G.R. No.

190702, February 27, 2017

JAIME T. GAISANO, Petitioner, v. DEVELOPMENT INSURANCE AND SURETY

CORPORATION, Respondent.

DECISION

JARDELEZA, J.:

This is a petition for review on certiorari1 seeking to nullify the Court of Appeals' (CA)
September 11, 2009 Decision2 and November 24, 2009 Resolution3 in CA-G.R. CV No. 81225.
The CA reversed the September 24, 2003 Decision4 of the Regional Trial Court (RTC) in Civil
Case No. 97-85464. The RTC granted Jaime T. Gaisano's (petitioner) claim on the proceeds of
the comprehensive commercial vehicle policy issued by Development Insurance and Surety
Corporation (respondent), viz.:ChanRoblesVirtualawlibrary

IN VIEW OF THE FOREGOING, the decision appealed from is reversed, and the defendant-
appellant ordered to pay the plaintiff-appellee the sum of P55,620.60 with interest at 6 percent
per annum from the date of the denial of the claim on October 9, 1996 until payment.

SO ORDERED.5chanroblesvirtuallawlibrary
I

The facts are undisputed. Petitioner was the registered owner of a 1992 Mitsubishi Montero
with plate number GTJ-777 (vehicle), while respondent is a domestic corporation engaged in
the insurance business.6 On September 27, 1996, respondent issued a comprehensive
commercial vehicle policy7 to petitioner in the amount of P1,500,000.00 over the vehicle for a
period of one year commencing on September 27, 1996 up to September 27,
1997.8 Respondent also issued two other commercial vehicle policies to petitioner covering two
other motor vehicles for the same period.9

To collect the premiums and other charges on the policies, respondent's agent, Trans-Pacific
Underwriters Agency (Trans-Pacific), issued a statement of account to petitioner's company,
Noah's Ark Merchandising (Noah's Ark).10 Noah's Ark immediately processed the payments and
issued a Far East Bank check dated September 27, 1996 payable to Trans-Pacific on the same
day.11 The check bearing the amount of P140,893.50 represents payment for the three
insurance policies, with P55,620.60 for the premium and other charges over the
vehicle.12 However, nobody from Trans-Pacific picked up the check that day (September 27)
because its president and general manager, Rolando Herradura, was celebrating his birthday.
Trans-Pacific informed Noah's Ark that its messenger would get the check the next day,
September 28.13

In the evening of September 27, 1996, while under the official custody of Noah's Ark marketing
manager Achilles Pacquing (Pacquing) as a service company vehicle, the vehicle was stolen in
the vicinity of SM Megamall at Ortigas, Mandaluyong City. Pacquing reported the loss to the
Philippine National Police Traffic Management Command at Camp Crame in Quezon
City.14 Despite search and retrieval efforts, the vehicle was not recovered. 15

Oblivious of the incident, Trans-Pacific picked up the check the next day, September 28. It
issued an official receipt numbered 124713 dated September 28, 1996, acknowledging the
receipt of P55,620.60 for the premium and other charges over the vehicle. 16 The check issued
to Trans-Pacific for P140,893.50 was deposited with Metrobank for encashment on October 1,
1996.17

On October 1, 1996, Pacquing informed petitioner of the vehicle's loss. Thereafter, petitioner
reported the loss and filed a claim with respondent for the insurance proceeds of
P1,500,000.00.18 After investigation, respondent denied petitioner's claim on the ground that
there was no insurance contract.19Petitioner, through counsel, sent a final demand on July 7,
1997.20 Respondent, however, refused to pay the insurance proceeds or return the premium
paid on the vehicle.

On October 9, 1997, petitioner filed a complaint for collection of sum of money and
damages21 with the RTC where it sought to collect the insurance proceeds from respondent. In
its Answer,22 respondent asserted that the non-payment of the premium rendered the policy
ineffective. The premium was received by the respondent only on October 2, 1996, and there
was no known loss covered by the policy to which the payment could be applied. 23

In its Decision24 dated September 24, 2003, the RTC ruled in favor of petitioner. It considered
the premium paid as of September 27, even if the check was received only on September 28
because (1) respondent's agent, Trans-Pacific, acknowledged payment of the premium on that
date, September 27, and (2) the check that petitioner issued was honored by respondent in
acknowledgment of the authority of the agent to receive it.25 Instead of returning the premium,
respondent sent a checklist of requirements to petitioner and assigned an underwriter to
investigate the claim.26 The RTC ruled that it would be unjust and inequitable not to allow a
recovery on the policy while allowing respondent to retain the premium paid. 27 Thus, petitioner
was awarded an indemnity of P1,500,000.00 and attorney's fees of P50,000.00.28

After respondent's motion for reconsideration was denied,29 it filed a Notice of Appeal.30 Records
were forwarded to the CA.31

The CA granted respondent's appeal.32 The CA upheld respondent's position that an insurance
contract becomes valid and binding only after the premium is paid pursuant to Section 77 of
the Insurance Code (Presidential Decree No. 612, as amended by Republic Act No. 10607). 33 It
found that the premium was not yet paid at the time of the loss on September 27, but only a
day after or on September 28, 1996, when the check was picked up by Trans-Pacific. 34 It also
found that none of the exceptions to Section 77 obtains in this case.35 Nevertheless, the CA
ordered respondent to return the premium it received in the amount of P55,620.60, with
interest at the rate of 6% per annum from the date of the denial of the claim on October 9, 1996
until payment.36

