions clause of the policy which, for easy
reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized
representative of the Insured whether acting alone or in conjunction with
others. . . . (emphases supplied)
There is marked disagreement between the parties on the correct meaning of the
terms "employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude
and exempt from protection and coverage losses arising from dishonest, fraudulent,
or criminal acts of persons granted or having unrestricted access to Producers'
money or payroll. When it used then the term "employee," it must have had in mind
any person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of
the employer-employee relationship, 21 or as statutorily declared even in a limited
sense as in the case of Article 106 of the Labor Code which considers the employees
under a "labor-only" contract as employees of the party employing them and not of
the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and Unicorn
Security Services are "labor-only" contracts.
Producers, however, insists that by the express terms thereof, it is not the
employer of Magalong. Notwithstanding such express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and the
security guards each shall supply to Producers are not the latter's employees,
it may, in fact, be that it is because the contracts are, indeed, "labor-only"
contracts. Whether they are is, in the light of the criteria provided for in
Article 106 of the Labor Code, a question of fact. Since the parties opted to
submit the case for judgment on the basis of their stipulation of facts which
are strictly limited to the insurance policy, the contracts with PRC
Management Systems and Unicorn Security Services, the complaint for
violation of P.D. No. 532, and the information therefor filed by the City Fiscal
of Pasay City, there is a paucity of evidence as to whether the contracts
between Producers and PRC Management Systems and Unicorn Security
Services are "labor-only" contracts.
But even granting for the sake of argument that these contracts were not "labor-
only" contracts, and PRC Management Systems and Unicorn Security Services were
truly independent contractors, we are satisfied that Magalong and Atiga were, in
respect of the transfer of Producer's money from its Pasay City branch to its head
office in Makati, its "authorized representatives" who served as such with its teller
Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the
specific duty to safely transfer the money to its head office, with Alampay to be
responsible for its custody in transit; Magalong to drive the armored vehicle which
would carry the money; and Atiga to provide the needed security for the money, the
vehicle, and his two other companions. In short, for these particular tasks, the three
acted as agents of Producers. A "representative" is defined as one who represents or
stands in the place of another; one who represents others or another in a special
capacity, as an agent, and is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general
exceptions clause of the insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of
the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET
ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.
No pronouncement as to costs.
SO ORDERED.
[G.R. No. 156167. May 16, 2005]
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE
CORPORATION, respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules
of Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE
CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court
decision[1] which dismissed its two appeals and affirmed the judgment of the trial
court.
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 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 swimming pools of petitioner.
 The facts as established by the court a quo, and affirmed by the appellate court as follows:
are as follows:
a) Tilter House- P19,800.00- 0.551%
[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 b) Power House- P41,000.00- 0.551%
Company (AHAC-AIU). In the first four insurance policies issued by AHAC-AIU from
c) House Shed- P55,000.00 -0.540%
1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E and F; also Exhs. 1, 2, 3
and 4 respectively), the risk of loss from earthquake shock was extended only to P100,000.00 for furniture, fixtures,
plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-
1; D-1, and E and two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 lines air-con and
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 plaintiffs favor Policy No. 206- operating equipment
4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G-1)
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU)
and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-
Policy No. 206-4568061-9 (Exh. H) provided that the policy wording and rates in said
1, Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at
policy be copied in the policy to be issued by defendant; that defendant issued Policy
the time of issue read that plaintiff renewed its policy with AHAC (AIU) for the period
No. 31944 to plaintiff covering the period of March 14, 1990 to March 14, 1991
of March 14, 1989 to March 14, 1990 under Policy No. 206-4568061-9 (Exh. H)
for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that in the
which carried the entry under Endorsement/Warranties at Time of Issue, which read
computation of the premium, defendants Policy No. 31944 (Exh. I), which is the
Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00
policy in question, contained on the right-hand upper portion of page 7 thereof, the
and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:
following:
Item -P7,691,000.00 - on the Clubhouse only
Rate-Various
@ .392%;
Premium - P37,420.60 F/L
1,500,000.00 - on the furniture, etc.
2,061.52 Typhoon
contained in the building
1,030.76 EC
above-mentioned@ .490%;
393.00 ES
393,000.00- on the two swimming
Doc. Stamps 3,068.10
pools, only (against the
F.S.T. 776.89
peril of earthquake
Prem. Tax 409.05
shock only) @ 0.100%
TOTAL 45,159.92;
116,600.00- other buildings include
that the above break-down of premiums shows that plaintiff paid only P393.00 as
premium against 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 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):
In consideration of the payment by the insured to the company of the
sum included additional premium the Company agrees, notwithstanding what is
stated in the printed conditions of this policy due to the contrary, that this insurance
covers loss or damage to shock to any of the property insured by this Policy
occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-
B, 5-A, 6-D and 7-C);
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 issued by defendant, including the
two swimming pools in its Agoo Playa Resort were damaged.[2]
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 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 report[5] 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 demand[7] 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 complaint[10] 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 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). 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.
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
letter[19] 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.
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 393.00[22]
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:
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 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?
Petitioner also cited and relies on the attachment of the phrase Subject to:
Other Insurance Clause, Typhoon Endorsement, Earthquake Shock
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?
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.
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 III[30]
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:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and
H?
A. Yes, sir.
ATTY. MEJIA:
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?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake
Shock Endorsement, in the Clauses and Warranties: Item 5 only
(Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand
alone basis. For swimming pools we do cover earthquake shock. For
building we covered it for full earthquake coverage which includes
earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific
coverage for other things other than swimming pool? You are covering
building? They are covered by a general insurance?
WITNESS:
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
 swimming pool, foundations, they are normally affected by earthquake CROSS-EXAMINATION OF JUAN BARANDA III
but not by fire, sir.
TSN, September 7, 1992
DIRECT EXAMINATION OF JUAN BARANDA III
pp. 4-6
TSN, August 11, 1992
ATTY. ANDRES:
pp. 23-25
Would you as a matter of practice [insure] swimming pools for fire
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only insurance?
Exhibits C, D, E and F inclusive [remained] its coverage against
earthquake shock to two (2) swimming pools only but that Exhibits G WITNESS:
and H respectively entend the coverage against earthquake shock to all
No, we dont, sir.
the properties indicated in the respective schedules attached to said
policies, what can you say about that testimony of plaintiffs witness? Q. That is why the phrase earthquake shock to the two (2) swimming pools
only was placed, is it not?
WITNESS:
A. Yes, sir.
As I have mentioned earlier, earthquake shock cannot stand alone
without the other half of it. I assure you that this one covers the two ATTY. ANDRES:
swimming pools with respect to earthquake shock endorsement. Based
on it, if we are going to look at the premium there has been no change Will you not also agree with me that these exhibits, Exhibits G and H
with respect to the rates. Everytime (sic) there is a renewal if the which you have pointed to during your direct-examination, the phrase
intention of the insurer was to include the earthquake shock, I think Item no. 5 only meaning to (sic) the two (2) swimming pools was
there is a substantial increase in the premium. We are not only going deleted from the policies issued by AIU, is it not?
to consider the two (2) swimming pools of the other as stated in the
policy. As I see, there is no increase in the amount of the premium. I xxx
must say that the coverage was not broaden (sic) to include the other
ATTY. ANDRES:
items.
As an insurance executive will you not attach any significance to the
COURT:
deletion of the qualifying phrase for the policies?
They are the same, the premium rates?
WITNESS:
WITNESS:
My answer to that would be, the deletion of that particular phrase is
They are the same in the sence (sic), in the amount of the coverage. If inadvertent. Being a company underwriter, we do not cover. . it was
you are going to do some computation based on the rates you will inadvertent because of the previous policies that we have issued with
arrive at the same premiums, your Honor. no specific attachments, premium rates and so on. It was inadvertent,
sir.
 The Court also rejects petitioners contention that respondents contemporaneous
and subsequent acts to the issuance of the insurance policy falsely gave the
petitioner assurance that the coverage of the earthquake shock endorsement
included all its properties in the resort. Respondent only insured the properties as
intended by the petitioner. Petitioners own witness testified to this agreement, viz:
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., 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 verbatim the
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:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
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.
G.R. No. 166245. April 9, 2008
ETERNAL GARDENS MEMORIAL PARK CORPORATION, Petitioner,
- versus –
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY,
x-----------------------------------------------------------------------------------------x
DECISION
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse
and set aside the November 26, 2004 Decision[1] of the Court of Appeals (CA) in CA-
G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company
(Philamlife) entered into an agreement denominated as Creditor Group Life Policy
No. P-1920[2] with petitioner Eternal Gardens Memorial Park Corporation (Eternal).
Under the policy, the clients of Eternal who purchased burial lots from it on
installment basis would be insured by Philamlife. The amount of insurance coverage
depended upon the existing balance of the purchased burial lots. The policy was to
be effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more
than 65 years of age, is indebted to the Assured for the unpaid
balance of his loan with the Assured, and is accepted for Life
Insurance coverage by the Company on its effective date is eligible
for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up
to P50,000.00. However, a declaration of good health shall be
required for all Lot Purchasers as part of the application. The
Company reserves the right to require further evidence of insurability
satisfactory to the Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
 LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be
the amount of the unpaid balance of his loan (including arrears up to
but not exceeding 2 months) as reported by the Assured to the
Company or the sum of P100,000.00, whichever is smaller. Such
benefit shall be paid to the Assured if the Lot Purchaser dies while
insured under the Policy.
death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate (with
form attached); (3) Application for Insurance accomplished and signed by the
insured, Chuang, while still living; and (4) Statement of Account showing the unpaid
balance of Chuang before his death.
Eternal transmitted the required documents through a letter dated November
14, 1984,[7] which was received by Philamlife on November 15, 1984.

EFFECTIVE DATE OF BENEFIT.

After more than a year, Philamlife had not furnished Eternal with any reply to
The insurance of any eligible Lot Purchaser shall be effective on the the latters insurance claim. This prompted Eternal to demand from Philamlife the
date he contracts a loan with the Assured. However, there shall be no payment of the claim for PhP 100,000 on April 25, 1986.[8]
insurance if the application of the Lot Purchaser is not approved by
the Company.[3]
In response to Eternals demand, Philamlife denied Eternals insurance claim in
a letter dated May 20, 1986,[9] a portion of which reads:
Eternal was required under the policy to submit to Philamlife a list of all new lot
purchasers, together with a copy of the application of each purchaser, and the
amounts of the respective unpaid balances of all insured lot purchasers. In relation
The deceased was 59 years old when he entered into Contract #9558
to the instant petition, Eternal complied by submitting a letter dated December 29,
and 9529 with Eternal Gardens Memorial Park in October 1982 for the
1982,[4] containing a list of insurable balances of its lot buyers for October 1982. One
total maximum insurable amount of P100,000.00 each. No application
of those included in the list as new business was a certain John Chuang. His balance
for Group Insurance was submitted in our office prior to his death
of payments was PhP 100,000. On August 2, 1984, Chuang died.
on August 2, 1984.

Eternal sent a letter dated August 20, 1984[5] to Philamlife, which served as an
insurance claim for Chuangs death. Attached to the claim were the following
documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating
that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984,[6] requiring
Eternal to submit the following documents relative to its insurance claim for Chuangs
In accordance with our Creditors Group Life Policy No. P-1920, under
Evidence of Insurability provision, a declaration of good health shall
be required for all Lot Purchasers as party of the application. We cite
further the provision on Effective Date of Coverage under the policy
which states that there shall be no insurance if the application is not
approved by the Company. Since no application had been submitted
by the Insured/Assured, prior to his death, for our approval but was
submitted instead on November 15, 1984, after his death, Mr. John
Uy Chuang was not covered under the Policy. We wish to point out
 that Eternal Gardens being the Assured was a party to the Contract approved Chuangs application. The RTC said that since the contract is a group life
and was therefore aware of these pertinent provisions. insurance, once proof of death is submitted, payment must follow.

With regard to our acceptance of premiums, these do not connote our Philamlife appealed to the CA, which ruled, thus:
approval per se of the insurance coverage but are held by us in trust
for the payor until the prerequisites for insurance coverage shall have
been met. We will however, return all the premiums which have been
WHEREFORE, the decision of the Regional Trial Court of
paid in behalf of John Uy Chuang.
Makati in Civil Case No. 57810 is REVERSED and SET ASIDE, and
the complaint is DISMISSED. No costs.

Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC)
for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial
SO ORDERED.[11]
court decided in favor of Eternal, the dispositive portion of which reads:
The CA based its Decision on the factual finding that Chuangs application was not
enclosed in Eternals letter dated December 29, 1982. It further ruled that the non-
WHEREFORE, premises considered, judgment is hereby rendered in accomplishment of the submitted application form violated Section 26 of the
favor of Plaintiff ETERNAL, against Defendant PHILAMLIFE, ordering Insurance Code. Thus, the CA concluded, there being no application form, Chuang
the Defendant PHILAMLIFE, to pay the sum of P100,000.00, was not covered by Philamlifes insurance.
representing the proceeds of the Policy of John Uy Chuang, plus legal
rate of interest, until fully paid; and, to pay the sum of P10,000.00 as
attorneys fees. Hence, we have this petition with the following grounds:

SO ORDERED. The Honorable Court of Appeals has decided a question of

substance, not therefore determined by this Honorable Court, or has
decided it in a way not in accord with law or with the applicable
The RTC found that Eternal submitted Chuangs application for insurance jurisprudence, in holding that:
which he accomplished before his death, as testified to by Eternals witness and
evidenced by the letter dated December 29, 1982, stating, among others: Encl: Phil-
Am Life Insurance Application Forms & Cert.[10] It further ruled that due to I. The application for insurance was not duly submitted to
Philamlifes inaction from the submission of the requirements of the group insurance respondent PhilamLife before the death of John Chuang;
on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes
acceptance of the premiums during the same period, Philamlife was deemed to have
 II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional
Trial Court dated May 29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine
factual issues raised before the CA and first level courts, considering their findings of
facts are conclusive and binding on this Court. However, such rule is subject to
exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises
or conjectures; (2) when the inference made is manifestly mistaken,
absurd or impossible; (3) when there is grave abuse of discretion; (4)
when the judgment is based on a misapprehension of facts; (5) when
the findings of facts are conflicting; (6) when in making its findings
the [CA] went beyond the issues of the case, or its findings are
contrary to the admissions of both the appellant and the
appellee; (7) when the findings [of the CA] are contrary to the
trial court; (8) when the findings are conclusions without citation of
specific evidence on which they are based; (9) when the facts set
forth in the petition as well as in the petitioners main and reply briefs
are not disputed by the respondent; (10) when the findings of fact
are premised on the supposed absence of evidence and contradicted
by the evidence on record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different
conclusion.[12](Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus,
this Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before his
death. In Eternals letter dated December 29, 1982, a list of insurable interests of
buyers for October 1982 was attached, including Chuang in the list of new
businesses. Eternal added it was noted at the bottom of said letter that the
corresponding Phil-Am Life Insurance Application Forms & Cert. were enclosed in the
letter that was apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance application which was signed
by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife
received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife
stamped as received, states that the insurance forms for the attached list of burial
lot buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is an
admission by Philamlife against its own interest.[13] The burden of evidence has
shifted to Philamlife, which must prove that the letter did not contain Chuangs
insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed
to have received Chuangs insurance application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal Philamlife together with the monthly remittances and the second copy
letter is stamped as received, the contents of the letter are correct and accounted is remained or retained with the marketing department
for. of EternalGardens.

Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due Atty. Miranda:
to inconsistencies is groundless. The trial court is in the best position to determine
the reliability and credibility of the witnesses, because it has the opportunity to
observe firsthand the witnesses demeanor, conduct, and attitude. Findings of the
We move to strike out the answer as it is not responsive as counsel is
trial court on such matters are binding and conclusive on the appellate court, unless
merely asking for the location and does not [ask] for the number of
some facts or circumstances of weight and substance have been overlooked,
copy.
misapprehended, or misinterpreted,[14] that, if considered, might affect the result of
the case.[15]

Atty. Arevalo:
An examination of the testimonies of the witnesses mentioned by Philamlife,
however, reveals no overlooked facts of substance and value.
Q Where is the original?

Philamlife primarily claims that Eternal did not even know where the original
insurance application of Chuang was, as shown by the testimony of Edilberto [Mendoza:]
Mendoza:

Atty. Arevalo:
A As far as I remember I do not know where the original but when I
submitted with that payment together with the new clients all the
originals I see to it before I sign the transmittal letter the originals are
Q Where is the original of the application form which is required in attached therein.[16]
case of new coverage?

In other words, the witness admitted not knowing where the original
[Mendoza:] insurance application was, but believed that the application was transmitted to
Philamlife as an attachment to a transmittal letter.

A It is [a] standard operating procedure for the new client to fill up

two copies of this form and the original of this is submitted to
 As to the seeming inconsistencies between the testimony of Manuel Cortez
on whether one or two insurance application forms were accomplished and the
testimony of Mendoza on who actually filled out the application form, these are
minor inconsistencies that do not affect the credibility of the witnesses. Thus, we
ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as
these negate any suspicion that the testimonies have been rehearsed.[17]
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the
essential integrity of the prosecutions evidence as a whole or reflect
on the witnesses honesty. The test is whether the testimonies agree
on essential facts and whether the respective versions corroborate
and substantially coincide with each other so as to make a consistent
and coherent whole.[18]
In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by
Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of
loss without approving the application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement
denominated as Creditor Group Life Policy No. P-1920 dated December 10, 1980. In
the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective
on the date he contracts a loan with the Assured. However, there
shall be no insurance if the application of the Lot Purchaser is not
approved by the Company.
An examination of the above provision would show ambiguity between its
two sentences. The first sentence appears to state that the insurance coverage of
the clients of Eternal already became effective upon contracting a loan with Eternal
while the second sentence appears to require Philamlife to approve the insurance
contract before the same can become effective.
It must be remembered that 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 latters interest. Thus, in Malayan Insurance
Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in
accordance with the general rule of resolving any ambiguity therein in
favor of the insured, where the contract or policy is prepared by the
insurer. A contract of insurance, being a contract of
adhesion, par excellence, any ambiguity therein should be
resolved against the insurer; in other words, it should be
construed liberally in favor of the insured and strictly against the
insurer. Limitations of liability should be regarded with extreme
jealousy and must be construed in such a way as to preclude the
insurer from noncompliance with its obligations.[19] (Emphasis
supplied.)