Hence petitioner filed this petition. He argues that there was a valid and binding insurance
contract between him and respondent.37 He submits that it comes within the exceptions to the
rule in Section 77 of the Insurance Code that no contract of insurance becomes binding unless
and until the premium thereof has been paid. The prohibitive tenor of Section 77 does not
apply because the parties stipulated for the payment of premiums.38 The parties intended the
contract of insurance to be immediately effective upon issuance, despite non-payment of the
premium, because respondent trusted petitioner.39He adds that respondent waived its right to
a pre-payment in full of the terms of the policy, and is in estoppel.40

Petitioner also argues that assuming he is not entitled to recover insurance proceeds, but only
to the return of the premiums paid, then he should be able to recover the full amount of
P140,893.50, and not merely P55,620.60.41 The insurance policy covered three vehicles yet
respondent's intention was merely to disregard the contract for only the lost
vehicle.42 According to petitioner, the principle of mutuality of contracts is violated, at his
expense, if respondent is allowed to be excused from performance on the insurance contract
only for one vehicle, but not as to the two others, just because no loss is suffered as to the two.
To allow this "would be to place exclusively in the hands of one of the contracting parties the
right to decide whether the contract should stand or not x x x."43

For failure of respondent to tile its comment to the petition, we declared respondent to have
waived its right to file a comment in our June 15, 2011 Resolution. 44

The lone issue here is whether there is a binding insurance contract between petitioner and
respondent.

II

We deny the petition.

Insurance is a contract whereby one undertakes for a consideration to indemnify another

against loss, damage or liability arising from an unknown or contingent event. 45 Just like any
other contract, it requires a cause or consideration. The consideration is the premium, which
must be paid at the time and in the way and manner specified in the policy. 46 If not so paid, the
policy will lapse and be forfeited by its own terms.47

The law, however, limits the parties' autonomy as to when payment of premium may be made
for the contract to take effect. The general rule in insurance laws is that unless the premium is
paid, the insurance policy is not valid and binding.48 Section 77 of the Insurance Code,
applicable at the time of the issuance of the policy, provides:ChanRoblesVirtualawlibrary
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no policy
or contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an industrial life policy
whenever the grace period provision applies.
In Tibay v. Court of Appeals,49 we emphasized the importance of this rule. We explained that in
an insurance contract, both the insured and insurer undertake risks. On one hand, there is
the insured, a member of a group exposed to a particular peril, who contributes premiums
under the risk of receiving nothing in return in case the contingency does not happen; on the
other, there is the insurer, who undertakes to pay the entire sum agreed upon in case the
contingency happens. This risk-distributing mechanism operates under a system where, by
prompt payment of the premiums, the insurer is able to meet its legal obligation to maintain a
legal reserve fund needed to meet its contingent obligations to the public. The premium,
therefore, is the elixir vitae or source of life of the insurance
business:ChanRoblesVirtualawlibrary
In the desire to safeguard the interest of the assured, it must not be ignored that the contract
of insurance is primarily a risk-distributing device, a mechanism by which all members of a
group exposed to a particular risk contribute premiums to an insurer. From these contributory
funds are paid whatever losses occur due to exposure to the peril insured against. Each party
therefore takes a risk: the insurer, that of being compelled upon the happening of the
contingency to pay the entire sum agreed upon, and the insured, that of parting with the
amount required as premium. without receiving anything therefor in case the contingency does
not happen. To ensure payment tor these losses, the law mandates all insurance companies to
maintain a legal reserve fund in favor of those claiming under their policies. It should be
understood that the integrity of this fund cannot be secured and maintained if by judicial fiat
partial offerings of premiums were to be construed as a legal nexus between the applicant and
the insurer despite an express agreement to the contrary. For what could prevent the
insurance applicant from deliberately or willfully holding back full premium payment and wait
for the risk insured against to transpire and then conveniently pass on the balance of the
premium to be deducted from the proceeds of the insurance? x x x

xxx

And so it must be. For it cannot be disputed that premium is the elixir vitae of the insurance
business because by law the insurer must maintain a legal reserve fund to meet its contingent
obligations to the public, hence, the imperative need for its prompt payment and full
satisfaction. It must be emphasized here that all actuarial calculations and various tabulations
of probabilities of losses under the risks insured against are based on the sound hypothesis of
prompt payment of premiums. Upon this bedrock insurance firms are enabled to other the
assurance of security to the public at favorable rates. x x x50(Citations omitted.)
Here, there is no dispute that the check was delivered to and was accepted by respondent's
agent, Trans-Pacific, only on September 28, 1996. No payment of premium had thus been
made at the time of the loss of the vehicle on September 27, 1996. While petitioner claims that
Trans-Pacific was informed that the check was ready for pick-up on September 27, 1996, the
notice of the availability of the check, by itself, does not produce the effect of payment of the
premium. Trans-Pacific could not be considered in delay in accepting the check because when
it informed petitioner that it will only be able to pick-up the check the next day, petitioner did
not protest to this, but instead allowed Trans-Pacific to do so. Thus, at the time of loss, there
was no payment of premium yet to make the insurance policy effective.

There are, of course, exceptions to the rule that no insurance contract takes effect unless
premium is paid. In UCPB General Insurance Co., Inc. v. Masagana Telamart, Inc.,51 we
said:ChanRoblesVirtualawlibrary
It can be seen at once that Section 77 does not restate the portion of Section 72 expressly
permitting an agreement to extend the period to pay the premium. But are there exceptions to
Section 77?

The answer is in the affirmative.