In the more recent case of Philamcare Health Systems, Inc. v. Court of
Appeals, we reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on
liability, courts should construe them in such a way as to preclude the
insurer from non-compliance with his obligation. Being a contract of
adhesion, the terms of an insurance contract are to be construed
strictly against the party which prepared the contract, the insurer. By
reason of the exclusive control of the insurance company over the
terms and phraseology of the insurance contract, ambiguity must be
strictly interpreted against the insurer and liberally in favor of the
insured, especially to avoid forfeiture.[20]
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-
1920 dated December 10, 1980, must be construed in favor of the insured and in
favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized
to mean that upon a partys purchase of a memorial lot on installment from Eternal,
an insurance contract covering the lot purchaser is created and the same is effective,
valid, and binding until terminated by Philamlife by disapproving the insurance
application. The second sentence of Creditor Group Life Policy No. P-1920 on the
Effective Date of Benefit is in the nature of a resolutory condition which would lead
to the cessation of the insurance contract. Moreover, the mere inaction of the
insurer on the insurance application must not work to prejudice the insured; it
cannot be interpreted as a termination of the insurance contract. The termination of
the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting
parties on equal footing is inaccurate at best. Insurance contracts are wholly
prepared by the insurer with vast amounts of experience in the industry purposefully
used to its advantage. More often than not, insurance contracts are contracts of
adhesion containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to
be delineated. Hence, in order to protect the interest of insurance applicants,
insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor
the application as a valid, binding, and effective insurance contract.[21]
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-
G.R. CV No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of
the Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP
100,000 from the time of extra-judicial demand by Eternal until Philamlifes receipt of
the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of
PhP 100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs. SO ORDERED.
G.R. No. 175666 July 29, 2013
MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.
vs.
CRESENCIA P. ABAN,
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 petitioner’s 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 Sotero’s 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 respondent’s 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.
Respondent filed a Motion to Dismiss14 claiming that petitioner’s 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, petitioner’s investigator testified in
court, stating among others that the insurance underwriter who solicited the
insurance is a cousin of respondent’s 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 respondent’s Motion
to Dismiss, thus:
WHEREFORE, defendant CRESENCIA P. ABAN’s 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 petitioner’s 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. 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
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 PETITIONER’S MOTION
FOR RECONSIDERATION.23
Petitioner’s 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 Sotero’s 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 respondent’s 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 latter’s 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
Respondent’s Arguments
Respondent, on the other hand, essentially argues in her Comment26 that the CA is
correct in applying Section 48. She adds that petitioner’s 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 CA’s pronouncement that
since it was Sotero who obtained the insurance, insurable interest was present.
Under Section 10 of the Insurance Code, Sotero had insurable interest in her own
life, and could validly designate anyone as her beneficiary. Respondent submits that
the CA’s 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
reveals that it was respondent, posing as Sotero, who obtained the insurance, this
claim is no longer feasible 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 – petitioner’s case is severely weakened, if not totally
disproved. Allegations of fraud, which are predicated on respondent’s 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.
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 court’s 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 insured’s lifetime. The phrase "during the lifetime" found in
Section 48 simply means that the policy is no longer considered in force after the
insured has died. The key phrase in the second paragraph of Section 48 is "for a
period of two years."
As 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 insured’s
fraudulent concealment or misrepresentation or want of insurable interest on the
part of the beneficiary, herein defendant-appellee.
Well-settled is the rule that it is the plaintiff-appellant’s 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 respondent’s 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 former’s 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.
G.R. No. 75605 January 22, 1993
RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE
PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
The two consolidated cases involved herein stemmed from the issuance by
Fidelity and Surety Insurance Company of the Philippines (Fidelity for
short) of its Fire Insurance Policy No. F-18876 effective between June 23,
1980 and June 23, 1981 covering Rafael (Rex) Verendia's residential
building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the amount
of P385,000.00. Designated as beneficiary was the Monte de Piedad &
Savings Bank. Verendia also insured the same building with two other
companies, namely, The Country Bankers Insurance for P56,000.00 under
Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development
Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30,
198l.
While the three fire insurance policies were in force, the insured property
was completely destroyed by fire on the early morning of December 28,
1980. Fidelity was accordingly informed of the loss and despite demands,
refused payment under its policy, thus prompting Verendia to file a
complaint with the then Court of First Instance of Quezon City, praying for
payment of P385,000.00, legal interest thereon, plus attorney's fees and
litigation expenses. The complaint was later amended to include Monte de
Piedad as an "unwilling defendant" (P. 16, Record).
Answering the complaint, Fidelity, among other things, averred that the
policy was avoided by reason of over-insurance; that Verendia maliciously
represented that the building at the time of the fire was leased under a
contract executed on June 25, 1980 to a certain Roberto Garcia, when
actually it was a Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A.
Ortiz, ruling in favor of Fidelity. In sustaining the defenses set up by
Fidelity, the trial court ruled that Paragraph 3 of the policy was also
violated by Verendia in that the insured failed to inform Fidelity of his
other insurance coverages with Country Bankers Insurance and
Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a
decision promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895,
Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the appellate court
reversed for the following reasons: (a) there was no misrepresentation
concerning the lease for the contract was signed by Marcelo Garcia in the
name of Roberto Garcia; and (b) Paragraph 3 of the policy contract
requiring Verendia to give notice to Fidelity of other contracts of insurance
was waived by Fidelity as shown by its conduct in attempting to settle the
claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986,
but instead of directly filing a motion for reconsideration within 15 days
therefrom, Fidelity filed on April 21, 1986, a motion for extension of 3 days
within which to file a motion for reconsideration. The motion for extension
was not filed on April 19, 1986 which was the 15th day after receipt of the
decision because said 15th day was a Saturday and of course, the
following day was a Sunday (p. 14., Rollo of G.R. No. 75605). The motion
for extension was granted by the appellate court on April 30, 1986 (p.
15. ibid.), but Fidelity had in the meantime filed its motion for
reconsideration on April 24, 1986 (p. 16, ibid.).
Verendia filed a motion to expunge from the record Fidelity's motion for
reconsideration on the ground that the motion for extension was filed out
of time because the 15th day from receipt of the decision which fell on a
Saturday was ignored by Fidelity, for indeed, so Verendia contended, the
Intermediate Appellate Court has personnel receiving pleadings even on
Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and
after a motion for reconsideration was similarly brushed aside on July 22,
1986 (p. 30, ibid .), the petition herein docketed as G.R. No. 75605 was
initiated. Subsequently, or more specifically on October 21, 1986, the
appellate court denied Fidelity's motion for reconsideration and account
thereof. Fidelity filed on March 31, 1986, the petition for review
on certiorari now docketed as G.R. No. 76399. The two petitions, inter-
related as they are, were consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is
the petition for review on certiorari, we must first determine whether the
decision of the appellate court may still be reviewed, or whether the same
is beyond further judicial scrutiny. Stated otherwise, before anything else,
inquiry must be made into the issue of whether Fidelity could have legally
asked for an extension of the 15-day reglementary period for appealing or
for moving for reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced
the doctrine that the pendency of a motion for extension of time to perfect
an appeal does not suspend the running of the period sought to be
extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same
effect were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160
[1948]) Bello vs. Fernando (4 SCRA 138 [1962]), and Joe vs. King (20
SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not
expressly prohibit the filing of a motion for extension of time to file a
motion for reconsideration in regard to a final order or judgment,
magistrates, including those in the Court of Appeals, held sharply divided
opinions on whether the period for appealing which also includes the
period for moving to reconsider may be extended. The matter was not
definitely settled until this Court issued its Resolution in Habaluyas
Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring that beginning
one month from the promulgation of the resolution on May 30, 1986 —
. . . the rule shall be strictly enforced that no motion for
extension of time to file a motion for new trial or
reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before
June 30, 1986, although, of course, Verendia's motion to expunge the
motion for reconsideration was not finally disposed until July 22, 1986, or
after the dictum in Habaluyas had taken effect. Seemingly, therefore, the
filing of the motion for extension came before its formal proscription
under Habaluyas, for which reason we now turn our attention to G.R. No.
76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a)
whether or not the contract of lease submitted by Verendia to support his
claim on the fire insurance policy constitutes a false declaration which
would forfeit his benefits under Section 13 of the policy and (b) whether
or not, in submitting the subrogation receipt in evidence, Fidelity had in
effect agreed to settle Verendia's claim in the amount stated in said
receipt.1
Verging on the factual, the issue of the veracity or falsity of the lease contract could
have been better resolved by the appellate court for, in a petition for review
on certiorari under Rule 45, the jurisdiction of this Court is limited to the review of
errors of law. The appellate court's findings of fact are, therefore, conclusive upon
this Court except in the following cases: (1) when the conclusion is a finding
grounded entirely on speculation, surmises, or conjectures; (2) when the inference
made is manifestly absurd, mistaken, or impossible; (3) when there is grave abuse
of discretion in the appreciation of facts; (4) when the judgment is premised on a
misapprehension of facts; (5) when the findings of fact are conflicting; and (6) when
the Court of Appeals in making its findings went beyond the issues of the case and
the same are contrary to the admissions of both appellant and appellee (Ronquillo v.
Court of Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the
trial court and the appellate court on important issues in these consolidated cases
and it appearing that the appellate court judgment is based on a misapprehension of
facts, this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance
benefits, was entered into between him and one Robert Garcia, married to Helen
Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the
insurance policy. When the rented residential building was razed to the ground on
December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still
within the premises. However, according to the investigation report prepared by Pat.
Eleuterio M. Buenviaje of the Antipolo police, the building appeared to have "no
occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic) portion of
said compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that
Marcelo Garcia, whom he considered as the real lessee, was occupying the building
when it was burned (TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an
adjuster was able to locate him. Robert Garcia then executed an affidavit before the
National Intelligence and Security Authority (NISA) to the effect that he was not the
lessee of Verendia's house and that his signature on the contract of lease was a
complete forgery. Thus, on the strength of these facts, the adjuster submitted a
report dated December 4, 1981 recommending the denial of Verendia's claim (Exh.
"2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who
signed the lease contract. According to Verendia, it was signed by Marcelo Garcia,
cousin of Robert, who had been paying the rentals all the while. Verendia, however,
failed to explain why Marcelo had to sign his cousin's name when he in fact was
paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse.
Fidelity's conclusions on these proven facts appear, therefore, to have sufficient
bases; Verendia concocted the lease contract to deflect responsibility for the fire
towards an alleged "lessee", inflated the value of the property by the alleged
monthly rental of P6,500 when in fact, the Provincial Assessor of Rizal had assessed
the property's fair market value to be only P40,300.00, insured the same property
with two other insurance companies for a total coverage of around P900,000, and
created a dead-end for the adjuster by the disappearance of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the
parties (Pacific Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its
terms and conditions constitute the measure of the insurer's liability and compliance
therewith is a condition precedent to the insured's right to recovery from the insurer
(Oriental Assurance Corporation vs. Court of Appeals, 200 SCRA 459 [1991],
citing Perla Compania de Seguros, Inc. vs. Court of Appeals, 185 SCRA 741 [1991]).
As it is also a contract of adhesion, an insurance contract should be liberally
construed in favor of the insured and strictly against the insurer company which
usually prepares it (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA
652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia
used a false lease contract to support his claim under Fire Insurance Policy No. F-
18876, the terms of the policy should be strictly construed against the insured.
Verendia failed to live by the terms of the policy, specifically Section 13 thereof
which is expressed in terms that are clear and unambiguous, that all benefits under
the policy shall be forfeited "If the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any fraudulent means or
devises are used by the Insured or anyone acting in his behalf to obtain any benefit
under the policy". Verendia, having presented a false declaration to support his claim
for benefits in the form of a fraudulent lease contract, he forfeited all benefits
therein by virtue of Section 13 of the policy in the absence of proof that Fidelity
waived such provision (Pacific Banking Corporation vs. Court of Appeals, supra).
Worse yet, by presenting a false lease contract, Verendia, reprehensibly disregarded
the principle that insurance contracts are uberrimae fidae and demand the most
abundant good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as
evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia's
claims in consideration of the amount of P142,685.77. While the said receipt appears
to have been a filled-up form of Fidelity, no representative of Fidelity had signed it.
It is even incomplete as the blank spaces for a witness and his address are not filled
up. More significantly, the same receipt states that Verendia had received the
aforesaid amount. However, that Verendia had not received the amount stated
therein, is proven by the fact that Verendia himself filed the complaint for the full
amount of P385,000.00 stated in the policy. It might be that there had been efforts
to settle Verendia's claims, but surely, the subrogation receipt by itself does not
prove that a settlement had been arrived at and enforced. Thus, to interpret
Fidelity's presentation of the subrogation receipt in evidence as indicative of its
accession to its "terms" is not only wanting in rational basis but would be
substituting the will of the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No.
76399 is GRANTED and the decision of the then Intermediate Appellate Court under
review is REVERSED and SET ASIDE and that of the trial court is hereby
REINSTATED and UPHELD.
SO ORDERED.
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642,
dated 21 March 1979, ordering petitioner Manila Mahogany Manufacturing
Corporation to pay private respondent Zenith Insurance Corporation the sum of Five
Thousand Pesos (P5,000.00) with 6% annual interest from 18 January 1973,
attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and
the resolution of the same Court, dated 8 February 1980, denying petitioner's motion
for reconsideration of it's decision.
From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door
sedan with respondent insurance company. On 4 May 1970 the insured vehicle was
bumped and damaged by a truck owned by San Miguel Corporation. For the damage
caused, respondent company paid petitioner five thousand pesos (P5,000.00) in
amicable settlement. Petitioner's general manager executed a Release of Claim,
subrogating respondent company to all its right to action against San Miguel
Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to
demand reimbursement from San Miguel Corporation of the amount it had paid
petitioner. Insurance Adjusters, Inc. refused reimbursement, alleging that San
Miguel Corporation had already paid petitioner P4,500.00 for the damages to
petitioner's motor vehicle, as evidenced by a cash voucher and a Release of Claim
executed by the General Manager of petitioner discharging San Miguel Corporation
from "all actions, claims, demands the rights of action that now exist or hereafter
[sic] develop arising out of or as a consequence of the accident."
Respondent insurance company thus demanded from petitioner reimbursement of
the sum of P4,500.00 paid by San Miguel Corporation. Petitioner refused; hence,
respondent company filed suit in the City Court of Manila for the recovery of
P4,500.00. The City Court ordered petitioner to pay respondent P4,500.00. On
appeal the Court of First Instance of Manila affirmed the City Court's decision in toto,
which CFI decision was affirmed by the Court of Appeals, with the modification that
petitioner was to pay respondent the total amount of P5,000.00 that it had earlier
received from the respondent insurance company.
Petitioner now contends it is not bound to pay P4,500.00, and much more,
P5,000.00 to respondent company as the subrogation in the Release of Claim it
executed in favor of respondent was conditioned on recovery of the total amount of
damages petitioner had sustained. Since total damages were valued by petitioner at
P9,486.43 and only P5,000.00 was received by petitioner from respondent, petitioner
argues that it was entitled to go after San Miguel Corporation to claim the additional
P4,500.00 eventually paid to it by the latter, without having to turn over said amount
to respondent. Respondent of course disputes this allegation and states that there
was no qualification to its right of subrogation under the Release of Claim executed
by petitioner, the contents of said deed having expressed all the intents and
purposes of the parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel
Corporation, petitioner cites Art. 2207 of the Civil Code, which states:
If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or
breach of contract complained of the insurance company shall be subrogated
to the rights of the insured against the wrongdoer or the person who has
violated the contract. If the amount paid by the insurance company does not
fully cover the injury or loss the aggrieved party shall be entitled to recover
the deficiency from the person causing the loss or injury.
Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may exercise his
As held in Phil. Air Lines v. Heald Lumber Co.,
right for the remainder, and he shall be preferred to the person who has
been subrogated in his place in virtue of the partial payment of the same
credit.
We find petitioners arguments to be untenable and without merit. In the absence of
any other evidence to support its allegation that a gentlemen's agreement existed
between it and respondent, not embodied in the Release of Claim, such ease of
Claim must be taken as the best evidence of the intent and purpose of the parties.
Thus, the Court of Appeals rightly stated:
The decision of the respondent court ordering petitioner to pay respondent
Petitioner argues that the release claim it executed subrogating Private
company, not the P4,500.00 as originally asked for, but P5,000.00, the amount
respondent to any right of action it had against San Miguel Corporation did
not preclude Manila Mahogany from filing a deficiency claim against the
wrongdoer. Citing Article 2207, New Civil Code, to the effect that if the
amount paid by an insurance company does not fully cover the loss, the
aggrieved party shall be entitled to recover the deficiency from the person
causing the loss, petitioner claims a preferred right to retain the amount
coming from San Miguel Corporation, despite the subrogation in favor of
Private respondent.
Although petitioners right to file a deficiency claim against San Miguel
Corporation is with legal basis, without prejudice to the insurer's right of
subrogation, nevertheless when Manila Mahogany executed another release
claim (Exhibit K) discharging San Miguel Corporation from "all actions, claims,
demands and rights of action that now exist or hereafter arising out of or as
a consequence of the accident" after the insurer had paid the proceeds of the
policy- the compromise agreement of P5,000.00 being based on the
insurance policy-the insurer is entitled to recover from the insured the
amount of insurance money paid (Metropolitan Casualty Insurance Company
of New York vs. Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code
and Insolvency Law with comments and annotations, H.B. Perez 1976, p.
151). Since petitioner by its own acts released San Miguel Corporation,
thereby defeating private respondents, the right of subrogation, the right of
action of petitioner against the insurer was also nullified. (Sy Keng & Co. vs.
Queensland Insurance Co., Ltd., 54 O.G. 391) Otherwise stated: private
respondent may recover the sum of P5,000.00 it had earlier paid to
petitioner. 1
2
f a property is insured and the owner receives the indemnity from the
insurer, it is provided in [Article 2207 of the New Civil Code] that the insurer
is deemed subrogated to the rights of the insured against the wrongdoer and
if the amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. ... Under this
legal provision, the real party in interest with regard to the portion of the
indemnity paid is the insurer and not the insured 3 (Emphasis supplied)
respondent company paid petitioner as insurance, is also in accord with law and
jurisprudence. In disposing of this issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel
Corporation under its clear right to file a deficiency claim for damages
incurred, against the wrongdoer, should the insurance company not fully pay
for the injury caused (Article 2207, New Civil Code). However, when
petitioner released San Miguel Corporation from any liability, petitioner's right
to retain the sum of P5,000.00 no longer existed, thereby entitling private
respondent to recover the same. (Emphasis supplied)
not prayed for, under the general prayer in the complaint "for such further or
other relief as may be deemed just or equitable, (Rule 6, Sec. 3, Revised
Rules of Court; Rosales vs. Reyes Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim,
50 Phil. 844; Baguiro vs. Barrios Tupas, 77 Phil 120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed
from is hereby AFFIRMED with costs against petitioner. SO ORDERED.

As has been observed:

... The right of subrogation can only exist after the insurer has paid
[G.R. No. 150094. August 18, 2004]
the otherwise the insured will be deprived of his right to full indemnity. If the
FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME
insurance proceeds are not sufficient to cover the damages suffered by the
ASSURANCE COMPANY and PHILAM INSURANCE COMPANY,
insured, then he may sue the party responsible for the damage for the the
INC., respondents.
[sic] remainder. To the extent of the amount he has already received from
the insurer enjoy's [sic] the right of subrogation.
Basic is the requirement that before suing to recover loss of or damage to
Since the insurer can be subrogated to only such rights as the insured may transported goods, the plaintiff must give the carrier notice of the loss or damage,
have, should the insured, after receiving payment from the insurer, release within the period prescribed by the Warsaw Convention and/or the airway bill.
the wrongdoer who caused the loss, the insurer loses his rights against the
The Case
latter. But in such a case, the insurer will be entitled to recover from the
insured whatever it has paid to the latter, unless the release was made with Before us is a Petition for Review[1] under Rule 45 of the Rules of Court,
the consent of the insurer. 4(Emphasis supplied.) challenging the June 4, 2001 Decision[2] and the September 21, 2001 Resolution[3] of
the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed Decision disposed as
And even if the specific amount asked for in the complaint is P4,500.00 only and not
follows:
P5,000.00, still, the respondent Court acted well within its discretion in awarding
P5,000.00, the total amount paid by the insurer. The Court of Appeals rightly WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack
reasoned as follows: of merit. The appealed Decision of Branch 149 of the Regional Trial Court of Makati
City in Civil Case No. 95-1219, entitled American Home Assurance Co. and PHILAM
It is to be noted that private respondent, in its companies, prays for
Insurance Co., Inc. v. FEDERAL EXPRESS CORPORATION and/or CARGOHAUS, INC.
the recovery, not of P5,000.00 it had paid under the insurance policy but
(formerly U-WAREHOUSE, INC.), is hereby AFFIRMED and REITERATED.
P4,500.00 San Miguel Corporation had paid to petitioner. On this score, We
believe the City Court and Court of First Instance erred in not awarding the Costs against the [petitioner and Cargohaus, Inc.].[4]
proper relief. Although private respondent prays for the reimbursement of
P4,500.00 paid by San Miguel Corporation, instead of P5,000.00 paid under The assailed Resolution denied petitioners Motion for Reconsideration.
the insurance policy, the trial court should have awarded the latter, although
The Facts
The antecedent facts are summarized by the appellate court as follows:
On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska,
USA delivered to Burlington Air Express (BURLINGTON), an agent of [Petitioner]
Federal Express Corporation, a shipment of 109 cartons of veterinary biologicals for
delivery to consignee SMITHKLINE and French Overseas Company in Makati City,
Metro Manila. The shipment was covered by Burlington Airway Bill No. 11263825
with the words, REFRIGERATE WHEN NOT IN TRANSIT and PERISHABLE stamp
marked on its face. That same day, Burlington insured the cargoes in the amount of
$39,339.00 with American Home Assurance Company (AHAC). The following day,
Burlington turned over the custody of said cargoes to Federal Express which
transported the same to Manila. The first shipment, consisting of 92 cartons arrived
in Manila on January 29, 1994 in Flight No. 0071-28NRT and was immediately stored
at [Cargohaus Inc.s] warehouse. While the second, consisting of 17 cartons, came in
two (2) days later, or on January 31, 1994, in Flight No. 0071-30NRT which was
likewise immediately stored at Cargohaus warehouse. Prior to the arrival of the
cargoes, Federal Express informed GETC Cargo International Corporation, the
customs broker hired by the consignee to facilitate the release of its cargoes from
the Bureau of Customs, of the impending arrival of its clients cargoes.
On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the
cargoes arrived in Manila, a non-licensed customs broker who was assigned by GETC
to facilitate the release of the subject cargoes, found out, while he was about to
cause the release of the said cargoes, that the same [were] stored only in a room
with two (2) air conditioners running, to cool the place instead of a refrigerator.
When he asked an employee of Cargohaus why the cargoes were stored in the cool
room only, the latter told him that the cartons where the vaccines were contained
specifically indicated therein that it should not be subjected to hot or cold
temperature. Thereafter, DIONEDA, upon instructions from GETC, did not proceed
with the withdrawal of the vaccines and instead, samples of the same were taken
and brought to the Bureau of Animal Industry of the Department of Agriculture in
the Philippines by SMITHKLINE for examination wherein it was discovered that the
ELISA reading of vaccinates sera are below the positive reference serum.
As a consequence of the foregoing result of the veterinary biologics test,
SMITHKLINE abandoned the shipment and, declaring total loss for the unusable
shipment, filed a claim with AHAC through its representative in the Philippines, the
Philam Insurance Co., Inc. (PHILAM) which recompensed SMITHKLINE for the whole
insured amount of THIRTY NINE THOUSAND THREE HUNDRED THIRTY NINE
DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages
against the [petitioner] imputing negligence on either or both of them in the
handling of the cargo.
Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being
held solidarily liable for the loss as follows:
WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner
and its Co-Defendant Cargohaus] are directed to pay [respondents], jointly and
severally, the following:
1. Actual damages in the amount of the peso equivalent of US$39,339.00 with
interest from the time of the filing of the complaint to the time the same is fully paid.
2. Attorneys fees in the amount of P50,000.00 and
3. Costs of suit.
SO ORDERED.
Aggrieved, [petitioner] appealed to [the CA].[5]
Ruling of the Court of Appeals
The Test Report issued by the United States Department of Agriculture (Animal
and Plant Health Inspection Service) was found by the CA to be inadmissible in
evidence. Despite this ruling, the appellate court held that the shipping Receipts
were a prima facie proof that the goods had indeed been delivered to the carrier in
good condition. We quote from the ruling as follows:
Where the plaintiff introduces evidence which shows prima facie that the goods were
delivered to the carrier in good condition [i.e., the shipping receipts], and that the
carrier delivered the goods in a damaged condition, a presumption is raised that the
damage occurred through the fault or negligence of the carrier, and this casts upon
the carrier the burden of showing that the goods were not in good condition when
delivered to the carrier, or that the damage was occasioned by some cause excepting
the carrier from absolute liability. This the [petitioner] failed to discharge. x x x.[6]
 Found devoid of merit was petitioners claim that respondents had no personality
to sue. This argument was supposedly not raised in the Answer or during trial.
Hence, this Petition.[7]
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
I. Are the decision and resolution of the Honorable Court of Appeals proper
subject for review by the Honorable Court under Rule 45 of the 1997
Rules of Civil Procedure?
II. Is the conclusion of the Honorable Court of Appeals petitioners claim that
respondents have no personality to sue because the payment was made
by the respondents to Smithkline when the insured under the policy is
Burlington Air Express is devoid of merit correct or not?
III. Is the conclusion of the Honorable Court of Appeals that the goods were
received in good condition, correct or not?
IV. Are Exhibits F and G hearsay evidence, and therefore, not admissible?
IV. Is the Honorable Court of Appeals correct in ignoring and disregarding
respondents own admission that petitioner is not liable? and
V. Is the Honorable Court of Appeals correct in ignoring the Warsaw
Convention?[8]
Simply stated, the issues are as follows: (1) Is the Petition proper for review by
the Supreme Court? (2) Is Federal Express liable for damage to or loss of the
insured goods?
This Courts Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from
undisputed facts is a question of law cognizable by the Supreme Court.[9]
In the present case, the facts are undisputed. As will be shown shortly,
petitioner is questioning the conclusions drawn from such facts. Hence, this case is a
proper subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no
cause of action against it -- because the payment made to Smithkline was
erroneous.
Pertinent to this issue is the Certificate of Insurance[10] (Certificate) that both
opposing parties cite in support of their respective positions. They differ only in their
interpretation of what their rights are under its terms. The determination of those
rights involves a question of law, not a question of fact. As distinguished from a
question of law which exists when the doubt or difference arises as to what the law
is on a certain state of facts -- there is a question of fact when the doubt or
difference arises as to the truth or the falsehood of alleged facts; or when the query
necessarily invites calibration of the whole evidence considering mainly the credibility
of witnesses, existence and relevancy of specific surrounding circumstance, their
relation to each other and to the whole and the probabilities of the situation.[11]
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is payable
to order x x x upon surrender of this Certificate. Such wording conveys the right of
collecting on any such damage or loss, as fully as if the property were covered by a
special policy in the name of the holder itself. At the back of the Certificate appears
the signature of the representative of Burlington. This document has thus been duly
indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right
of collecting or of being indemnified for loss of or damage to the insured shipment,
as fully as if the property were covered by a special policy in the name of the holder.
Hence, being the holder of the Certificate and having an insurable interest in the
goods, Smithkline was the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a
subrogation Receipt[12] in favor of respondents. The latter were thus authorized to
file claims and begin suit against any such carrier, vessel, person, corporation or
government. Undeniably, the consignee had a legal right to receive the goods in the
same condition it was delivered for transport to petitioner. If that right was violated,
the consignee would have a cause of action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to
the insured goods, the insurers entitlement to subrogation pro tanto -- being of the
highest equity -- equips it with a cause of action in case of a contractual breach or
negligence.[13]Further, the insurers subrogatory right to sue for recovery under the
bill of lading in case of loss of or damage to the cargo is jurisprudentially upheld.[14]
In the exercise of its subrogatory right, an insurer may proceed against an
erring carrier. To all intents and purposes, it stands in the place and in substitution
of the consignee. A fortiori, both the insurer and the consignee are bound by the
contractual stipulations under the bill of lading.[15]
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has
tirelessly pointed out that respondents claim and right of action are already barred.
The latter, and even the consignee, never filed with the carrier any written notice or
complaint regarding its claim for damage of or loss to the subject cargo within the
period required by the Warsaw Convention and/or in the airway bill. Indeed, this fact
has never been denied by respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
6. No action shall be maintained in the case of damage to or partial loss of the
shipment unless a written notice, sufficiently describing the goods concerned, the
approximate date of the damage or loss, and the details of the claim, is presented
by shipper or consignee to an office of Burlington within (14) days from the date the
goods are placed at the disposal of the person entitled to delivery, or in the case of
total loss (including non-delivery) unless presented within (120) days from the date
of issue of the [Airway Bill].[16]
Relevantly, petitioners airway bill states:
12./12.1 The person entitled to delivery must make a complaint to the carrier in
writing in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the
damage and at the latest within fourteen (14) days from receipt of the
goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the
date of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed
at his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120)
days from the date of the issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose
air waybill was used, or to the first carrier or to the last carrier or to the carrier who
performed the transportation during which the loss, damage or delay took place.[17]
Article 26 of the Warsaw Convention, on the other hand, provides:
ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods
without complaint shall be prima facie evidence that the same have been delivered
in good condition and in accordance with the document of transportation.
(2) In case of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within 3 days from
the date of receipt in the case of baggage and 7 days from the date of receipt in the
case of goods. In case of delay the complaint must be made at the latest within 14
days from the date on which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or
by separate notice in writing dispatched within the times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the We note that respondents are not without recourse. Cargohaus, Inc. --
carrier, save in the case of fraud on his part.[18] petitioners co-defendant in respondents Complaint below -- has been adjudged by
the trial court as liable for, inter alia, actual damages in the amount of the peso
Condition Precedent equivalent of US $39,339.[25] This judgment was affirmed by the Court of Appeals
and is already final and executory.[26]
In this jurisdiction, the filing of a claim with the carrier within the time limitation
therefor actually constitutes a condition precedent to the accrual of a right of action WHEREFORE, the Petition is GRANTED, and the assailed
against a carrier for loss of or damage to the goods.[19] The shipper or consignee Decision REVERSED insofar as it pertains to Petitioner Federal Express Corporation.
must allege and prove the fulfillment of the condition. If it fails to do so, no right of No pronouncement as to costs.
action against the carrier can accrue in favor of the former. The aforementioned
requirement is a reasonable condition precedent; it does not constitute a limitation SO ORDERED.
of action.[20]

The requirement of giving notice of loss of or injury to the goods is not an

empty formalism. The fundamental reasons for such a stipulation are (1) to inform
the carrier that the cargo has been damaged, and that it is being charged with
liability therefor; and (2) to give it an opportunity to examine the nature and extent
of the injury. This protects the carrier by affording it an opportunity to make an G.R. No. 194320. Promulgated: February 1, 2012
investigation of a claim while the matter is fresh and easily investigated so as to
safeguard itself from false and fraudulent claims.[21] MALAYAN INSURANCE CO., INC.,
Petitioner,
When an airway bill -- or any contract of carriage for that matter -- has a
- versus -
stipulation that requires a notice of claim for loss of or damage to goods shipped and
RODELIO ALBERTO and ENRICO
the stipulation is not complied with, its enforcement can be prevented and the
ALBERTO REYES, Respondents.
liability cannot be imposed on the carrier. To stress, notice is a condition precedent,
and the carrier is not liable if notice is not given in accordance with the
stipulation.[22]Failure to comply with such a stipulation bars recovery for the loss or damage
suffered.[23]
The Case
Being a condition precedent, the notice must precede a suit for
enforcement.[24] In the present case, there is neither an allegation nor a showing of
respondents compliance with this requirement within the prescribed period. While Before Us is a Petition for Review on Certiorari under Rule 45, seeking to
respondents may have had a cause of action then, they cannot now enforce it for reverse and set aside the July 28, 2010 Decision[1] of the Court of Appeals (CA) and
their failure to comply with the aforesaid condition precedent. its October 29, 2010 Resolution[2] denying the motion for reconsideration filed by
petitioner Malayan Insurance Co., Inc. (Malayan Insurance). The July 28, 2010 CA
In view of the foregoing, we find no more necessity to pass upon the other
Decision reversed and set aside the Decision[3] dated February 2, 2009 of the
issues raised by petitioner.
Regional Trial Court, Branch 51 in Manila.

The Facts
At around 5 oclock in the morning of December 17, 1995, an accident
occurred at the corner of EDSA and Ayala Avenue, Makati City, involving four (4)
vehicles, to wit: (1) a Nissan Bus operated by Aladdin Transit with plate number NYS
381; (2) an Isuzu Tanker with plate number PLR 684; (3) a Fuzo Cargo Truck with
plate number PDL 297; and (4) a Mitsubishi Galant with plate number TLM 732.[4]
Based on the Police Report issued by the on-the-spot investigator, Senior
Police Officer 1 Alfredo M. Dungga (SPO1 Dungga), the Isuzu Tanker was in front of
the Mitsubishi Galant with the Nissan Bus on their right side shortly before the
vehicular incident. All three (3) vehicles were at a halt along EDSA facing the south
direction when the Fuzo Cargo Truck simultaneously bumped the rear portion of the
Mitsubishi Galant and the rear left portion of the Nissan Bus. Due to the strong
impact, these two vehicles were shoved forward and the front left portion of the
Mitsubishi Galant rammed into the rear right portion of the Isuzu Tanker.[5]
Previously, particularly on December 15, 1994, Malayan Insurance issued Car
Insurance Policy No. PV-025-00220 in favor of First Malayan Leasing and Finance
Corporation (the assured), insuring the aforementioned Mitsubishi Galant against
third party liability, own damage and theft, among others. Having insured the vehicle
against such risks, Malayan Insurance claimed in its Complaint dated October 18,
1999 that it paid the damages sustained by the assured amounting to PhP
700,000.[6]
Maintaining that it has been subrogated to the rights and interests of the
assured by operation of law upon its payment to the latter, Malayan Insurance sent
several demand letters to respondents Rodelio Alberto (Alberto) and Enrico Alberto
Reyes (Reyes), the registered owner and the driver, respectively, of the Fuzo Cargo
Truck, requiring them to pay the amount it had paid to the assured. When
respondents refused to settle their liability, Malayan Insurance was constrained to
file a complaint for damages for gross negligence against respondents.[7]
In their Answer, respondents asserted that they cannot be held liable for the
vehicular accident, since its proximate cause was the reckless driving of the Nissan
Bus driver. They alleged that the speeding bus, coming from the service road of
EDSA, maneuvered its way towards the middle lane without due regard to Reyes
right of way. When the Nissan Bus abruptly stopped, Reyes stepped hard on the
brakes but the braking action could not cope with the inertia and failed to gain
sufficient traction. As a consequence, the Fuzo Cargo Truck hit the rear end of the
Mitsubishi Galant, which, in turn, hit the rear end of the vehicle in front of it. The
Nissan Bus, on the other hand, sideswiped the Fuzo Cargo Truck, causing damage to
the latter in the amount of PhP 20,000. Respondents also controverted the results of
the Police Report, asserting that it was based solely on the biased narration of the
Nissan Bus driver.[8]
After the termination of the pre-trial proceedings, trial ensued. Malayan
Insurance presented the testimony of its lone witness, a motor car claim adjuster,
who attested that he processed the insurance claim of the assured and verified the
documents submitted to him. Respondents, on the other hand, failed to present any
evidence.
In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-
95885, ruled in favor of Malayan Insurance and declared respondents liable for
damages. The dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of the
plaintiff against defendants jointly and severally to pay plaintiff the
following:
1. The amount of P700,000.00 with legal interest from
the time of the filing of the complaint;
 2. Attorneys fees of P10,000.00 and;

3. Cost of suit. The Issues

SO ORDERED.[9]

Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV In its Memorandum[14] dated June 27, 2011, Malayan Insurance raises the
No. 93112. In its Decision dated July 28, 2010, the CA reversed and set aside the following issues for Our consideration:
Decision of the trial court and ruled in favor of respondents, disposing:

I WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE

WHEREFORE, the foregoing considered, the instant appeal is POLICE REPORT SINCE THE POLICE INVESTIGATOR WHO PREPARED
hereby GRANTED and the assailed Decision dated 2 February THE SAME DID NOT ACTUALLY TESTIFY IN COURT THEREON.
2009 REVERSED and SET ASIDE. The Complaint dated 18 October
1999 is hereby DISMISSED for lack of merit. No costs.
II WHETHER THE SUBROGATION OF MALAYAN INSURANCE IS
IMPAIRED AND/OR DEFICIENT.
SO ORDERED.[10]

The CA held that the evidence on record has failed to establish not only
negligence on the part of respondents, but also compliance with the other requisites
and the consequent right of Malayan Insurance to subrogation.[11] It noted that the
police report, which has been made part of the records of the trial court, was not
properly identified by the police officer who conducted the on-the-spot investigation
of the subject collision. It, thus, held that an appellate court, as a reviewing body,
cannot rightly appreciate firsthand the genuineness of an unverified and unidentified
document, much less accord it evidentiary value.[12]
On the other hand, respondents submit the following issues in
its Memorandum[15] dated July 7, 2011:
I WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT
FOR FAILURE OF MALAYAN INSURANCE TO OVERCOME THE BURDEN
OF PROOF REQUIRED TO ESTABLISH THE NEGLIGENCE OF
RESPONDENTS.