The first exception is provided by Section 77 itself, and that is, in case of a life or industrial life
policy whenever the grace period provision applies.

The second is that covered by Section 78 of the Insurance Code, which

provides:ChanRoblesVirtualawlibrary
SEC. 78. Any acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until premium is actually paid.
A third exception was laid down in Makati Tuscany Condominium Corporation vs. Court of
Appeals, wherein we ruled that Section 77 may not apply if the parties have agreed to the
payment in installments of the premium and partial payment has been made at the time of
loss. We said therein, thus:ChanRoblesVirtualawlibrary
We hold that the subject policies are valid even if the premiums were paid on installments. The
records clearly show that the petitioners and private respondent intended subject insurance
policies to be binding and effective notwithstanding the staggered payment of the premiums.
The initial insurance contract entered into in 1982 was renewed in 1983, then in 1984. In
those three years, the insurer accepted all the installment payments. Such acceptance of
payments speaks loudly of the insurer's intention to honor the policies it issued to petitioner.
Certainly, basic principles of equity and fairness would not allow the insurer to continue
collecting and accepting the premiums, although paid on installments, and later deny liability
on the lame excuse that the premiums were not prepaid in full.
Not only that. In Tuscany, we also quoted with approval the following pronouncement of the
Court of Appeals in its Resolution denying the motion for reconsideration of its
decision:ChanRoblesVirtualawlibrary
While the import of Section 77 is that prepayment of premiums is strictly required as a
condition to the validity of the contract, We are not prepared to rule that the request to make
installment payments duly approved by the insurer would prevent the entire contract of
insurance from going into effect despite payment and acceptance of the initial premium or first
installment. Section 78 of the Insurance Code in effect allows waiver by the insurer of the
condition of prepayment by making an acknowledgment in the insurance policy of receipt of
premium as conclusive evidence of payment so far as to make the policy binding despite the
fact that premium is actually unpaid. Section 77 merely precludes the parties from stipulating
that the policy is valid even if premiums are not paid, but docs not expressly prohibit an
agreement granting credit extension, and such an agreement is not contrary to morals, good
customs, public order or public policy (De Leon,' The Insurance Code, p. 175). So is an
understanding to allow insured to pay premiums in installments not so prescribed. At the very
least, both parties should be deemed in estoppel to question the arrangement they have
voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of
Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the insurer may
grant credit extension for the payment of the premium. This simply means that if the insurer
has granted the insured a credit term for the payment of the premium and loss occurs before
the expiration of the term, recovery on the policy should be allowed even though the premium
is paid after the loss but within the credit term.

xxx

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would
not be permitted against Petitioner, which had consistently granted a 60- to 90-day credit term
for the payment of premiums despite its full awareness of Section 77. Estoppel bars it from
taking refuge under said Section, since Respondent relied in good faith on such practice.
Estoppel then is the fifth exception to Section 77.52 (Citations omitted.)
In UCPB General Insurance Co., Inc., we summarized the exceptions as follows: (1) in case of life
or industrial life policy, whenever the grace period provision applies, as expressly provided by
Section 77 itself; (2) where the insurer acknowledged in the policy or contract of insurance
itself the receipt of premium, even if premium has not been actually paid, as expressly provided
by Section 78 itself; (3) where the parties agreed that premium payment shall be in
installments and partial payment has been made at the time of loss, as held in Makati Tuscany
Condominium Corp. v. Court of Appeals;53 (4) where the insurer granted the insured a credit
term for the payment of the premium, and loss occurs before the expiration of the term, as held
in Makati Tuscany Condominium Corp.; and (5) where the insurer is in estoppel as when it has
consistently granted a 60 to 90-day credit term for the payment of premiums.

The insurance policy in question does not fall under the first to third exceptions laid out in
UCPB General Insurance Co., Inc.: (1) the policy is not a life or industrial life policy; (2) the
policy does not contain an acknowledgment of the receipt of premium but merely a statement
of account on its face;54 and (3) no payment of an installment was made at the time of loss on
September 27.

Petitioner argues that his case falls under the fourth and fifth exceptions because the parties
intended the contract of insurance to be immediately effective upon issuance, despite non-
payment of the premium. This waiver to a pre-payment in full of the premium places
respondent in estoppel.

We do not agree with petitioner.

The fourth and fifth exceptions to Section 77 operate under the facts obtaining in Makati
Tuscany Condominium Corp. and UCPB General Insurance Co., Inc. Both contemplate situations
where the insurers have consistently granted the insured a credit extension or term for the
payment of the premium. Here, however, petitioner failed to establish the fact of a grant by
respondent of a credit term in his favor, or that the grant has been consistent. While there was
mention of a credit agreement between Trans-Pacific and respondent, such arrangement was
not proven and was internal between agent and principal.55 Under the principle of relativity of
contracts, contracts bind the parties who entered into it. It cannot favor or prejudice a third
person, even if he is aware of the contract and has acted with knowledge. 56

We cannot sustain petitioner's claim that the parties agreed that the insurance contract is
immediately effective upon issuance despite non payment of the premiums. Even if there is a
waiver of pre-payment of premiums, that in itself does not become an exception to Section 77,
unless the insured clearly gave a credit term or extension. This is the clear import of the fourth
exception in the UCPB General Insurance Co., Inc. To rule otherwise would render nugatory the
requirement in Section 77 that "[n]otwithstanding any agreement to the contrary, no policy or
contract of insurance issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, x x x." Moreover, the policy itself
states:ChanRoblesVirtualawlibrary
WHEREAS THE INSURED, by his corresponding proposal and declaration, and which shall be
the basis of this Contract and deemed incorporated herein, has applied to the company for the
insurance hereinafter contained, subject to the payment of the Premium as consideration for
such insurance.57 (Emphasis supplied.)
The policy states that the insured's application for the insurance is subject to the payment of
the premium. There is no waiver of pre-payment, in full or in installment, of the premiums
under the policy. Consequently, respondent cannot be placed in estoppel.
Thus, we find that petitioner is not entitled to the insurance proceeds because no insurance
policy became effective for lack of premium payment.

The consequence of this declaration is that petitioner is entitled to a return of the premium
paid for the vehicle in the amount of P55,620.60 under the principle of unjust enrichment.
There is unjust enrichment when a person unjustly retains a benefit to the loss of another, or
when a person retains money or property of another against the fundamental principles of
justice, equity and good conscience.58Petitioner cannot claim the full amount of P140,893.50,
which includes the payment of premiums for the two other vehicles. These two policies are not
affected by our ruling on the policy subject of this case because they were issued as separate
and independent contracts of insurance.59 We, however, find that the award shall earn legal
interest of 6% from the time of extrajudicial demand on July 7, 1997. 60

WHEREFORE, the petition is DENIED. The assailed Decision of the CA dated September 11,
2009 and the Resolution dated November 24, 2009 are AFFIRMED with
the MODIFICATION that respondent should return the amount of P55,620.60 with the legal
interest computed at the rate of 6% per annumreckoned from July 7, 1997 until finality of this
judgment. Thereafter, the total amount shall earn interest at the rate of 6% per annum from the
finality of this judgment until its full satisfaction.

SO ORDERED.chanroblesvirtuallawlibrary
G.R. No. 94071 March 31, 1992

NEW LIFE ENTERPRISES and JULIAN SY, petitioners,

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

REGALADO, J.:

This appeal by certiorari seeks the nullification of the decision 1 of respondent Court of Appeals
in CA-G.R. CV No. 13866 which reversed the decision of the Regional Trial Court, Branch LVII
at Lucena City, jointly deciding Civil Cases Nos. 6-84, 7-84 and 8-84 thereof and consequently
ordered the dismissal of the aforesaid actions filed by herein petitioners.

The undisputed background of this case as found by the court a quo and adopted by
respondent court, being sustained by the evidence on record, we hereby reproduce the same
with approval. 2

The antecedents of this case show that Julian Sy and Jose Sy Bang have
formed a business partnership in the City of Lucena. Under the business name
of New Life Enterprises, the partnership engaged in the sale of construction
materials at its place of business, a two storey building situated at Iyam,
Lucena City. The facts show that Julian Sy insured the stocks in trade of New
Life Enterpriseswith Western Guaranty Corporation, Reliance Surety and
Insurance. Co., Inc., and Equitable Insurance Corporation.

On May 15, 1981, Western Guaranty Corporation

issued Fire Insurance Policy No. 37201 in the amount of P350,000.00. This
policy was renewed on May, 13, 1982.

On July 30,1981, Reliance Surety and Insurance Co., Inc. issued Fire
Insurance Policy No. 69135 inthe amount of P300,000.00 (Renewed under
Renewal Certificate No. 41997) An additional
insurancewas issued by the same company on
November 12, 1981 under Fire Insurance Policy No. 71547 in the amount of
P700,000.00.

On February 8, 1982, Equitable Insurance

Corporation issued Fire Insurance Policy No. 39328 in the amount of
P200,000.00.

Thus when the building occupied by the New Life Enterprises

was gutted by fire at about 2:00 o'clock inthe morning of October 19, 1982, the
stocks in the trade inside said building were insured against
fire inthe total amount of P1,550,000.00.
According to the certification issued by the Headquarters, Philippine
Constabulary /Integrated National Police, Camp Crame, the cause of fire was
electrical in nature.According to the plaintiffs,
the building and the stocks inside were burned.
After the fire, Julian Sy wentto the agent of
Reliance Insurance whom he asked to accompany him to the
office of the company sothat he can file
his claim. He averred that in support of his claim, he
submitted the fire clearance, the insurance policies and inventory of stocks. He
further testified that the three insurance companies are sister
companies, and as a matter of fact when he was following-up his claim with
Equitable Insurance, the Claims Manager told him to go first to Reliance
Insurance and if said company agrees to pay, they would also pay. The same
treatment was given him by the other insurance
companies. Ultimately, thethree insurance companies denied plaintiffs' claim for
payment.

In its letter of denial dated March 9, 1983, (Exhibit "C" No. 8-

84) Western Guaranty Corporationthrough Claims Manager Bernard S. Razon tol
d the plaintiff that his claim "is
denied for breach of policyconditions." Reliance Insurance purveyed the same
message in its letter dated November 23, 1982and signed by Executive Vice-
President Mary Dee Co (Exhibit "C" No. 7-84) which said that "plaintiff's
claim is denied for breach of policy conditions."
 The letter of denial received by the plaintiff fromEquitable Insurance
Corporation (Exhibit "C" No. 6-84) was of the same tenor, as said letter dated
February 22, 1983, and signed by Vice-President
Elma R. Bondad, said "we find that certain
policyconditions were violated, therefore, we regret, we have to deny your claim,
as it is hereby denied in its entirety."