Subsequently, Malayan Insurance filed its Motion for Reconsideration,

arguing that a police report is a prima facie evidence of the facts stated in it. And II WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN
inasmuch as they never questioned the presentation of the report in evidence, INSURANCE ARE SUFFICIENT TO CLAIM FOR THE AMOUNT OF
respondents are deemed to have waived their right to question its authenticity and DAMAGES.
due execution.[13]

In its Resolution dated October 29, 2010, the CA denied the motion for
reconsideration. Hence, Malayan Insurance filed the instant petition.
 III WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS
PASSED COMPLIANCE AND REQUISITES AS PROVIDED UNDER
PERTINENT LAWS.
Essentially, the issues boil down to the following: (1) the admissibility of the
police report; (2) the sufficiency of the evidence to support a claim for gross
negligence; and (3) the validity of subrogation in the instant case.
Our Ruling
The petition has merit.
Admissibility of the Police Report
Malayan Insurance contends that, even without the presentation of the police
investigator who prepared the police report, said report is still admissible in
evidence, especially since respondents failed to make a timely objection to its
presentation in evidence.[16] Respondents counter that since the police report was
never confirmed by the investigating police officer, it cannot be considered as part of
the evidence on record.[17]
Indeed, under the rules of evidence, a witness can testify only to those facts
which the witness knows of his or her personal knowledge, that is, which are derived
from the witness own perception.[18] Concomitantly, a witness may not testify on
matters which he or she merely learned from others either because said witness was
told or read or heard those matters.[19] Such testimony is considered hearsay and
may not be received as proof of the truth of what the witness has learned. This is
known as the hearsay rule.[20]
As discussed in D.M. Consunji, Inc. v. CA,[21] Hearsay is not limited to oral
testimony or statements; the general rule that excludes hearsay as evidence applies
to written, as well as oral statements.
There are several exceptions to the hearsay rule under the Rules of Court,
among which are entries in official records.[22]Section 44, Rule 130 provides:
Entries in official records made in the performance of his duty
by a public officer of the Philippines, or by a person in the
performance of a duty specially enjoined by law are prima facie
evidence of the facts therein stated.
In Alvarez v. PICOP Resources,[23] this Court reiterated the requisites for the
admissibility in evidence, as an exception to the hearsay rule of entries in official
records, thus: (a) that the entry was made by a public officer or by another person
specially enjoined by law to do so; (b) that it was made by the public officer in the
performance of his or her duties, or by such other person in the performance of a
duty specially enjoined by law; and (c) that the public officer or other person had
sufficient knowledge of the facts by him or her stated, which must have been
acquired by the public officer or other person personally or through official
information.
Notably, the presentation of the police report itself is admissible as an
exception to the hearsay rule even if the police investigator who prepared it was not
presented in court, as long as the above requisites could be adequately proved.[24]
Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator,
prepared the report, and he did so in the performance of his duty. However, what is
not clear is whether SPO1 Dungga had sufficient personal knowledge of the facts
contained in his report. Thus, the third requisite is lacking.
Respondents failed to make a timely objection to the police reports
presentation in evidence; thus, they are deemed to have waived their right to do
so.[25] As a result, the police report is still admissible in evidence.
Sufficiency of Evidence
Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo
truck, bumped the rear of the Mitsubishi Galant, he is presumed to be negligent
unless proved otherwise. It further contends that respondents failed to present any
evidence to overturn the presumption of negligence.[26] Contrarily, respondents claim
that since Malayan Insurance did not present any witness who shall affirm any
negligent act of Reyes in driving the Fuzo Cargo truck before and after the incident,
there is no evidence which would show negligence on the part of respondents.[27]
We agree with Malayan Insurance. Even if We consider the inadmissibility of
the police report in evidence, still, respondents cannot evade liability by virtue of
the res ipsa loquitur doctrine. The D.M. Consunji, Inc. case is quite elucidating:
x x x where it is shown that the thing or
instrumentality which caused the injury complained of was
under the control or management of the defendant, and that
the occurrence resulting in the injury was such as in the
ordinary course of things would not happen if those who had
its control or management used proper care, there is sufficient
evidence, or, as sometimes stated, reasonable evidence, in the
absence of explanation by the defendant, that the injury arose
from or was caused by the defendants want of care.

Petitioners contention, however, loses relevance in the face of

the application of res ipsa loquitur by the CA. The effect of the
One of the theoretical bases for the doctrine is its necessity,
doctrine is to warrant a presumption or inference that the mere fall of
i.e., that necessary evidence is absent or not available.
the elevator was a result of the person having charge of the
instrumentality was negligent. As a rule of evidence, the doctrine
of res ipsa loquitur is peculiar to the law of negligence which
recognizes that prima facie negligence may be established without The res ipsa loquitur doctrine is based in part upon the
direct proof and furnishes a substitute for specific proof of negligence. theory that the defendant in charge of the instrumentality
which causes the injury either knows the cause of the accident
or has the best opportunity of ascertaining it and that the
plaintiff has no such knowledge, and therefore is compelled to
The concept of res ipsa loquitur has been explained in this
allege negligence in general terms and to rely upon the proof
wise:
of the happening of the accident in order to establish
negligence. The inference which the doctrine permits is
grounded upon the fact that the chief evidence of the true
While negligence is not ordinarily inferred or presumed, cause, whether culpable or innocent, is practically accessible
and while the mere happening of an accident or injury will not to the defendant but inaccessible to the injured person.
generally give rise to an inference or presumption that it was
due to negligence on defendants part, under the doctrine
of res ipsa loquitur, which means, literally, the thing or
It has been said that the doctrine of res ipsa
transaction speaks for itself, or in one jurisdiction, that the
loquitur furnishes a bridge by which a plaintiff, without
thing or instrumentality speaks for itself, the facts or
knowledge of the cause, reaches over to defendant who
circumstances accompanying an injury may be such as to raise
knows or should know the cause, for any explanation of care
a presumption, or at least permit an inference of negligence
exercised by the defendant in respect of the matter of which
on the part of the defendant, or some other person who is
the plaintiff complains. The res ipsa loquitur doctrine, another
charged with negligence.
court has said, is a rule of necessity, in that it proceeds on the
theory that under the peculiar circumstances in which the
 doctrine is applicable, it is within the power of the defendant
to show that there was no negligence on his part, and direct
proof of defendants negligence is beyond plaintiffs power.
Accordingly, some courts add to the three prerequisites for the
application of the res ipsa loquitur doctrine the further
requirement that for the res ipsa loquitur doctrine to apply, it
must appear that the injured party had no knowledge or
means of knowledge as to the cause of the accident, or that
the party to be charged with negligence has superior
knowledge or opportunity for explanation of the accident.
The CA held that all the requisites of res ipsa loquitur are
present in the case at bar:
There is no dispute that appellees husband fell down
from the 14th floor of a building to the basement while he was
working with appellants construction project, resulting to his
death. The construction site is within the exclusive control and
management of appellant. It has a safety engineer, a project
superintendent, a carpenter leadman and others who are in
complete control of the situation therein. The circumstances of
any accident that would occur therein are peculiarly within the
knowledge of the appellant or its employees. On the other
hand, the appellee is not in a position to know what caused
the accident. Res ipsa loquitur is a rule of necessity and it
applies where evidence is absent or not readily available,
provided the following requisites are present: (1) the accident
was of a kind which does not ordinarily occur unless someone
is negligent; (2) the instrumentality or agency which caused
the injury was under the exclusive control of the person
charged with negligence; and (3) the injury suffered must not
have been due to any voluntary action or contribution on the
part of the person injured. x x x.
No worker is going to fall from the 14th floor of a
building to the basement while performing work in a
construction site unless someone is negligent[;] thus, the first
requisite for the application of the rule of res ipsa loquitur is
present. As explained earlier, the construction site with all its
paraphernalia and human resources that likely caused the
injury is under the exclusive control and management of
appellant[;] thus[,] the second requisite is also present. No
contributory negligence was attributed to the appellees
deceased husband[;] thus[,] the last requisite is also present.
All the requisites for the application of the rule of res ipsa
loquitur are present, thus a reasonable presumption or
inference of appellants negligence arises. x x x.
Petitioner does not dispute the existence of the requisites for
the application of res ipsa loquitur, but argues that the presumption
or inference that it was negligent did not arise since it proved that it
exercised due care to avoid the accident which befell respondents
husband.
Petitioner apparently misapprehends the procedural effect of
the doctrine. As stated earlier, the defendants negligence is presumed
or inferred when the plaintiff establishes the requisites for the
application of res ipsa loquitur. Once the plaintiff makes out a prima
facie case of all the elements, the burden then shifts to defendant to
explain. The presumption or inference may be rebutted or overcome
by other evidence and, under appropriate circumstances a disputable
presumption, such as that of due care or innocence, may outweigh
the inference. It is not for the defendant to explain or prove its
defense to prevent the presumption or inference from arising.
Evidence by the defendant of say, due care, comes into play only
after the circumstances for the application of the doctrine has been
established.[28]
 In the case at bar, aside from the statement in the police report, none of the
parties disputes the fact that the Fuzo Cargo Truck hit the rear end of the Mitsubishi
Galant, which, in turn, hit the rear end of the vehicle in front of it. Respondents,
however, point to the reckless driving of the Nissan Bus driver as the proximate
cause of the collision, which allegation is totally unsupported by any evidence on
record. And assuming that this allegation is, indeed, true, it is astonishing that
respondents never even bothered to file a cross-claim against the owner or driver of
the Nissan Bus.
What is at once evident from the instant case, however, is the presence of all
the requisites for the application of the rule of res ipsa loquitur. To reiterate, res ipsa
loquitur is a rule of necessity which applies where evidence is absent or not readily
available. As explained in D.M. Consunji, Inc., it is partly based upon the theory that
the defendant in charge of the instrumentality which causes the injury either knows
the cause of the accident or has the best opportunity of ascertaining it and that the
plaintiff has no such knowledge, and, therefore, is compelled to allege negligence in
general terms and to rely upon the proof of the happening of the accident in order
to establish negligence.
As mentioned above, the requisites for the application of the res ipsa
loquitur rule are the following: (1) the accident was of a kind which does not
ordinarily occur unless someone is negligent; (2) the instrumentality or agency which
caused the injury was under the exclusive control of the person charged with
negligence; and (3) the injury suffered must not have been due to any voluntary
action or contribution on the part of the person injured.[29]
In the instant case, the Fuzo Cargo Truck would not have had hit the rear
end of the Mitsubishi Galant unless someone is negligent. Also, the Fuzo Cargo Truck
was under the exclusive control of its driver, Reyes. Even if respondents avert
liability by putting the blame on the Nissan Bus driver, still, this allegation was self-
serving and totally unfounded. Finally, no contributory negligence was attributed to
the driver of the Mitsubishi Galant. Consequently, all the requisites for the
application of the doctrine of res ipsa loquitur are present, thereby creating a
reasonable presumption of negligence on the part of respondents.
It is worth mentioning that just like any other disputable presumptions or
inferences, the presumption of negligence may be rebutted or overcome by other
evidence to the contrary. It is unfortunate, however, that respondents failed to
present any evidence before the trial court. Thus, the presumption of negligence
remains. Consequently, the CA erred in dismissing the complaint for Malayan
Insurances adverted failure to prove negligence on the part of respondents.
Validity of Subrogation
Malayan Insurance contends that there was a valid subrogation in the instant
case, as evidenced by the claim check voucher[30] and the Release of Claim and
Subrogation Receipt[31] presented by it before the trial court. Respondents, however,
claim that the documents presented by Malayan Insurance do not indicate certain
important details that would show proper subrogation.
As noted by Malayan Insurance, respondents had all the opportunity, but
failed to object to the presentation of its evidence. Thus, and as We have mentioned
earlier, respondents are deemed to have waived their right to make an objection. As
this Court held in Asian Construction and Development Corporation v. COMFAC
Corporation:
The rule is that failure to object to the offered
evidence renders it admissible, and the court cannot, on its
own, disregard such evidence. We note that ASIAKONSTRUCTs
counsel of record before the trial court, Atty. Bernard Dy, who actively
participated in the initial stages of the case stopped attending the
hearings when COMFAC was about to end its presentation. Thus,
ASIAKONSTRUCT could not object to COMFACs offer of evidence nor
present evidence in its defense; ASIAKONSTRUCT was deemed by the
trial court to have waived its chance to do so.
Note also that when a party desires the court to reject
the evidence offered, it must so state in the form of a timely
objection and it cannot raise the objection to the evidence for
 the first time on appeal. Because of a partys failure to timely is designed to promote and to accomplish justice; and is the mode
object, the evidence becomes part of the evidence in the that equity adopts to compel the ultimate payment of a debt by one
case. Thereafter, all the parties are considered bound by any who, in justice, equity, and good conscience, ought to pay.[33]
outcome arising from the offer of evidence properly
presented.[32] (Emphasis supplied.)
Considering the above ruling, it is only but proper that Malayan Insurance be
subrogated to the rights of the assured.

Bearing in mind that the claim check voucher and the Release of Claim and
Subrogation Receipt presented by Malayan Insurance are already part of the
evidence on record, and since it is not disputed that the insurance company, indeed,
paid PhP 700,000 to the assured, then there is a valid subrogation in the case at bar.
As explained in Keppel Cebu Shipyard, Inc. v. Pioneer Insurance and Surety
Corporation:
WHEREFORE, the petition is hereby GRANTED. The CAs July 28, 2010
Decision and October 29, 2010 Resolution in CA-G.R. CV No. 93112 are
hereby REVERSED and SET ASIDE. The Decision dated February 2, 2009 issued
by the trial court in Civil Case No. 99-95885 is hereby REINSTATED.

No pronouncement as to cost. SO ORDERED.