In relation to the case against Reliance

Surety and Insurance Company, a certain Atty. Serafin D.Dator, acting in behalf
of the plaintiff, sent a letter dated February 13, 1983 (Exhibit "G-l" No 7-
84) toExecutive Vice-President Mary Dee Co asking that he be informed as to
the specific policy conditions allegedly violated by the plaintiff. In her reply-letter
dated March 30, 1983, Executive Vice-PresidentMary Dee Co informed Atty.
Dator that Julian Sy violated Policy Condition No. "3" which requires theinsured
to give notice of any insurance or insurances already effected covering the stocks
in trade. 3

Because of the denial of their claims for payment by the three (3) insurance
companies, petitioner filed separate civilactions against the former before the Regional Trial
Court of Lucena City, which cases were consolidated for trial,
and thereafter the court below rendered its decision on December 19, l986 with the following
disposition:

WHEREFORE, judgment in the above-entitled cases is rendered in the following

manner, viz:

1. In Civil Case No. 6-84, judgment is rendered for the

plaintiff New Life Enterprises and against the defendant Equitable Insurance
Corporation ordering the latter to pay the former the sum of
TwoHundred Thousand (P200,000.00) Pesos and
considering that payment of the claim of the insured hasbeen unreasonably deni
ed, pursuant to Sec. 244 of the Insurance Code, defendant is further ordered top
ay the plaintiff attorney's fees in the amount of Twenty Thousand (P20,000.00)
Pesos. All sums ofmoney to be paid by virtue
hereof shall bear interest at 12% per annum (pursuant
to Sec. 244 of theInsurance Code) from
February 14, 1983, (91st day from November 16, 1982, when Sworn Statementof
Fire Claim was received from the insured) until they are fully paid;

2. In Civil Case No. 7-

84, judgment is rendered for the plaintiff Julian Sy and against
the defendantReliance Surety and Insurance Co.,
Inc., ordering the latter to pay the former the sum
of P1,000,000.00(P300,000.00 under Policy
No. 69135 and P700,000.00 under Policy No. 71547)
and considering thatpayment of the claim of the
insured has been unreasonably denied, pursuant to
Sec. 244 of theInsurance Code, defendant is further ordered
to pay the plaintiff the amount of P100,000.00 as attorney's fees.

All sums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of the Insurance Code) from February 14, 1983,
(91st day from November 16,
1982 when SwornStatement of Fire Claim was received from the insured) until
they are fully paid;

3. In Civil Case No. 8-84, judgment is rendered for

the plaintiff New Life Enterprises and against thedefendant Western Guaranty Co
rporation ordering the latter to pay the sum of P350,000.00
to theConsolidated Bank and Trust Corporation,
Lucena Branch, Lucena City, as stipulated on the
face ofPolicy No. 37201, and considering that payment of the
aforementioned sum of money has been
unreasonably denied, pursuant to Sec. 244 of the Insurance Code,
defendant is further ordered to pay the plaintiff attorney's fees in the amount of
P35,000.00.

All sums of money to be paid by virtue hereof shall bear interest at 12% per
annum (pursuant to Sec. 244 of the Insurance Code) from February 5, 1982,
(91st day from 1st week of November 1983 when
insured filed formal claim for full indemnity according to adjuster
Vetremar Dela Merced) until they are fully paid. 4
As aforestated, respondent Court of Appeals reversed said judgment of the trial court, hence
this petition the cruxwherein is whether or not Conditions Nos. 3 and 27 of
the insurance contracts were violated by petitioners thereby resulting in
their forfeiture of all the benefits thereunder.

Condition No. 3 of said insurance policies, otherwise known as

the "Other Insurance Clause," is uniformly contained in all the aforestated
insurance contracts of herein petitioners, as follows:

3. The insured shall give notice to the Company

of any insurance or insurances already effected, orwhich
may subsequently be effected, covering any of the property or properties
consisting of stocks intrade, goods in process
and/or inventories only hereby insured, and unless
such notice be given andthe particulars of such
insurance or insurances be stated therein or endorsed on this policy pursuant to
Section 50 of the Insurance Code, by or on behalf of the Company
before the occurrence of any loss ordamage, all benefits under this policy shall
be deemed forfeited, provided however, that this condition shall not apply when
the total insurance or insurances in force at
the time of loss or damage not morethan P200,000.00. 5

Petitioners admit that the respective insurance policies

issued by private respondents did not state or endorse thereon
the other insurance coverage obtained or subsequently effected on the same stocks in trade for
the loss of which compensation is claimed by petitioners. 6 The policy
issued by respondent Western Guaranty Corporation(Western) did not
declare respondent Reliance Surety and Insurance Co., Inc. (Reliance) and respondent
Equitable Insurance Corporation (Equitable) as co-insurers on the same stocks,
while Reliance's Policies covering the samestocks did not
likewise declare Western and Equitable as such co-insurers. It is
further admitted by petitioners thatEquitable's policy stated "nil" in the space thereon requiring
indication of any co-insurance although there were three (3) policies subsisting on the same
stocks in trade at the time of the loss, namely, that of Western in the amount ofP350,000.00
and two (2) policies of Reliance in the total amount of P1,000,000.00. 7

In other words, the coverage by other insurance or co-insurance effected

or subsequently arranged by petitioners were neither stated nor endorsed in the policies of the
three (3) private respondents, warranting forfeiture of all benefits
thereunder if we are to follow the express stipulation in the aforequoted Policy Condition No. 3.

Petitioners contend that they are not to be blamed for the omissions,
alleging that insurance agent Leon Alvarez (for Western) and Yap Kam Chuan (for
Reliance and Equitable) knew about the existence of the additional insurancecoverage and that
they were not informed about the requirement that such other or additional insurance
should bestated in the policy, as they have not even read policies.8 These contentions cannot
pass judicial muster.

The terms of the contract are clear and unambiguous.

The insured is specifically required to disclose to the insurer any other insurance and its
particulars which he may have effected on the same subject matter. The knowledge of such
insurance by the insurer's agents, even assuming the acquisition thereof by the former,
is not the "notice" that would estop the insurers from denying the claim. Besides, the so-called
theory of imputed knowledge, that is, knowledge of the agent is
knowledge of the principal, aside from being
of dubious applicability here has likewisebeen roundly
refuted by respondent court whose factual findings we find acceptable.

Thus, it points out that while petitioner Julian Sy

claimed that he had informed insurance agent Alvarez regarding the co-insurance on the
property, he contradicted himself by inexplicably claiming that he had not read the terms of the
policies; that Yap Dam Chuan could not likewise have obtained such
knowledge for the same reason, aside from the fact that
the insurance with Western was obtained before those of
Reliance and Equitable; and that theconclusion of
the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawnfrom the mere fact that Yap Kam Chuan was
an agent for both companies which also had the same insuranceclaims adjuster. Availment of
the services of the same agents and adjusters by different companies is a
commonpractice in the insurance business and such facts
do not warrant the speculative conclusion of the trial court.
Furthermore, when the words and language of documents are clear and plain
or readily understandable by an ordinary reader thereof, there is absolutely no room for
interpretation or construction anymore.9 Courts are not allowed to make contracts
for the parties; rather, they will intervene only when the terms of the policy areambiguous,
equivocal, or uncertain. 10 The parties must abide by the
terms of the contract because such termsconstitute the
measure of the insurer's liability and compliance therewith is a
condition precedent to the insured'sright of recovery from the insurer. 11

While it is a cardinal principle of insurance law that a policy or contract

of insurance is to be construed liberally infavor of the insured and strictly against the insurer
company, yet contracts of insurance, like other contracts, are to be construed according to
the sense and meaning of the terms which the parties themselves have used. If suchterms are
clear and unambiguous, they must be taken and understood in their plain, ordinary and
popular sense. 12Moreover, obligations arising from contracts have the force of law between
the contracting parties and should becomplied with in good faith. 13

Petitioners should be aware of the fact that a party is not relieved of the duty to exercise the
ordinary care and prudence that would be exacted in relation to other contracts. The
conformity of the insured to the terms of the policy is implied from his failure to express any
disagreement with what is provided for.14 It may be true that themajority rule, as cited
by petitioners, is that injured persons may accept policies without reading them, and that this
is not negligence per se. 15 But, this is not without any exception. It is and was incumbent
upon petitioner Sy to read the insurance contracts, and this can be reasonably expected
of him considering that he has been a businessman since 196516 and the contract concerns
indemnity in case of loss in his money-making trade of which important
consideration he could not have been unaware as it was pre-in case of loss in his money-
making trade of which important consideration he could not have been unaware as it was
precisely the reason for his procuring the same.

17
We reiterate our pronouncement in Pioneer Insurance and Surety Corporation vs. Yap:

...
And considering the terms of the policy which required the insured to declare oth
er insurances, thestatement in question must be deemed to be a statement
(warranty) binding on both insurer and insured, that there were no other
insurance on the property. . . .

The annotation then, must be deemed to be a warranty that the property was not
insured by any other policy. Violation thereof entitled the insurer to rescind (Sec.
69, Insurance Act). Such misrepresentation is fatal in the light of
our views in Santa Ana vs. Commercial Union Assurance Company, Ltd., 55 Phil.
329. The materiality of non-disclosure of other insurance policies is not open to
doubt.

xxx xxx xxx

The obvious purpose of the aforesaid requirement in the policy

is to prevent over-insurance and thus avert the perpetration of fraud. The public,
as well as the insurer, is interested in preventing the situation
in which a fire would be profitable to the insured. According to Justice Story:
"The insured has no right to complain, for he assents to comply
with all the stipulations on his side, in order to entitlehimself to the
benefit of the contract, which, upon reason or principle, he
has no right to ask the court to dispense with the
performance of his own part of the agreement, and yet to bind the other party to
obligations, which, but for those stipulations, would not have been entered into."

18
Subsequently, in the case of Pacific Banking Corporation vs. Court of Appeals, et al., we held:

It is not disputed that the insured failed to reveal before the

loss three other insurances. As found by the Court
of Appeals, by reason of said unrevealed insurances, the insured had been
guilty of a falsedeclaration; a clear misrepresentation and a vital one because
where the insured had been asked to reveal
but did not, that was deception. Otherwise stated, had the
insurer known that there were many co-insurances, it could have hesitated or
plainly desisted from entering into such contract.
Hence, theinsured was guilty of clear fraud (Rollo, p. 25).
 Petitioner's contention that the allegation of fraud is but
a mere inference or suspicion is untenable. In fact, concrete evidence of fraud or
false declaration by the insured was furnished by the petitioner itself when the
facts alleged in the policy under clauses "Co-Insurances Declared" and
"Other InsuranceClause" are materially different from the actual number of co-
insurances taken over the subjectproperty. Consequently, "the whole foundation
of the contract fails, the
risk does not attach and thepolicy never becomes a contract between the
parties." Representations of facts are the foundation ofthe contract and if
the foundation does not exist, the superstructure does
not arise. Falsehood in suchrepresentations is not shown to vary
or add to the contract, or to terminate a contract which has oncebeen made, but
to show that no contract has ever
existed (Tolentino, Commercial Laws of thePhilippines, p.
991, Vol. II, 8th Ed.,) A void or inexistent contract is one which has no
force and effectfrom the very beginning, as if it had never been entered into, and
which cannot be validated either bytime or by ratification
(Tongoy vs. C.A., 123 SCRA 99 (1983); Avila v. C.A., 145 SCRA, 1986).