Subrogation is the substitution of one person by another with
reference to a lawful claim or right, so that he who is substituted
succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities. The principle covers a situation
wherein an insurer has paid a loss under an insurance policy is
entitled to all the rights and remedies belonging to the insured
against a third party with respect to any loss covered by the policy. It
contemplates full substitution such that it places the party subrogated
G.R. No. L-109937 March 21, 1994
in the shoes of the creditor, and he may use all means that the
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
creditor could employ to enforce payment.
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS,
represented by CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION
We have held that payment by the insurer to the insured INSURANCE POOL, respondents.
operates as an equitable assignment to the insurer of all the remedies
that the insured may have against the third party whose negligence
or wrongful act caused the loss. The right of subrogation is not This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
dependent upon, nor does it grow out of, any privity of contract. It to reverse and set aside the decision of the Court of Appeals in CA-G.R CV No.
accrues simply upon payment by the insurance company of the 26434 and its resolution denying reconsideration thereof.
insurance claim. The doctrine of subrogation has its roots in equity. It
We affirm the decision of the Court of Appeals with modification.
I The DBP and the DBP MRI Pool separately filed their answers, with the former
In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-
law, applied for a loan of P500,000.00 with the Development Bank of the Philippines
(DBP), Basilan Branch. As the principal mortgagor, Dans, then 76 years of age, was
advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4,
1987 and released on August 11, 1987. From the proceeds of the loan, DBP
deducted the amount of P1,476.00 as payment for the MRI premium. On August 15,
1987, Dans accomplished and submitted the "MRI Application for Insurance" and the
"Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10
percent, was credited by DBP to the savings account of the DBP MRI Pool.
Accordingly, the DBP MRI Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed
this information to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool
notified DBP that Dans was not eligible for MRI coverage, being over the acceptance
age limit of 60 years at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late
husband's MRI application. The DBP offered to refund the premium of P1,476.00
which the deceased had paid, but Candida Dans refused to accept the same,
demanding payment of the face value of the MRI or an amount equivalent to the
loan. She, likewise, refused to accept an ex gratia settlement of P30,000.00, which
the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix,
filed a complaint with the Regional Trial Court, Branch I, Basilan, against DBP and
the insurance pool for "Collection of Sum of Money with Damages." Respondent
Estate alleged that Dans became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to apply for MRI,
and later collected the insurance premium thereon. Respondent Estate therefore
prayed: (1) that the sum of P139,500.00, which it paid under protest for the loan, be
reimbursed; (2) that the mortgage debt of the deceased be declared fully paid; and
(3) that damages be awarded.
asserting a cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits
submitted by respondent Estate. As a result of these admissions, the trial court
narrowed down the issues and, without opposition from the parties, found the case
ripe for summary judgment. Consequently, the trial court ordered the parties to
submit their respective position papers and documentary evidence, which may serve
as basis for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of respondent Estate
and against DBP. The DBP MRI Pool, however, was absolved from liability, after the
trial court found no privity of contract between it and the deceased. The trial court
declared DBP in estoppel for having led Dans into applying for MRI and actually
collecting the premium and the service fee, despite knowledge of his age ineligibility.
The dispositive portion of the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance
of justice and equity, the Court finds judgment for the plaintiff and against
Defendant DBP, ordering the latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal
rate of interest as amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest
accumulated or otherwise to have been settled, satisfied or set-off by virtue
of the insurance coverage of the late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and
other expenses, and other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are hereby
dismissed. The Cross-claim of Defendant DBP is likewise dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992,
the appellate court affirmed in toto the decision of the trial court. The DBP's motion
for reconsideration was denied in a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement
for DBP MRI Pool" (Exh. "5-Bank") with the following declaration:
I hereby declare and agree that all the statements and answers
contained herein are true, complete and correct to the best of my knowledge
and belief and form part of my application for insurance. It is understood and
agreed that no insurance coverage shall be effected unless and until this
application is approved and the full premium is paid during my continued
good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when
the application shall be approved by the insurance pool; and (2) when the full
premium is paid during the continued good health of the applicant. These two
conditions, being joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI
Pool. The pool, however, did not approve the application of Dans. There is also no
showing that it accepted the sum of P1,476.00, which DBP credited to its account
with full knowledge that it was payment for Dan's premium. There was, as a result,
no perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable
on a contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the borrower, to
secure MRI coverage. Instead of allowing Dans to look for his own insurance carrier
or some other form of insurance policy, DBP compelled him to apply with the DBP
MRI Pool for MRI coverage. When Dan's loan was released on August 11, 1987, DBP
already deducted from the proceeds thereof the MRI premium. Four days latter, DBP
made Dans fill up and sign his application for MRI, as well as his health statement.
The DBP later submitted both the application form and health statement to the DBP
MRI Pool at the DBP Main Building, Makati Metro Manila. As service fee, DBP
deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the
second as an insurance agent.
As an insurance agent, DBP made Dans go through the motion of applying for said
insurance, thereby leading him and his family to believe that they had already
fulfilled all the requirements for the MRI and that the issuance of their policy was
forthcoming. Apparently, DBP had full knowledge that Dan's application was never
going to be approved. The maximum age for MRI acceptance is 60 years as clearly
and specifically provided in Article 1 of the Group Mortgage Redemption Insurance
Policy signed in 1984 by all the insurance companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such
is not personally liable to the party with whom he contracts, unless he expressly
binds himself or exceeds the limits of his authority without giving such party
sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more
than 60 years of age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible
for MRI coverage because of his advanced age, DBP exceeded the scope of its
authority when it accepted Dan's application for MRI by collecting the insurance
premium, and deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon
whether the third person is aware of the limits of the agent's powers. There is no
showing that Dans knew of the limitation on DBP's authority to solicit applications for
MRI.
If the third person dealing with an agent is unaware of the limits of the authority
conferred by the principal on the agent and he (third person) has been deceived by
the non-disclosure thereof by the agent, then the latter is liable for damages to him
(V Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines,
p. 422 [1992], citing Sentencia [Cuba] of September 25, 1907). The rule that the
agent is liable when he acts without authority is founded upon the supposition that
there has been some wrong or omission on his part either in misrepresenting, or in
affirming, or concealing the authority under which he assumes to act (Francisco, V.,
Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the non-
disclosure of the limits of the agency carries with it the implication that a deception
was perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21
of the Civil Code of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his
duties, act with justice give everyone his due and observe honesty and good
faith.
Article 20 provides:
Every person who, contrary to law, willfully or negligently causes damage to
another, shall indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter
for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy.
To assume that were it not for DBP's concealment of the limits of its authority, Dans
would have secured an MRI from another insurance company, and therefore would
have been fully insured by the time he died, is highly speculative. Considering his
advanced age, there is no absolute certainty that Dans could obtain an insurance
coverage from another company. It must also be noted that Dans died almost
immediately, i.e., on the nineteenth day after applying for the MRI, and on the
twenty-third day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered
by him as he has duly proved (Civil Code of the Philippines, Art. 2199). Damages, to
be recoverable, must not only be capable of proof, but must be actually proved with
a reasonable degree of certainty (Refractories Corporation v. Intermediate Appellate
Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447
[1916]). Speculative damages are too remote to be included in an accurate estimate
of damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral
damages. No proof of pecuniary loss is required in the assessment of said kind of
damages (Civil Code of Philippines, Art. 2216). The same may be recovered in acts
referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of the court according to
the circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering
that DBP had offered to pay P30,000.00 to respondent Estate in ex gratia settlement
of its claim and that DBP's non-disclosure of the limits of its authority amounted to a
deception to its client, an award of moral damages in the amount of P50,000.00
would be reasonable.
The award of attorney's fees is also just and equitable under the circumstances (Civil
Code of the Philippines, Article 2208 [11]).
WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE
respondent Estate of Juan B. Dans the amount of P1,476.00 with legal interest from
the date of the filing of the complaint until fully paid; and (2) to PAY said Estate the
amount of Fifty Thousand Pesos (P50,000.00) as moral damages and the amount of
Ten Thousand Pesos (P10,000.00) as attorney's fees. With costs against petitioner.
SO ORDERED.
G.R. No. L-15895 November 29, 1920
RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma.
Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
This is an action brought by the plaintiff ad administrator of the estate of the late
Joaquin Ma. Herrer to recover from the defendant life insurance company the sum of
pesos 6,000 paid by the deceased for a life annuity. The trial court gave judgment
for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made
application to the Sun Life Assurance Company of Canada through its office in Manila
for a life annuity. Two days later he paid the sum of P6,000 to the manager of the
company's Manila office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela
Renta Vitalicia solicitada por dicho Don Joaquin Herrer hoy, sujeta al examen medico
y aprobacion de la Oficina Central de la Compañia.
The application was immediately forwarded to the head office of the company at
Montreal, Canada. On November 26, 1917, the head office gave notice of
acceptance by cable to Manila. (Whether on the same day the cable was received
notice was sent by the Manila office of Herrer that the application had been
accepted, is a disputed point, which will be discussed later.) On December 4, 1917,
the policy was issued at Montreal. On December 18, 1917, attorney Aurelio A. Torres
wrote to the Manila office of the company stating that Herrer desired to withdraw his
application. The following day the local office replied to Mr. Torres, stating that the
policy had been issued, and called attention to the notification of November 26,
1917. This letter was received by Mr. Torres on the morning of December 21, 1917.
Mr. Herrer died on December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer
received notice of acceptance of his application. To resolve this question, we
propose to go directly to the evidence of record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at
the time of the trial testified that he prepared the letter introduced in evidence as
Exhibit 3, of date November 26, 1917, and handed it to the local manager, Mr. E. E.
White, for signature. The witness admitted on cross-examination that after preparing
the letter and giving it to he manager, he new nothing of what became of it. The
local manager, Mr. White, testified to having received the cablegram accepting the
application of Mr. Herrer from the home office on November 26, 1917. He said that
on the same day he signed a letter notifying Mr. Herrer of this acceptance. The
witness further said that letters, after being signed, were sent to the chief clerk and
placed on the mailing desk for transmission. The witness could not tell if the letter
had every actually been placed in the mails. Mr. Tuason, who was the chief clerk, on
November 26, 1917, was not called as a witness. For the defense, attorney Manuel
Torres testified to having prepared the will of Joaquin Ma. Herrer, that on this
occasion, Mr. Herrer mentioned his application for a life annuity, and that he said
that the only document relating to the transaction in his possession was the
provisional receipt. Rafael Enriquez, the administrator of the estate, testified that he
had gone through the effects of the deceased and had found no letter of notification
from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November
26, 1917, notifying Mr. Herrer that his application had been accepted, was prepared
and signed in the local office of the insurance company, was placed in the ordinary
channels for transmission, but as far as we know, was never actually mailed and
thus was never received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the
law which should be applied to the facts. In order to reach our legal goal, the
obvious signposts along the way must be noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines
were found in the Code of Commerce and the Civil Code. In the Code of the
Commerce, there formerly existed Title VIII of Book III and Section III of Title III of
Book III, which dealt with insurance contracts. In the Civil Code there formerly
existed and presumably still exist, Chapters II and IV, entitled insurance contracts
and life annuities, respectively, of Title XII of Book IV. On the after July 1, 1915,
there was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act
concerns life and health insurance. The Act expressly repealed Title VIII of Book II
and Section III of Title III of Book III of the code of Commerce. The law of
insurance is consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to
the methods to be followed in order that there may be a contract of insurance. On
the other hand, the Civil Code, in article 1802, not only describes a contact of life
annuity markedly similar to the one we are considering, but in two other articles,
gives strong clues as to the proper disposition of the case. For instance, article 16 of
the Civil Code provides that "In matters which are governed by special laws, any
deficiency of the latter shall be supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that the special law on the subject of
insurance is deficient in enunciating the principles governing acceptance, the
subject-matter of the Civil code, if there be any, would be controlling. In the Civil
Code is found article 1262 providing that "Consent is shown by the concurrence of
offer and acceptance with respect to the thing and the consideration which are to
constitute the contract. An acceptance made by letter shall not bind the person
making the offer except from the time it came to his knowledge. The contract, in
such case, is presumed to have been entered into at the place where the offer was
made." This latter article is in opposition to the provisions of article 54 of the Code of
Commerce.
If no mistake has been made in announcing the successive steps by which we reach
a conclusion, then the only duty remaining is for the court to apply the law as it is
found. The legislature in its wisdom having enacted a new law on insurance, and
expressly repealed the provisions in the Code of Commerce on the same subject,
and having thus left a void in the commercial law, it would seem logical to make use
of the only pertinent provision of law found in the Civil code, closely related to the
chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making
the offer only from the date it came to his knowledge, may not be the best
expression of modern commercial usage. Still it must be admitted that its
enforcement avoids uncertainty and tends to security. Not only this, but in order that
the principle may not be taken too lightly, let it be noticed that it is identical with the
principles announced by a considerable number of respectable courts in the United
States. The courts who take this view have expressly held that an acceptance of an
offer of insurance not actually or constructively communicated to the proposer does
not make a contract. Only the mailing of acceptance, it has been said, completes the
contract of insurance, as the locus poenitentiae is ended when the acceptance has
passed beyond the control of the party. (I Joyce, The Law of Insurance, pp. 235,
244.)
In resume, therefore, the law applicable to the case is found to be the second
paragraph of article 1262 of the Civil Code providing that an acceptance made by
letter shall not bind the person making the offer except from the time it came to his
knowledge. The pertinent fact is, that according to the provisional receipt, three
things had to be accomplished by the insurance company before there was a
contract: (1) There had to be a medical examination of the applicant; (2) there had
to be approval of the application by the head office of the company; and (3) this
approval had in some way to be communicated by the company to the applicant.
The further admitted facts are that the head office in Montreal did accept the
application, did cable the Manila office to that effect, did actually issue the policy and
did, through its agent in Manila, actually write the letter of notification and place it in
the usual channels for transmission to the addressee. The fact as to the letter of
notification thus fails to concur with the essential elements of the general rule
pertaining to the mailing and delivery of mail matter as announced by the American
courts, namely, when a letter or other mail matter is addressed and mailed with
postage prepaid there is a rebuttable presumption of fact that it was received by the
addressee as soon as it could have been transmitted to him in the ordinary course of
the mails. But if any one of these elemental facts fails to appear, it is fatal to the
presumption. For instance, a letter will not be presumed to have been received by
the addressee unless it is shown that it was deposited in the post-office, properly
addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq.,
notes.)
We hold that the contract for a life annuity in the case at bar was not perfected
because it has not been proved satisfactorily that the acceptance of the application
ever came to the knowledge of the applicant.lawph!l.net
Judgment is reversed, and the plaintiff shall have and recover from the defendant
the sum of P6,000 with legal interest from November 20, 1918, until paid, without
special finding as to costs in either instance. So ordered.
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.
The two above-entitled cases were ordered consolidated by the Resolution of this
Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in
both cases seek similar relief, through these petitions for certiorari by way of appeal,
from the amended decision of respondent Court of Appeals which affirmed in toto
the decision of the Court of First Instance of Cebu, ordering "the defendants (herein
petitioners Great Pacific Ligfe Assurance Company and Mondragon) jointly and
severally to pay plaintiff (herein private respondent Ngo Hing) the amount of
P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific
Life) for a twenty-year endownment policy in the amount of P50,000.00 on the life
of his one-year old daughter Helen Go. Said respondent supplied the essential data
which petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu
City wrote on the corresponding form in his own handwriting (Exhibit I-M).
Mondragon finally type-wrote the data on the application form which was signed by
private respondent Ngo Hing. The latter paid the annual premuim the sum of
P1,077.75 going over to the Company, but he reatined the amount of P1,317.00 as
his commission for being a duly authorized agebt of Pacific Life. Upon the payment
of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to
private respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the
bottom of the back page of the application form his strong recommendation for the
approval of the insurance application. Then on April 30, 1957, Mondragon received a
letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The
letter stated that the said life insurance application for 20-year endowment plan is
not available for minors below seven years old, but Pacific Life can consider the
same under the Juvenile Triple Action Plan, and advised that if the offer is
acceptable, the Juvenile Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not
communicated by petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 1957, Mondragon wrote back Pacific Life again strongly recommending the
approval of the 20-year endowment insurance plan to children, pointing out that
since 1954 the customers, especially the Chinese, were asking for such coverage
(Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of
influenza with complication of bronchopneumonia. Thereupon, private respondent
sought the payment of the proceeds of the insurance, but having failed in his effort,
he filed the action for the recovery of the same before the Court of First Instance of
Cebu, which rendered the adverse decision as earlier refered to against both
petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt
(Exhibit E) constituted a temporary contract of the life insurance in question; and (2)
whether private respondent Ngo Hing concealed the state of health and physical
condition of Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is
considered a BINDING RECEIPT. These conditions state that:
A. If the Company or its agent, shan have received the premium deposit ...
and the insurance application, ON or PRIOR to the date of medical
examination ... said insurance shan be in force and in effect from the date of
such medical examination, for such period as is covered by the deposit
..., PROVIDED the company shall be satisfied that on said date the applicant
was insurable on standard rates under its rule for the amount of insurance
and the kind of policy requested in the application.
D. If the Company does not accept the application on standard rate for the
amount of insurance and/or the kind of policy requested in the
application but issue, or offers to issue a policy for a different plan and/or
amount ..., the insurance shall not be in force and in effect until the applicant
shall have accepted the policy as issued or offered by the Company and shall
have paid the full premium thereof. If the applicant does not accept the
policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition A above,
and the Company declines to approve the application the insurance applied
for shall not have been in force at any time and the sum paid be returned to
the applicant upon the surrender of this receipt. (Emphasis Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit
receipt is intended to be merely a provisional or temporary insurance contract and
only upon compliance of the following conditions: (1) that the company shall be
satisfied that the applicant was insurable on standard rates; (2) that if the company
does not accept the application and offers to issue a policy for a different plan, the
insurance contract shall not be binding until the applicant accepts the policy offered;
otherwise, the deposit shall be reftmded; and (3) that if the applicant is not ble
according to the standard rates, and the company disapproves the application, the
insurance applied for shall not be in force at any time, and the premium paid shall
be returned to the applicant.
Clearly implied from the aforesaid conditions is that the binding deposit receipt in
question is merely an acknowledgment, on behalf of the company, that the latter's
branch office had received from the applicant the insurance premium and had
accepted the application subject for processing by the insurance company; and that
the latter will either approve or reject the same on the basis of whether or not the
applicant is "insurable on standard rates." Since petitioner Pacific Life disapproved
the insurance application of respondent Ngo Hing, the binding deposit receipt in
question had never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, where an agreement
is made between the applicant and the agent, no liability shall attach until the
principal approves the risk and a receipt is given by the agent. The acceptance is
merely conditional and is subordinated to the act of the company in approving or
rejecting the application. Thus, in life insurance, a "binding slip" or "binding receipt"
does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41
Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to
children less than seven years of age. What it offered instead is another plan known
as the Juvenile Triple Action, which private respondent failed to accept. In the
absence of a meeting of the minds between petitioner Pacific Life and private
respondent Ngo Hing over the 20-year endowment life insurance in the amount of
P50,000.00 in favor of the latter's one-year old daughter, and with the non-
compliance of the abovequoted conditions stated in the disputed binding deposit
receipt, there could have been no insurance contract duly perfected between thenl
Accordingly, the deposit paid by private respondent shall have to be refunded by
Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person
or by their agents ... The contract, to be binding from the date of the application,
must have been a completed contract, one that leaves nothing to be dione, nothing
to be completed, nothing to be passed upon, or determined, before it shall take
effect. There can be no contract of insurance unless the minds of the parties have
met in agreement."
We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would
not have any adverse effect on the allegedly perfected temporary contract
(Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected
between the parties who had no meeting of their minds. Private respondet, being an
authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware
that said company does not offer the life insurance applied for. When he filed the
insurance application in dispute, private respondent was, therefore, only taking the
chance that Pacific Life will approve the recommendation of Mondragon for the
acceptance and approval of the application in question along with his proposal that
the insurance company starts to offer the 20-year endowment insurance plan for
children less than seven years. Nonetheless, the record discloses that Pacific Life had
rejected the proposal and recommendation. Secondly, having an insurable interest
on the life of his one-year old daughter, aside from being an insurance agent and an
offense associate of petitioner Mondragon, private respondent Ngo Hing must have
known and followed the progress on the processing of such application and could
not pretend ignorance of the Company's rejection of the 20-year endowment life
insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of
then Appellate Associate Justice Ruperto G. Martin who later came up to this Court,
from his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum of rejection
(Exhibit 3-M) nor the reply thereto of appellant Mondragon reiterating the
 desire for applicant's father to have the application considered as one for a
20-year endowment plan was ever duly communicated to Ngo; Hing, father
of the minor applicant. I am not quite conninced that this was so. Ngo Hing,
as father of the applicant herself, was precisely the "underwriter who wrote
this case" (Exhibit H-1). The unchallenged statement of appellant Mondragon
in his letter of May 6, 1957) (Exhibit 4-M), specifically admits that said Ngo
Hing was "our associate" and that it was the latter who "insisted that the
plan be placed on the 20-year endowment plan." Under these circumstances,
it is inconceivable that the progress in the processing of the application was
not brought home to his knowledge. He must have been duly apprised of the
rejection of the application for a 20-year endowment plan otherwise
Mondragon would not have asserted that it was Ngo Hing himself who
insisted on the application as originally filed, thereby implictly declining the
offer to consider the application under the Juvenile Triple Action Plan.
Besides, the associate of Mondragon that he was, Ngo Hing should only be
presumed to know what kind of policies are available in the company for
minors below 7 years old. What he and Mondragon were apparently trying to
do in the premises was merely to prod the company into going into the
business of issuing endowment policies for minors just as other insurance
companies allegedly do. Until such a definite policy is however, adopted by
the company, it can hardly be said that it could have been bound at all under
the binding slip for a plan of insurance that it could not have, by then issued
at all. (Amended Decision, Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm belief
that private respondent had deliberately concealed the state of health and piysical
condition of his daughter Helen Go. Wher private regpondeit supplied the required
essential data for the insurance application form, he was fully aware that his one-
year old daughter is typically a mongoloid child. Such a congenital physical defect
could never be ensconced nor disguished. Nonetheless, private respondent, in
apparent bad faith, withheld the fact materal to the risk to be assumed by the
insurance compary. As an insurance agent of Pacific Life, he ought to know, as he
surely must have known. his duty and responsibility to such a material fact. Had he
diamond said significant fact in the insurance application fom Pacific Life would have
verified the same and would have had no choice but to disapprove the application
outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good
faith, absolute and perfect candor or openness and honesty; the absence of any
concealment or demotion, however slight [Black's Law Dictionary, 2nd Edition], not
for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda
de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a
partY knows aDd Ought to communicate (Section 25, Act No. 2427). Whether
intentional or unintentional the concealment entitles the insurer to rescind the
contract of insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al,
105 Phil 930; Satumino vs. Philippine American Life Insurance Company, 7 SCRA
316). Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected between
the parties with the noncompliance of the conditions provided in the binding receipt,
and concealment, as legally defined, having been comraitted by herein private
respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof,
one is hereby entered absolving petitioners Lapulapu D. Mondragon and Great
Pacific Life Assurance Company from their civil liabilities as found by respondent
Court and ordering the aforesaid insurance company to reimburse the amount of
P1,077.75, without interest, to private respondent, Ngo Hing. Costs against private
respondent.
SO ORDERED.
KEPPEL CEBU SHIPYARD, INC.,Petitioner, G.R. Nos. 180880-81
- versus -
PIONEER INSURANCE AND SURETY
CORPORATION,Respondent.
X----------------------------X
PIONEER INSURANCE AND SURETY G.R. Nos. 180896-97
CORPORATION, Petitioner, September 25, 2009 Representative shall be carried out under the Keppel Cebu Shipyard
- versus - Standard Conditions of Contract for Shiprepair, guidelines and
KEPPEL CEBU SHIPYARD, INC., Respondent. regulations on safety and security issued by Keppel Cebu Shipyard. In
x------------------------------------------------------------------------------------x addition, the following are mutually agreed upon by the parties:

Before us are the consolidated petitions filed by the partiesPioneer Insurance and 1. The Owner shall inform its insurer of Clause
Surety Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc.[2] (KCSI)to review 20[7] and 22 (a)[8] (refer at the back hereof) and
on certiorari the Decision[3] dated December 17, 2004 and the Amended shall include Keppel Cebu Shipyard as a co-assured
Decision[4]dated December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. in its insurance policy.
74018 and 73934.
2. The Owner shall waive its right to claim for any
loss of profit or loss of use or damages
consequential on such loss of use resulting from
On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) the delay in the redelivery of the above vessel.
executed a Shiprepair Agreement[5] wherein KCSI would renovate and reconstruct
WG&As M/V Superferry 3 using its dry docking facilities pursuant to its restrictive
safety and security rules and regulations. Prior to the execution of the Shiprepair
Agreement, Superferry 3 was already insured by WG&A with Pioneer for 3. Owners sub-contractors or workers are not
US$8,472,581.78. The Shiprepair Agreement reads permitted to work in the yard without the written
approval of the Vice President Operations.

SHIPREPAIR AGREEMENT[6]
4. In consideration of Keppel Cebu Shipyard
allowing Owner to carry out own repairs onboard
the vessel, the Owner shall indemnify and hold
Company: WG & A JEBSENS SHIPMANAGEMENT INC. Keppel Cebu Shipyard harmless from any or all
claims, damages, or liabilities arising from death or
Address: Harbour Center II, Railroad & Chicago Sts.
bodily injuries to Owners workers, or damages to
Port Area, City of Manila the vessel or other property however caused.

We, WG & A JEBSENS SHIPMGMT. Owner/Operator of 5. On arrival, the Owner Representative, Captain,
M/V SUPERFERRY 3 and KEPPEL CEBU SHIPYARD, INC. Chief Officer and Chief Engineer will be invited to
(KCSI)enter into an agreement that the Drydocking and Repair of attend a conference with our Production, Safety
the above-named vessel ordered by the Owners Authorized and Security personnel whereby they will be
 briefed on, and given copies of Shipyard safety 11. Payment term shall be as follows:
regulations.

12. The Owner and Keppel Cebu Shipyard shall

6. An adequate number of officers and crew must
remain on board at all times to ensure the safety
of the vessel and compliance of safety regulations
by crew and owner employed workmen.
7. The ships officers/crew or owner appointed
security personnel shall maintain watch against
pilferage and acts of sabotage.
(Signed)
endeavor to settle amicably any dispute that may
arise under this Agreement. Should all efforts for
an amicable settlement fail, the disputes shall be
submitted for arbitration in Metro Manila in
accordance with provisions of Executive Order No.
1008 under the auspices of the Philippine
Arbitration Commission.

BARRY CHIA SOO HOCK _________(Signed)__________

8. The yard must be informed and instructed to
provide the necessary security arrangement (Printed Name/Signature Above Name) (Printed Name/Signature
coverage should there be inadequate or no crew Above Name)
on board to provide the expressed safety and
security enforcement.
Vice President Operations Authorized Representative

9. The Owner shall be liable to Keppel Cebu Keppel Cebu Shipyard, Inc. for and in behalf of:
Shipyard for any death and/or bodily injuries for
WG & A Jebsens Shipmgmt.
the [K]eppel Cebu Shipyards employees and/or
contract workers; theft and/or damages to Keppel
Cebu Shipyards properties and other liabilities
which are caused by the workers of the Owner. JAN. 26, 2000 . ________________________

Date Date

10. The invoice shall be based on quotation

reference 99-KCSI-211 dated December 20,
1999 tariff dated March 15, 1998.
On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by Fire on board at Keppel Cebu Shipyard
fire. Claiming that the extent of the damage was pervasive, WG&A declared the
vessels damage as a total constructive loss and, hence, filed an insurance claim with on 08 February 2000
Pioneer.

and in consideration of which the undersigned hereby assigns and

On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of
US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt[9] in
favor of Pioneer, to wit:
LOSS AND SUBROGATION RECEIPT
transfers to the said company each and all claims and demands
against any person, persons, corporation or property arising from or
connected with such loss or damage and the said company is
subrogated in the place of and to the claims and demands of the
undersigned against said person, persons, corporation or property in
the premises to the extent of the amount above-mentioned.

WILLIAM, GOTHONG & ABOITIZ, INC.

16 June 2000
&/OR ABOITIZ SHIPPING CORP.

By: (Signed)
Our Claim Ref: MH-NIL-H0-99-00018
______________________________________
US$8,472,581.78
Witnesses: (Signed)
------------------------------------------------
______________________________________

(Signed)
RECEIVED from PIONEER INSURANCE & SURETY
CORPORATION the sum of U.S. DOLLARS EIGHT MILLION ______________________________________
FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED
EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent
to PESOS THREE HUNDRED SIXTY MILLION & 00/100 (Php
360,000,000.00), in full satisfaction, compromise and discharge of
all claims for loss and expenses sustained to the Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but
vessel SUPERFERRY 3 insured under Policy Nos. MH-H0-99- the latter denied any responsibility for the loss of the subject vessel. As KCSI
0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as continuously refused to pay despite repeated demands, Pioneer, on August 7, 2000,
follows: filed a Request for Arbitration before the Construction Industry Arbitration
Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following
reliefs:
1. To pay to the claimant Pioneer Insurance and
Surety Corporation the sum of U.S.$8,472,581.78 or its equivalent
amount in Philippine Currency, plus interest thereon computed from
the date of the Loss and Subrogation Receipt on 16 June 2000 or
from the date of filing of [the] Request for Arbitration, as may be
found proper;
2. To pay to claimant WG&A, INC. and/or Aboitiz
Shipping Corporation and WG&A Jebsens Shipmanagement, Inc. the
sum of P500,000,000.00 plus interest thereon from the date of filing
[of the] Request for Arbitration or date of the arbitral award, as may
be found proper;
3. To pay to the claimants herein the sum
of P3,000,000.00 for and as attorneys fees; plus other damages as
may be established during the proceedings, including arbitration fees
and other litigation expenses, and the costs of suit.
It is likewise further prayed that Clauses 1 and 2 on the unsigned
page 1 of the Shiprepair Agreement (Annex A) as well as the hardly
legible Clauses 20 and 22 (a) and other similar clauses printed in very
fine print on the unsigned dorsal page thereof, be all declared illegal
and void ab initio and without any legal effect whatsoever.[10]
KCSI and WG&A reached an amicable settlement, leading the latter to file a
Notice of Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC granted the
withdrawal on October 22, 2001, thereby dismissing the claim of WG&A against
KCSI. Hence, the arbitration proceeded with Pioneer as the remaining claimant.
In the course of the proceedings, Pioneer and KCSI stipulated, among others,
that: (1) on January 26, 2000, M/V Superferry 3 arrived at KCSI in Lapu-Lapu City,
Cebu, for dry docking and repairs; (2) on the same date, WG&A signed a ship repair
agreement with KCSI; and (3) a fire broke out on board M/V Superferry 3 on
February 8, 2000, while still dry docked in KCSIs shipyard.[11]
As regards the disputed facts, below are the respective positions of the
parties, viz.:
Pioneers Theory of the Case:
First, Pioneer (as Claimant) is the real party in interest in this case
and that Pioneer has been subrogated to the claim of its assured. The
Claimant claims that it has the preponderance of evidence over that
of the Respondent. Claimant cited documentary references on
the Statutory Source of the Principle of Subrogation. Claimant then
proceeded to explain that the Right of Subrogation:
Is by Operation of Law
exists in Property Insurance
is not Dependent Upon Privity of Contract.
Claimant then argued that Payment Operates as Equitable Assignment
of Rights to Insurer and that the Right of Subrogation Entitles Insurer
to Recover from the Liable Party.
Second, Respondent Keppel had custody of and control over the M/V
Superferry 3 while said vessel was in Respondent Keppels
premises. In its Draft Decision, Claimant stated:
A. The evidence presented during the
hearings indubitably proves that respondent not
only took custody but assumed responsibility
and control over M/V Superferry 3 in carrying
out the dry-docking and repair of the vessel.
B. The presence on board the M/V
Superferry 3 of its officers and crew does not
relieve the respondent of its responsibility for
said vessel.
C. Respondent Keppel assumed
responsibility over M/V Superferry 3 when it
brought the vessel inside its graving dock and
applied its own safety rules to the dry-docking
and repairs of the vessel.
D. The practice of allowing a shipowner and
its sub-contractors to perform maintenance
works while the vessel was within respondents
premises does not detract from the fact that
control and custody over M/V Superferry 3 was
transferred to the yard.
From the preceding statements, Claimant claims that Keppel is
clearly liable for the loss of M/V Superferry 3.
Third, the Vessels Safety Manual cannot be relied upon as proof of
the Masters continuing control over the vessel.
Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa
Loquitur. According to Claimant, the Yard is liable under the ruling
laid down by the Supreme Court in the Manila City case. Claimant
asserts that said ruling is applicable hereto as The Law of the Case.
Fifth, the liability of Respondent does not arise merely from the
application of the Doctrine of Res Ipsa Loquitur, but from
its negligencein this case.
Sixth, the Respondent Yard was the employer responsible for the
negligent acts of the welder. According to Claimant;
In contemplation of law, Sevillejo was not a loaned
servant/employee. The yard, being his employer, is solely and
exclusively liable for his negligent acts. Claimant proceeded to
enumerate its reasons:
A. The Control Test The yard exercised
control over Sevillejo. The power of control is
not diminished by the failure to exercise
control.
B. There was no independent work contract
between Joniga and Sevillejo Joniga was not
 the employer of Sevillejo, as Sevillejo remained Eight[h], in supplying welders and equipment as per The Work Order
an employee of the yard at the time the loss Dated 26 January 2000, the Yard did so at its own risk, and acted as
occurred. a Less Than Prudent Ship Repairer.

C. The mere fact that Dr. Joniga requested The Claimant then disputed the statements of Manuel Amagsila by
Sevillejo to perform some of the Owners hot claiming that Amagsila was a disgruntled employee. Nevertheless,
works under the 26 January 2000 work order Claimant claims that Amagsila affirmed that the five yard welders
did not make Dr. Joniga the employer of never became employees of the owner so as to obligate the latter to
Sevillejo. be responsible for their conduct and performance.

Claimant proffers that Dr. Joniga was not a Contractor of the Claimant enumerated further badges of yard negligence.
Hot Work Done on Deck A. Claimant argued that:

According to Claimant:
A. The yard, not Dr. Joniga, gave the
welders their marching orders, and
A. Yards water supply was inadequate.

B. Dr. Jonigas authority to request the B. Yard Fire Fighting Efforts and Equipment Were
execution of owners hot works in the passenger Inadequate.
areas was expressly recognized by the Yard
C. Yard Safety Practices and Procedures Were Unsafe or
Project Superintendent Orcullo.
Inadequate.

D. Yard Safety Assistants and Firewatch-Men were

Seventh, the shipowner had no legal duty to apply for a hotworks Overworked.
permit since it was not required by the yard, and the owners
hotworks were conducted by welders who remained employees of the
yard. Claimant contends that the need, if any, for an owners Finally, Claimant disputed the theories propounded by the
application for a hot work permit was canceled out by the yards Respondent (The Yard). Claimant presented its case against:
actual knowledge of Sevillejos whereabouts and the fact that he was
in deck A doing owners hotworks.

(i) Non-removal of the life jackets theory.