As the insurance policy against fire expressly required that notice should be
given by the insured ofother insurance upon the same property,
the total absence of such notice nullifies the policy.

To further warrant and justify the forfeiture of the

benefits under the insurance contracts involved, we need
merely toturn to Policy Condition No. 15 thereof, which reads in part:

15. . . . if any false declaration be made or used

19
in support thereof, . . . all benefits under this Policy shall be forfeited . . . .

Additionally, insofar as the liability of respondent

Reliance is concerned, it is not denied that the complaint for recovery was filed in court by
petitioners only on January 31, 1984, or after more than one (1) year had
elapsedfrom petitioners' receipt of the insurers' letter of
denial on November 29, 1982. Policy Condition No. 27 of their insurance contract with Reliance
provides:

27. Action or suit

clause. — If a claim be made and rejected and an action or suit be not commence
d
either in the Insurance Commission or any court of competent jurisdiction of noti
ce of such rejection, orin case of arbitration taking place
as provided herein, within twelve (12) months after due
notice of theaward made by the arbitrator or arbitrators
or umpire, then the claim shall for all purposes be
deemedto have been abandoned and shall not thereafter be recoverable
hereunder. 20

On this point, the trial court ruled:

. . . However, because of the peculiar circumstances of this case, we hesitate

in concluding thatplaintiff's right to ventilate his claim in court has been barred
by reason of the time constraint provided in the insurance contract. It is
evident that after the plaintiff had received
the letter of denial, he stillfound it necessary to be informed of the specific cause
s or reasons for the denial of his claim, reasonfor which his lawyer, Atty. Dator
deemed it wise to send a letter of inquiry to the defendant which wasanswered by
defendant's Executive Vice-President in a letter
dated March 30, 1983, . . . . Assuming,gratuitously, that the letter of Executive V
ice-President Mary Dee Co dated March 30, 1983, was received by plaintiff
on the same date, the period of limitation should start to run only from said date
in the spirit of fair play and equity. . . . 21

We have perforce to reject this theory of the court below for being contrary to what we have
heretofore declared:

It is important to note the principle laid down by this Court in the case of Ang vs.
Fulton Fire Insurance Co. (2 SCRA 945 [1961]) to wit:

The condition contained in an insurance policy that claims must b

e presented within one year
 after rejection is not merely a procedural requirement but an impo
rtant matter essential to a prompt settlement of claims against
insurance companies as it
demandsthat insurance suits be brought by
the insured while the evidence as to the
origin andcause of destruction have not yet disappeared.

In enunciating the above-cited principle, this Court had definitely

settled the rationale for the necessityof bringing suits against the Insurer
within one year from the rejection of the claim. The contention
ofthe respondents that the one-year prescriptive period does
not start to run until the petition forreconsideration had been resolved by the ins
urer, runs counter to the declared purpose for requiringthat an
action or suit be filed in the Insurance Commission or in a court of competent
jurisdiction fromthe denial of the claim. To uphold respondents' contention
would contradict and defeat the very principle which this Court had
laid down. Moreover, it can easily be used by insured persons as a scheme or
device to waste time until any evidence which may be considered against them is
destroyed.

xxx xxx xxx

While in the Eagle Star case (96 Phil. 701),

this Court uses the phrase "final rejection", the
samecannot be taken to mean the rejection of a petition for reconsideration as
insisted by respondents.
Suchwas clearly not the meaning contemplated by this Court. The insurance poli
cy in said case providesthat the insured should file his claim first, with
the carrier and then with the insurer.
The "final rejection"being referred to in said case is the rejection by the
insurance company. 22

Furthermore, assuming arguendo that petitioners felt the

legitimate need to be clarified as to the policy condition violated, there was a considerable lapse
of time from their receipt of the insurer's clarificatory letter dated March 30, 1983, up to the
time the complaint was filed in court on January 31, 1984. The one-
year prescriptive period was yet to expire on November 29, 1983, or about eight (8) months from
the receipt of the clarificatory letter, but petitioners let the
period lapse without bringing their action in court.
We accordingly find no "peculiar circumstances" sufficient to relax the enforcement of the one-
year prescriptive period and we, therefore, hold that petitioners' claim was definitely filed out of
time.

WHEREFORE, finding no cogent reason to disturb the judgment

of respondent Court of Appeals, the same ishereby AFFIRMED.

SO ORDERED.
[G.R. No. 11959. March 20, 1997]

MALAYAN INSURANCE CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS

and TKC MARKETING CORPORATION, respondents.