 (ii) Hole-in-the[-]floor theory.
(iii) Need for a plan theory.
(iv) The unauthorized hot works theory.
(v) The Marina report theory.
The Claimant called the attention of the Tribunal (CIAC) on the non-
appearance of the welder involved in the cause of the fire, Mr.
Severino Sevillejo. Claimant claims that this is suppression of evidence
by Respondent.
KCSIs Theory of the Case
1. The Claimant has no standing to file the Request for
Arbitration and the Tribunal has no jurisdiction over the case:
(a) There is no valid arbitration agreement between
the Yard and the Vessel Owner. On January 26, 2000,
when the ship repair agreement (which includes the
arbitration agreement) was signed by WG&A Jebsens
on behalf of the Vessel, the same was still owned by
Aboitiz Shipping. Consequently, when another firm,
WG&A, authorized WG&A Jebsens to manage the MV
Superferry 3, it had no authority to do so. There is, as
a result, no binding arbitration agreement between the
Vessel Owner and the Yard to which the Claimant can
claim to be subrogated and which can support CIAC
jurisdiction.
(b) The Claimant is not a real party in interest and
has no standing because it has not been subrogated to
the Vessel Owner.For the reason stated above, the
insurance policies on which the Claimant bases its right
of subrogation were not validly obtained. In any event,
the Claimant has not been subrogated to any rights
which the Vessel may have against the Yard because:
i. The Claimant has not proved payment
of the proceeds of the policies to any specific
party. As a consequence, it has also not proved
payment to the Vessel Owner.
ii. The Claimant had no legally
demandable obligation to pay under the policies
and did so only voluntarily. Under the policies,
the Claimant and the Vessel agreed that there
is no Constructive Total Loss unless the
expense of recovering and repairing the vessel
would exceed the Agreed Value of P360 million
assigned by the parties to the Vessel, a
threshold which the actual repair cost for the
Vessel did not reach. Since the Claimant opted
to pay contrary to the provisions of the policies,
its payment was voluntary, and there was no
resulting subrogation to the Vessel.
iii. There was also no subrogation under
Article 1236 of the Civil Code. First, if the
Claimant asserts a right of payment only by
virtue of Article 1236, then there is no legal
subrogation under Article 2207 and it
does notsucceed to the Vessels rights under the
Ship [R]epair Agreement and the arbitration
agreement. It does not have a right to demand
arbitration and will have only a purely civil law
 claim for reimbursement to the extent that its
payment benefited the Yard which should be
filed in court. Second, since the Yard is not
liable for the fire and the resulting damage to
the Vessel, then it derived no benefit from the
Claimants payment to the Vessel Owner. Third,
in any event, the Claimant has not proved
payment of the proceeds to the Vessel Owner.
2. The Ship [R]epair Agreement was not imposed upon the
Vessel. The Vessel knowingly and voluntarily accepted that
agreement.Moreover, there are no signing or other formal defects
that can invalidate the agreement.
3. The proximate cause of the fire and damage to the Vessel was
not any negligence committed by Angelino Sevillejo in cutting the
bulkhead door or any other shortcoming by the Yard. On the
contrary, the proximate cause of the fire was Dr. Jonigas and the
Vessels deliberate decision to have Angelino Sevillejo undertake
cutting work in inherently dangerous conditions created by them.
(a) The Claimants material witnesses lied on the
record and the Claimant presented no credible proof of
any negligence by Angelino Sevillejo.
(b) Uncontroverted evidence proved that Dr. Joniga
neglected or decided not to obtain a hot work permit
for the bulkhead cutting and also neglected or refused
to have the ceiling and the flammable lifejackets
removed from underneath the area where he
instructed Angelino Sevillejo to cut the bulkhead
door. These decisions or oversights guaranteed that
the cutting would be done in extremely hazardous
conditions and were the proximate cause of the fire
and the resulting damage to the Vessel.
(c) The Yards expert witness, Dr. Eric Mullen gave
the only credible account of the cause and the
mechanics of ignition of the fire. He established that: i)
the fire started when the cutting of the bulkhead door
resulted in sparks or hot molten slag which fell through
pre-existing holes on the deck floor and came into
contact with and ignited the flammable lifejackets
stored in the ceiling void directly below; and ii) the
bottom level of the bulkhead door was immaterial,
because the sparks and slag could have come from the
cutting of any of the sides of the door. Consequently,
the cutting itself of the bulkhead door under the
hazardous conditions created by Dr. Joniga, rather
than the positioning of the doors bottom edge, was the
proximate cause of the fire.
(d) The Manila City case is irrelevant to this dispute
and in any case, does not establish governing
precedent to the effect that when a ship is damaged in
dry dock, the shipyard is presumed at fault. Apart from
the differences in the factual setting of the two cases,
the Manila City pronouncements regarding the res ipsa
loquitur doctrine are obiter dicta without value as
binding precedent. Furthermore, even if the principle
were applied to create a presumption of negligence by
the Yard, however, that presumption is conclusively
rebutted by the evidence on record.
(e) The Vessels deliberate acts and its negligence
created the inherently hazardous conditions in which
the cutting work that could otherwise be done safely
ended up causing a fire and the damage to the
Vessel. The fire was a direct and logical consequence
of the Vessels decisions to: (1) take Angelino Sevillejo
 away from his welding work at the Promenade Deck
restaurant and instead to require him to do
unauthorized cutting work in Deck A; and (2) to have
him do that without satisfying the requirements for and
obtaining a hot work permit in violation of the Yards
Safety Rules and without removing the flammable
ceiling and life jackets below, contrary to the
requirements not only of the Yards Safety Rules but
also of the demands of standard safe practice and the
Vessels own explicit safety and hot work policies.
(f) The vessel has not presented any proof to show
that the Yard was remiss in its fire fighting
preparations or in the actual conduct of fighting the 8
February 2000 fire. The Yard had the necessary
equipment and trained personnel and employed all
those resources immediately and fully to putting out
the 8 February 2000 fire.
4. Even assuming that Angelino Sevillejo cut the bulkhead door
close to the deck floor, and that this circumstance rather than the
extremely hazardous conditions created by Dr. Joniga and the
Vessel for that activity caused the fire, the Yard may still not be
held liable for the resulting damage.
(a) The Yards only contractual obligation to the
Vessel in respect of the 26 January 2000 Work Order
was to supply welders for the Promenade Deck
restaurant who would then perform welding work per
owner[s] instruction. Consequently, once it had
provided those welders, including Angelino Sevillejo, its
obligation to the Vessel was fully discharged and no
claim for contractual breach, or for damages on
account thereof, may be raised against the Yard.
(b) The Yard is also not liable to the Vessel/Claimant
on the basis of quasi-delict.
i. The Vessel
exercised supervision and control over Angelino
Sevillejo when he was doing work at the
Promenade Deck restaurant and especially
when he was instructed by Dr. Joniga to cut the
bulkhead door.Consequently, the Vessel was
the party with actual control over his tasks and
is deemed his true and effective employer for
purposes of establishing Article 2180 employer
liability.
ii. Even
assuming that the Yard was Angelino Sevillejos
employer, the Yard may nevertheless not be
held liable under Article 2180 because Angelino
Sevillejo was acting beyond the scope of his
tasks assigned by the Yard (which was only to
do welding for the Promenade Deck restaurant)
when he cut the bulkhead door pursuant to
instructions given by the Vessel.
iii. The Yard is
nonetheless not liable under Article 2180
because it exercised due diligence in the
selection and supervision of Angelino Sevillejo.
5. Assuming that the Yard is liable, it cannot be compelled to pay
the full amount of P360 million paid by the Claimant.
(a) Under the law, the Yard may not be held liable
to the Claimant, as subrogee, for an amount greater
than that which the Vessel could have recovered, even
if the Claimant may have paid a higher amount under
its policies. In turn, the right of the Vessel to recover is
limited to actual damage to the MV Superferry 3, at the
time of the fire.
(b) Under the Ship [R]epair Agreement, the liability
of the Yard is limited to P50 million a stipulation which,
under the law and decisions of the Supreme Court, is
valid, binding and enforceable.
(c) The Vessel breached its obligation under Clause
22 (a) of the Yards Standard Terms to name the Yard
as co-assured under the policies a breach which makes
the Vessel liable for damages. This liability should in
turn be set-off against the Claimants claim for
damages.
The Respondent listed what it believes the Claimant wanted to
impress upon the Tribunal. Respondent enumerated and disputed
these as follows:
1. Claimants counsel contends that the cutting of
the bulkhead door was covered by the 26 January
2000 Work Order.
2. Claimants counsel contends that Dr. Joniga told
Gerry Orcullo about his intention to have Angelino
Sevillejo do cutting work at the Deck A bulkhead on
the morning of 8 February 2000.
3. Claimants counsel contends that under Article
1727 of the Civil Code, The contractor is responsible
for the work done by persons employed by him.
4. Claimants counsel contends that [t]he second
reason why there was no job spec or job order for this
cutting work, [is] the cutting work was known to the
yard and coordinated with Mr. Gerry Orcullo, the yard
project superintendent.
5. Claimants counsel also contends, to make the
Vessels unauthorized hot works activities seem less
likely, that they could easily be detected because Mr.
Avelino Aves, the Yard Safety Superintendent,
admitted that No hot works could really be hidden from
the Yard, your Honors, because the welding cables and
the gas hoses emanating from the dock will give these
hotworks away apart from the assertion and the fact
that there were also safety assistants supposedly going
around the vessel.
Respondent disputed the above by presenting its own argument in its
Final Memorandum.[12]
On October 28, 2002, the CIAC rendered its Decision[13] declaring both WG&A
and KCSI guilty of negligence, with the following findings and conclusions
 The Tribunal agrees that the contractual obligation of the Yard is to Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No.
provide the welders and equipment to the promenade deck. [The] 74018. KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP
Tribunal agrees that the cutting of the bulkhead door was not a No. 73934. The cases were consolidated.
contractual obligation of the Yard. However, by requiring, according
to its own regulations, that only Yard welders are to undertake
hotworks, it follows that there are certain qualifications of Yard
On December 17, 2004, the Former Fifteenth Division of the CA rendered its
welders that would be requisite of yard welders against those of the
Decision, disposing as follows:
vessel welders. To the Tribunal, this means that yard welders are
aware of the Yard safety rules and regulations on hotworks such as
applying for a hotwork permit, discussing the work in a production
meeting, and complying with the conditions of the hotwork permit WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R.
prior to implementation. By the requirement that all hotworks are to SP No. 74018) is DISMISSED while the Petition of the Yard (CA-G.R.
be done by the Yard, the Tribunal finds that Sevillejo remains a yard SP No. 73934) is GRANTED, dismissing petitioners claims in its
employee. The act of Sevillejo is however mitigated in that he was not entirety. No costs.
even a foreman, and that the instructions to him was (sic) by an
authorized person. The Tribunal notes that the hotworks permit
require[s] a request by at least a foreman. The fact that no foreman
The Yard and The WG&A are hereby ordered to pay the arbitration
was included in the five welders issued to the Vessel was never raised
costs pro-rata.
in this dispute. As discussed earlier by the Tribunal, with the fact that
what was ask (sic) of Sevillejo was outside the work order, the Vessel
is considered equally negligent. This Tribunal finds the concurrent
negligence of the Yard through Sevillejo and the Vessel through Dr. SO ORDERED.[16]
Joniga as both contributory to the cause of the fire that damaged the
vessel.[14]

Aggrieved, Pioneer sought reconsideration of the December 17, 2004

Holding that the liability for damages was limited to P50,000,000.00, the CIAC
ordered KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6% per
annum from the time of the filing of the case up to the time the decision is
promulgated, and 12% interest per annum added to the award, or any balance
thereof, after it becomes final and executory. The CIAC further ordered that the
arbitration costs be imposed on both parties on a pro rata basis.[15]
Decision, insisting that it suffered from serious errors in the appreciation of the
evidence and from gross misapplication of the law and jurisprudence on
negligence. KCSI, for its part, filed a motion for partial reconsideration of the same
Decision.
On December 20, 2007, an Amended Decision was promulgated by the
Special Division of Five Former Fifteenth Division of the CA in light of the dissent of
Associate Justice Lucas P. Bersamin,[17] joined by Associate Justice Japar B.
Dimaampao. The fallo of the Amended Decision reads
 LEGAL CONCLUSIONS; NON-FACTS REMAIN TO INVALIDATE
THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14,
WHEREFORE, premises considered, the Court hereby ARTICLE VIII OF THE CONSTITUTION.
decrees that:

II THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL

1. Pioneers Motion for Reconsideration is PARTIALLY LIABILITY OF THE YARD TO THE SUM OF P50,000,000.00, IN THAT:
GRANTED, ordering The Yard to pay Pioneer P25 Million, without
legal interest, within 15 days from the finality of this Amended
Decision, subject to the following modifications:
A. STARE DECISIS RENDERS INAPPLICABLE ANY
INVOCATION OF LIMITED LIABILITY BY THE YARD.

1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLY
GRANTED as the Yard is hereby ordered to pay Pioneer P25 Million
without legal interest;
2. The Yard is hereby declared as equally negligent, thus, the
total GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced
to PARTIALLY GRANTED, in so far as it is ordered to pay
Pioneer P25 Million, without legal interest, within 15 days from the
finality of this Amended Decision; and
B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC
POLICY.
C. THE VESSEL OWNER DID NOT AGREE THAT THE YARDS
LIABILITY FOR LOSS OR DAMAGE TO THE VESSEL ARISING FROM
YARDS NEGLIGENCE IS LIMITED TO THE SUM OF P50,000,000.00
ONLY.
D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT
LIABILITY, IN THAT:

(i) THE YARD HAD CUSTODY AND CONTROL OVER THE

3. The rest of the disposition in the original Decision remains VESSEL (M/V SUPERFERRY 3) ON 08 FEBRUARY 2000 WHEN
the same. IT WAS GUTTED BY FIRE;

SO ORDERED.[18]

(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE

COURSE OF THE REPAIRS EXCLUSIVELY PERFORMED BY
Hence, these petitions. Pioneer bases its petition on the following grounds: YARD WORKERS.

I THE COURT OF APPEALS ERRED IN BASING ITS III THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A
ORIGINAL DECISION ON NON-FACTS LEADING IT TO MAKE FALSE WAS CONCURRENTLY NEGLIGENT, CONSIDERING THAT:
A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER, DID NOT
SUPERVISE OR CONTROL THE REPAIRS.
B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT
GERMINIANO ORCULLO THAT SUPERVISED AND CONTROLLED THE
REPAIR WORKS.
C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT
FOLLOWS THAT THEY ALONE COULD BE GUILTY OF NEGLIGENCE IN
DOING THE SAME.
D. THE YARD AUTHORIZED THE HOT WORK OF YARD WELDER
ANGELINO SEVILLEJO.
E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE PROXIMATE
CAUSE OF THE LOSS.
F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT OR
CONTRIBUTORY TO THE LOSS.
IV THE COURT OF APPEALS CORRECTLY RULED THAT WG&A
SUFFERED A CONSTRUCTIVE TOTAL LOSS OF ITS VESSEL BUT
ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR THE
VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS.
V THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD
LIABLE FOR INTEREST.
VI THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD
SOLELY LIABLE FOR ARBITRATION COSTS.[19]
On the other hand, KCSI cites the following grounds for the allowance of its petition,
to wit:
1. ABSENCE OF YARD RESPONSIBILITY
IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT,
WITHOUT EXPLANATION, THE CIACS RULING THAT THE YARD WAS
EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT
WORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO,
AFTER THE COURT OF APPEALS ITSELF HAD SHOWN THAT RULING TO BE
COMPLETELY WRONG AND BASELESS.
2. NO CONSTRUCTIVE TOTAL LOSS
IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO
RULE, WITHOUT EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE
TOTAL LOSS AFTER HAVING ITSELF EXPLAINED WHY THE VESSEL COULD
NOT BE A CONSTRUCTIVE TOTAL LOSS.
3. FAILURE OR REFUSAL TO ADDRESS
KEPPELS MOTION FOR RECONSIDERATION
FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF
APPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND
ALSO WITHOUT EXPLANATION, KEPPELS PARTIAL MOTION FOR
RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY
PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER
AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT
BE REQUIRED TO REIMBURSE PIONEERS PAYMENTS TO THE VESSEL
OWNER IN VIEW OF THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR
AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF
ARBITRATION.
4. FAILURE TO CREDIT FOR SALVAGE RECOVERY
EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THE
FOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLY BE
HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED
TO PAY HALF OF THE DAMAGES AWARDED (P25 MILLION), THE COURT OF
APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE
VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO
REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION.[20]
To our minds, these errors assigned by both Pioneer and KCSI may be summed up
in the following core issues:
A. To whom may negligence over the fire that broke out on board
M/V Superferry 3 be imputed?
B. Is subrogation proper? If proper, to what extent can subrogation
be made?
C. Should interest be imposed on the award of damages? If so, how
much?
D. Who should bear the cost of the arbitration?
To resolve these issues, it is imperative that we digress from the general rule
that in petitions for review under Rule 45 of the Rules of Court, only questions of law
shall be entertained. Considering the disparate findings of fact of the CIAC and the
CA which led them to different conclusions, we are constrained to revisit the factual
circumstances surrounding this controversy.[21]
The Courts Ruling
A. The issue of negligence
Undeniably, the immediate cause of the fire was the hot work done by Angelino
Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck
A. As established before the CIAC
The fire broke out shortly after 10:25 and an alarm was raised (Exh.
1-Ms. Aini Ling,[22] p. 20). Angelino Sevillejo tried to put out the fire
by pouring the contents of a five-liter drinking water container on it
and as he did so, smoke came up from under Deck A. He got another
container of water which he also poured whence the smoke was
coming. In the meantime, other workers in the immediate vicinity
tried to fight the fire by using fire extinguishers and buckets of
water. But because the fire was inside the ceiling void, it was
extremely difficult to contain or extinguish; and it spread rapidly
because it was not possible to direct water jets or the fire
extinguishers into the space at the source. Fighting the fire was
extremely difficult because the life jackets and the construction
materials of the Deck B ceiling were combustible and permitted the
 fire to spread within the ceiling void. From there, the fire dropped into
the Deck B accommodation areas at various locations, where there
were combustible materials. Respondent points to cans of paint and
thinner, in addition to the plywood partitions and foam mattresses on
deck B (Exh. 1-Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[24]
Operations, in the letter dated January 2, 1997, banned any hot works from being
done except by KCSIs workers, viz.:
The Yard will restrict all hot works in the engine room,
accommodation cabin, and fuel oil tanks to be carried out only by
shipyard workers x x x.[26]

Pioneer contends that KCSI should be held liable because Sevillejo was its employee
who, at the time the fire broke out, was doing his assigned task, and that KCSI was
solely responsible for all the hot works done on board the vessel. KCSI claims
WG&A recognized and complied with this restrictive directive such that,
otherwise, stating that the hot work done was beyond the scope of Sevillejos
during the arrival conference on January 26, 2000, Dr. Joniga, the vessels passage
assigned tasks, the same not having been authorized under the Work Order[25] dated
team leader in charge of its hotel department, specifically requested KCSI to finish
January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A
the hot works started by the vessels contractors on the passenger accommodation
was itself negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga),
decks.[27] This was corroborated by the statements of the vessels hotel manager
for failing to remove the life jackets from the ceiling void, causing the immediate
Marcelo Rabe[28] and the vessels quality control officer Joselito Esteban.[29] KCSI
spread of the fire to the other areas of the ship.
knew of the unfinished hot works in the passenger accommodation areas. Its safety
supervisor Esteban Cabalhug confirmed that KCSI was aware that the owners of this
vessel (M/V Superferry 3) had undertaken their own (hot) works prior to arrival
We rule in favor of Pioneer. alongside (sic) on 26th January, and that no hot work permits could thereafter be
issued to WG&As own workers because this was not allowed for the Superferry
3.[30] This shows that Dr. Joniga had authority only to request the performance of
hot works by KCSIs welders as needed in the repair of the vessel while on dry dock.
First. The Shiprepair Agreement is clear that WG&A, as owner of M/V Superferry 3,
entered into a contract for the dry docking and repair of the vessel under KCSIs
Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on
safety and security. Thus, the CA erred when it said that WG&A would renovate and Third. KCSI welders covered by the Work Order performed hot works on various
reconstruct its own vessel merely using the dry docking facilities of KCSI. areas of the M/V Superferry 3, aside from its promenade deck. This was a
recognition of Dr. Jonigas authority to request the conduct of hot works even on the
passenger accommodation decks, subject to the provision of the January 26, 2000
Work Order that KCSI would supply welders for the promenade deck of the ship.
Second. Pursuant to KCSIs rules and regulations on safety and security, only
employees of KCSI may undertake hot works on the vessel while it was in the
graving dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the
Shiprepair Agreement requiring the prior written approval of KCSIs Vice President for At the CIAC proceedings, it was adequately shown that between February 4
Operations before WG&A could effect any work performed by its own workers or and 6, 2000, the welders of KCSI: (a) did the welding works on the ceiling hangers
sub-contractors. In the exercise of this authority, KCSIs Vice-President for in the lobby of Deck A; (b) did the welding and cutting works on the deck beam to
access aircon ducts; and (c) did the cutting and welding works on the protection
bars at the tourist dining salon of Deck B,[31] at a rate of P150.00/welder/hour.[32] In
fact, Orcullo, Project Superintendent of KCSI, admitted that as early as February 3,
2000 (five days before the fire) [the Yard] had acknowledged Dr. Jonigas authority
to order such works or additional jobs.[33]
It is evident, therefore, that although the January 26, 2000 Work Order was
a special order for the supply of KCSI welders to the promenade deck, it was not
restricted to the promenade deck only. The Work Order was only a special
arrangement between KCSI and WG&A that meant additional cost to the latter.
Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to
the latters direct control and supervision.
Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the
power and the right to discharge or substitute him with another welder; providing
him and the other welders with its equipment; giving him and the other welders
marching orders to work on the vessel; and monitoring and keeping track of his and
the other welders activities on board, in view of the delicate nature of their
work.[34] Thus, as such employee, aware of KCSIs Safety Regulations on Vessels
Afloat/Dry, which specifically provides that (n)o hotwork (welding/cutting works)
shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety
Section,[35] it was incumbent upon Sevillejo to obtain the required hot work safety
permit before starting the work he did, including that done on Deck A where the fire
started.
Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the fire
broke out.
It was established that no hot works could be hidden from or remain undetected by
KCSI because the welding cables and the gas hoses emanating from the dock would
give the hot works away. Moreover, KCSI had roving fire watchmen and safety
assistants who were moving around the vessel.[36] This was confirmed by Restituto
Rebaca (Rebaca), KCSIs Safety Supervisor, who actually spotted Sevillejo on Deck A,
two hours before the fire, doing his cutting work without a hot work permit, a fire
watchman, or a fire extinguisher. KCSI contends that it did its duty when it
prohibited Sevillejo from continuing the hot work.However, it is noteworthy that,
after purportedly scolding Sevillejo for working without a permit and telling him to
stop until the permit was acquired and the other safety measures were observed,
Rebaca left without pulling Sevillejo out of the work area or making sure that the
latter did as he was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with
his cutting of the bulkhead door at Deck A after Rebaca left, even disregarding the
4-inch marking set, thus cutting the door level with the deck, until the fire broke out.
This conclusion on the failure of supervision by KCSI was absolutely supported by
Dr. Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore,
KCSIs own fire expert, who observed that
4.3. The foregoing would be compounded by Angelino Sevillejo being
an electric arc welder, not a cutter. The dangers of ignition occurring
as a result of the two processes are similar in that both electric arc
welding and hot cutting produce heat at the work area and sparks
and incendive material that can travel some distance from the work
area. Hence, the safety precautions that are expected to be applied
by the supervisor are the same for both types of work. However, the
quantity and incendivity of the spray from the hot cutting are much
greater than those of sparks from electric arc welding, and it may
well be that Angelino Sevillejo would not have a full
appreciation of the dangers involved. This made it all the
more important that the supervisor, who should have had
such an appreciation, ensured that the appropriate safety
precautions were carried out.[37]

In this light, therefore, Sevillejo, being one of the specially trained welders
specifically authorized by KCSI to do the hot works on M/V Superferry 3 to the
exclusion of other workers, failed to comply with the strict safety standards of KCSI,
not only because he worked without the required permit, fire watch, fire buckets,
and extinguishers, but also because he failed to undertake other precautionary
measures for preventing the fire. For instance, he could have, at the very least,
ensured that whatever combustible material may have been in the vicinity would be
protected from the sparks caused by the welding torch. He could have easily
removed the life jackets from the ceiling void, as well as the foam mattresses, and
covered any holes where the sparks may enter.
Conjunctively, since Rebaca was already aware of the hazard, he should have
taken all possible precautionary measures, including those above mentioned, before
allowing Sevillejo to continue with his hot work on Deck A. In addition to scolding
Sevillejo, Rebaca merely checked that no fire had started yet. Nothing more. Also,
inasmuch as KCSI had the power to substitute Sevillejo with another electric arc
welder, Rebaca should have replaced him.
There is negligence when an act is done without exercising the competence
that a reasonable person in the position of the actor would recognize as necessary to
prevent an unreasonable risk of harm to another. Those who undertake any work
calling for special skills are required to exercise reasonable care in what they
do.[38] Verily, there is an obligation all persons have to take due care which, under
ordinary circumstances of the case, a reasonable and prudent man would take. The
omission of that care constitutes negligence. Generally, the degree of care required
is graduated according to the danger a person or property may be subjected to,
arising from the activity that the actor pursues or the instrumentality that he
uses. The greater the danger, the greater the degree of care required. Extraordinary
risk demands extraordinary care. Similarly, the more imminent the danger, the
higher degree of care warranted.[39] In this aspect,
KCSI failed to exercise the necessary degree of caution and foresight called for by
the circumstances.
We cannot subscribe to KCSIs position that WG&A, through Dr. Joniga, was
negligent.
On the one hand, as discussed above, Dr. Joniga had authority to request the
performance of hot works in the other areas of the vessel. These hot works were
deemed included in the January 26, 2000 Work Order and the Shiprepair
Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the
cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what
Sevillejo was doing, but failed to supervise him with the degree of care warranted by
the attendant circumstances.
Neither can Dr. Joniga be faulted for not removing the life jackets from the
ceiling void for two reasons (1) the life jackets were not even contributory to the
occurrence of the fire; and (2) it was not incumbent upon him to remove the
same. It was shown during the hearings before the CIAC that the removal of the life
jackets would not have made much of a difference. The fire would still have
occurred due to the presence of other combustible materials in the area. This was
the uniform conclusion of both WG&As[40] and KCSIs[41] fire experts. It was also
proven during the CIAC proceedings that KCSI did not see the life jackets as being in
the way of the hot works, thus, making their removal from storage unnecessary.[42]
These circumstances, taken collectively, yield the inevitable conclusion that
Sevillejo was negligent in the performance of his assigned task. His negligence was
the proximate cause of the fire on board M/V Superferry 3. As he was then definitely
engaged in the performance of his assigned tasks as an employee of KCSI, his
negligence gave rise to the vicarious liability of his employer[43] under Article 2180 of
the Civil Code, which provides
 Art. 2180. The obligation imposed by article 2176 is demandable not
only for ones own act or omission, but also for those of persons for
whom one is responsible.
xxxx
Employers shall be liable for the damages caused by their employees
and household helpers acting within the scope of their assigned tasks,
even though the former are not engaged in any business or industry.
xxxx
The responsibility treated of in this article shall cease when the
persons herein mentioned prove that they observed all the diligence
of a good father of a family to prevent damage.
KCSI failed to prove that it exercised the necessary diligence incumbent upon
it to rebut the legal presumption of its negligence in supervising
Sevillejo.[44] Consequently, it is responsible for the damages caused by the negligent
act of its employee, and its liability is primary and solidary. All that is needed is proof
that the employee has, by his negligence, caused damage to another in order to
make the employer responsible for the tortuous act of the former.[45] From the
foregoing disquisition, there is ample proof of the employees negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that it had to pay
WG&A the full amount of the insurance coverage and, by operation of law, it was
entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It
further argues that the limitation of liability clause found in the Shiprepair Agreement
is null and void for being iniquitous and against public policy.
KCSI counters that a total constructive loss was not adequately proven by Pioneer,
and that there is no proof of payment of the insurance proceeds. KCSI insists on the
validity of the limited-liability clause up to P50,000,000.00, because WG&A acceded
to the provision when it executed the Shiprepair Agreement. KCSI also claims that
the salvage value of the vessel should be deducted from whatever amount it will be
made to pay to Pioneer.
We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of
M/V Superferry 3.
In marine insurance, a constructive total loss occurs under any of the conditions set
forth in Section 139 of the Insurance Code, which provides
Sec. 139. A person insured by a contract of marine insurance may
abandon the thing insured, or any particular portion hereof separately
valued by the policy, or otherwise separately insured, and recover for
a total loss thereof, when the cause of the loss is a peril insured
against:
(a) If more than three-fourths thereof in value is actually lost, or
would have to be expended to recover it from the peril;
(b) If it is injured to such an extent as to reduce its value more than
three-fourths; x x x.
 (c) P301,839,974.00, based on the Philippine currency equivalent of the quotation of
Singapore Technologies Marine Ltd. All the estimates showed that the repair
expense would exceed P270,000,000.00, the amount equivalent to of the vessels
insured value of P360,000,000.00.Thus, WG&A opted to abandon M/V Superferry 3
It appears, however, that in the execution of the insurance policies over M/V
and claimed from Pioneer the full amount of the policies. Pioneer paid WG&As claim,
Superferry 3, WG&A and Pioneer incorporated by reference the American Institute
and now demands from KCSI the full amount of P360,000,000.00, by virtue of
Hull Clauses 2/6/77, the Total Loss Provision of which reads
subrogation.

Total Loss
KCSI denies the liability because, aside from its claim that it cannot be held
culpable for negligence resulting in the destructive fire, there was no constructive
total loss, as the amount of damage was only US$3,800,000.00 or P170,611,260.00,
In ascertaining whether the Vessel is a constructive Total Loss the the amount of repair expense quoted by Simpson, Spence & Young.
Agreed Value shall be taken as the repaired value and nothing in
respect of the damaged or break-up value of the Vessel or wreck shall
be taken into account.
In the face of this apparent conflict, we hold that Section 139 of the
Insurance Code should govern, because (1) Philippine law is deemed incorporated in
every locally executed contract; and (2) the marine insurance policies in question
There shall be no recovery for a constructive Total Loss hereunder expressly provided the following:
unless the expense of recovering and repairing the Vessel would
exceed the Agreed Value in policies on Hull and Machinery. In making
this determination, only expenses incurred or to be incurred by
IMPORTANT
reason of a single accident or a sequence of damages arising from the
same accident shall be taken into account, but expenses incurred
prior to tender of abandonment shall not be considered if such are to
be claimed separately under the Sue and Labor clause. x x x. This insurance is subject to English jurisdiction, except in the event
that loss or losses are payable in the Philippines, in which case if the
said laws and customs of England shall be in conflict with the laws of
the Republic of the Philippines, then the laws of the Republic of the
Philippines shall govern. (Underscoring supplied.)
In the course of the arbitration proceedings, Pioneer adduced in evidence the
estimates made by three (3) disinterested and qualified shipyards for the cost of the
repair of the vessel, specifically: (a) P296,256,717.00, based on the Philippine
currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi
Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine currency The CA held that Section 139 of the Insurance Code is merely permissive on account
equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and of the word may in the provision. This is incorrect. Properly considered, the word
may in the provision is intended to grant the insured (WG&A) the option or
discretion to choose the abandonment of the thing insured (M/V Superferry 3), or
any particular portion thereof separately valued by the policy, or otherwise
separately insured, and recover for a total loss when the cause of the loss is a peril
insured against. This option or discretion is expressed as a right in Section 131 of
the same Code, to wit:
because the person who signed the Receipt appeared to be an employee of Aboitiz
Shipping Corporation.[47] The Loss and Subrogation Receipt issued by WG&A to
Pioneer is the best evidence of payment of the insurance proceeds to the former,
and no controverting evidence was presented by KCSI to rebut the presumed
authority of the signatory to receive such payment.

On the matter of subrogation, Article 2207 of the Civil Code provides

Sec. 131. A constructive total loss is one which gives to a person
insured a right to abandon under Section one hundred thirty-nine.
Art. 2207. If the plaintiffs property has been insured and he
has received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured
It cannot be denied that M/V Superferry 3 suffered widespread damage from the fire against the wrongdoer or the person who has violated the contract. If
that occurred on February 8, 2000, a covered peril under the marine insurance the amount paid by the insurance company does not fully cover the
policies obtained by WG&A from Pioneer. The estimates given by the three injury or loss, the aggrieved party shall be entitled to recover the
disinterested and qualified shipyards show that the damage to the ship would deficiency from the person causing the loss or injury.
exceed P270,000,000.00, or of the total value of the policiesP360,000,000.00. These
estimates constituted credible and acceptable proof of the extent of the damage
sustained by the vessel. It is significant that these estimates were confirmed by the
Adjustment Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.),
Inc., the average adjuster that Pioneer had enlisted to verify and confirm the extent
Subrogation is the substitution of one person by another with reference to a
of the damage. The Adjustment Report verified and confirmed that the damage to
lawful claim or right, so that he who is substituted succeeds to the rights of the
the vessel amounted to a constructive total loss and that the claim
other in relation to a debt or claim, including its remedies or securities. The principle
for P360,000,000.00 under the policies was compensable.[46] It is also noteworthy
covers a situation wherein an insurer has paid a loss under an insurance policy is
that KCSI did not cross-examine Henson Lim, Director of Richards Hogg, whose
entitled to all the rights and remedies belonging to the insured against a third party
affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a
with respect to any loss covered by the policy. It contemplates full substitution such
constructive total loss.
that it places the party subrogated in the shoes of the creditor, and he may use all
means that the creditor could employ to enforce payment.[48]

Considering the extent of the damage, WG&A opted to abandon the ship and
claimed the value of its policies. Pioneer, finding the claim compensable, paid the
We have held that payment by the insurer to the insured operates as an
claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the
equitable assignment to the insurer of all the remedies that the insured may have
payment of the insurance proceeds from Pioneer. On this note, we find as
against the third party whose negligence or wrongful act caused the loss. The right
unacceptable the claim of KCSI that there was no ample proof of payment simply
of subrogation is not dependent upon, nor does it grow out of, any privity of
contract. It accrues simply upon payment by the insurance company of the
insurance claim. The doctrine of subrogation has its roots in equity. It is designed to
promote and to accomplish justice; and is the mode that equity adopts to compel
the ultimate payment of a debt by one who, in justice, equity, and good conscience,
ought to pay.[49]
We cannot accept KCSIs insistence on upholding the validity Clause 20, which
provides that the limit of its liability is only up to P50,000,000.00; nor of Clause
22(a), that KCSI stands as a co-assured in the insurance policies, as found in the
Shiprepair Agreement.
Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and
legal foundation. They are unfair and inequitable under the premises. It was
established during arbitration that WG&A did not voluntarily and expressly agree to
these provisions.Engr. Elvin F. Bello, WG&As fleet manager, testified that he did not
sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a)
were found, because he did not want WG&A to be bound by them. However,
considering that it was only KCSI that had shipyard facilities large enough to
accommodate the dry docking and repair of big vessels owned by WG&A, such as
M/V Superferry 3, in Cebu, he had to sign the front portion of the Shiprepair
Agreement; otherwise, the vessel would not be accepted for dry docking.[50]
Indeed, the assailed clauses amount to a contract of adhesion imposed on
WG&A on a take-it-or-leave-it basis. A contract of adhesion is so-called because its
terms are prepared by only one party, while the other party merely affixes his
signature signifying his adhesion thereto. Although not invalid, per se, a contract of
adhesion is void when the weaker party is imposed upon in dealing with the
dominant bargaining party, and its option is reduced to the alternative of taking it or
leaving it, completely depriving such party of the opportunity to bargain on equal
footing.[51]
Clause 20 is also a void and ineffectual waiver of the right of WG&A to be
compensated for the full insured value of the vessel or, at the very least, for its
actual market value. There was clearly no intention on the part of WG&A to
relinquish such right. It is an elementary rule that a waiver must be positively
proved, since a waiver by implication is not normally countenanced.The norm is that
a waiver must not only be voluntary, but must have been made knowingly,
intelligently, and with sufficient awareness of the relevant circumstances and likely
consequences. There must be persuasive evidence to show an actual intention to
relinquish the right.[52] This has not been demonstrated in this case.
Likewise, Clause 20 is a stipulation that may be considered contrary to public
policy. To allow KCSI to limit its liability to only P50,000,000.00, notwithstanding the
fact that there was a constructive total loss in the amount of P360,000,000.00,
would sanction the exercise of a degree of diligence short of what is ordinarily
required. It would not be difficult for a negligent party to escape liability by the
simple expedient of paying an amount very much lower than the actual damage or
loss sustained by the other.[53]
Along the same vein, Clause 22(a) cannot be upheld. The intention of the
parties to make each other a co-assured under an insurance policy is to be gleaned
principally from the insurance contract or policy itself and not from any other
contract or agreement, because the insurance policy denominates the assured and
the beneficiaries of the insurance contract. Undeniably, the hull and machinery
insurance procured by WG&A from Pioneer named only the former as the
assured. There was no manifest intention on the part of WG&A to constitute KCSI as
a co-assured under the policies. To have deemed KCSI as a co-assured under the
policies would have had the effect of nullifying any claim of WG&A from Pioneer for
any loss or damage caused by the negligence of KCSI. No ship owner would agree to
make a ship repairer a co-assured under such insurance policy. Otherwise, any claim
for loss or damage under the policy would be rendered nugatory. WG&A could not
have intended such a result.[54]
 Nevertheless, we concur with the position of KCSI that the salvage value of
the damaged M/V Superferry 3 should be taken into account in the grant of any
award. It was proven before the CIAC that the machinery and the hull of the vessel
were separately sold for P25,290,000.00 (or US$468,333.33) and US$363,289.50,
respectively. WG&As claim for the upkeep of the wreck until the same were sold
amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of
the sale of the machinery and the hull, for a net recovery of US$673,812.87, or
equivalent to P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when
the Request for Arbitration was filed. Not considering this salvage value in the award
would amount to unjust enrichment on the part of Pioneer.
20, 2007 of the Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay
Pioneer the amount of P360,000,000.00 less P30,252,648.09, equivalent to the
salvage value recovered by Pioneer from M/V Superferry 3, or the net total amount
of P329,747,351.91, with six percent (6%) interest per annum reckoned from the
time the Request for Arbitration was filed until this Decision becomes final and
executory, plus twelve percent (12%) interest per annum on the said amount or any
balance thereof from the finality of the Decision until the same will have been fully
paid. The arbitration costs shall be borne by both parties on a pro rata basis. Costs
against KCSI.

SO ORDERED.
C. On the imposition of interest
.

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the
award in favor of Pioneer in the amount of P350,146,786.89 should earn interest at
6% per annum from the filing of the case until the award becomes final and
executory.Thereafter, the rate of interest shall be 12% per annum from the date the
award becomes final and executory until its full satisfaction.

D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the cost of
arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute a
suit against KCSI, as it believed that it was entitled to claim reimbursement of the
amount it paid to WG&A. However, we disagree with Pioneer that only KCSI should
shoulder the arbitration costs. KCSI cannot be faulted for defending itself for
perceived wrongful acts and conditions. Otherwise, we would be putting a price on
the right to litigate on the part of Pioneer.

WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in

G.R. No. 180896-97 and the Petition of Keppel Cebu Shipyard, Inc. in G.R. No.
180880-81 are PARTIALLY GRANTED and the Amended Decision dated December