DECISION
ROMERO, J.:

Assailed in this petition for review on certiorari is the decision of the Court of Appeals in
CA-G.R. No. 43023[1] which affirmed, with slight modification, the decision of the Regional Trial
Court of Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the owner/consignee of some 3,189.171
metric tons of soya bean meal which was loaded on board the ship MV Al Kaziemah on or
about September 8, 1989 for carriage from the port of Rio del Grande, Brazil, to the port of
Manila. Said cargo was insured against the risk of loss by petitioner Malayan Insurance
Corporation for which it issued two (2) Marine Cargo Policy Nos. M/LP 97800305 amounting
to P18,986,902.45 and M/LP 97800306 amounting to P1,195,005.45, both dated September
1989.
While the vessel was docked in Durban, South Africa on September 11, 1989 enroute to
Manila, the civil authorities arrested and detained it because of a lawsuit on a question of
ownership and possession. As a result, private respondent notified petitioner on October 4,
1989 of the arrest of the vessel and made a formal claim for the amount of US$916,886.66,
representing the dollar equivalent on the policies, for non-delivery of the cargo. Private
respondent likewise sought the assistance of petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a peril covered by
the policies. Private respondent, accordingly, advised petitioner that it might tranship the cargo
and requested an extension of the insurance coverage until actual transhipment, which
extension was approved upon payment of additional premium. The insurance coverage was
extended under the same terms and conditions embodied in the original policies while in the
process of making arrangements for the transhipment of the cargo from Durban to Manila,
covering the period October 4-December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for
US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature which
could no longer stand a voyage of twenty days to Manila and another twenty days for the
discharge thereof. On January 5, 1990, private respondent forthwith reduced its claim to
US$448,806.09 (or its peso equivalent of P9,879,928.89 at the exchange rate of P22.0138 per
$1.00) representing private respondent's loss after the proceeds of the sale were deducted from
the original claim of $916,886.66 or P20,184,159.55.
Petitioner maintained its position that the arrest of the vessel by civil authorities on a
question of ownership was an excepted risk under the marine insurance policies. This
prompted private respondent to file a complaint for damages praying that aside from its claim,
it be reimbursed the amount of P128,770.88 as legal expenses and the interest it paid for the
loan it obtained to finance the shipment totalling P942,269.30. In addition, private respondent
asked for moral damages amounting to P200,000.00, exemplary damages amounting
to P200,000.00 and attorney's fees equivalent to 30% of what will be awarded by the court.
The lower court decided in favor of private respondent and required petitioner to pay, aside
from the insurance claim, consequential and liquidated damages amounting to P1,024,233.88,
exemplary damages amounting to P100,000.00, reimbursement in the amount equivalent to
10% of whatever is recovered as attorney's fees as well as the costs of the suit. On private
respondent's motion for reconsideration, petitioner was also required to further pay interest at
the rate of 12% per annum on all amounts due and owing to the private respondent by virtue
of the lower court decision counted from the inception of this case until the same is paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that with
the deletion of Clause 12 of the policies issued to private respondent, the same became
automatically covered under subsection 1.1 of Section 1 of the Institute War Clauses. The
arrests, restraints or detainments contemplated in the former clause were those effected by
political or executive acts. Losses occasioned by riot or ordinary judicial processes were not
covered therein. In other words, arrest, restraint or detainment within the meaning of Clause
12 (or F.C. & S. Clause) rules out detention by ordinary legal processes. Hence, arrests by civil
authorities, such as what happened in the instant case, is an excepted risk under Clause 12 of
the Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause 12 of
the Institute Cargo Clause and the consequent adoption or institution of the Institute War
Clauses (Cargo), the arrest and seizure by judicial processes which were excluded under the
former policy became one of the covered risks.
 The appellate court added that the failure to deliver the consigned goods in the port of
destination is a loss compensable, not only under the Institute War Clause but also under the
Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance policies, as read in relation to
Section 130 of the Insurance Code and as held in Williams v. Cole.[2]
Furthermore, the appellate court contended that since the vessel was prevented at an
intermediate port from completing the voyage due to its seizure by civil authorities, a peril
insured against, the liability of petitioner continued until the goods could have been
transhipped. But due to the perishable nature of the goods, it had to be promptly sold to
minimize loss. Accordingly, the sale of the goods being reasonable and justified, it should not
operate to discharge petitioner from its contractual liability.
Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject insurance
policies.

2. In ruling that there was constructive total loss over the cargo.

3. In ruling that petitioner was in bad faith in declining private respondent's claim.

4. In giving undue reliance to the doctrine that insurance policies are strictly construed against
the insurer.

In assigning the first error, petitioner submits the following: (a) an arrest by civil authority
is not compensable since the term "arrest" refers to "political or executive acts" and does not
include a loss caused by riot or by ordinary judicial process as in this case; (b) the deletion of
the Free from Capture or Seizure Clause would leave the assured covered solely for the perils
specified by the wording of the policy itself; (c) the rationale for the exclusion of an arrest
pursuant to judicial authorities is to eliminate collusion between unscrupulous assured and
civil authorities.
As to the second assigned error, petitioner submits that any loss which private respondent
may have incurred was in the nature and form of unrecovered acquisition value brought about
by a voluntary sacrifice sale and not by arrest, detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result of its
honest belief that the arrest of the vessel was not a compensable risk under the policies issued.
In fact, petitioner supported private respondent by accommodating the latter's request for an
extension of the insurance coverage, notwithstanding that it was then under no legal obligation
to do so.
Private respondent, on the other hand, argued that when it appealed its case to the Court
of Appeals, petitioner did not raise as an issue the award of exemplary damages. It cannot now,
for the first time, raise the same before this Court. Likewise, petitioner cannot submit for the
first time on appeal its argument that it was wrong for the Court of Appeals to have ruled the
way it did based on facts that would need inquiry into the evidence. Even if inquiry into the
facts were possible, such was not necessary because the coverage as ruled upon by the Court
of Appeals is evident from the very terms of the policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should be
strictly interpreted against it because the rule is that any ambiguity is to be taken contra
proferentum. Risk policies should be construed reasonably and in a manner as to make
effective the intentions and expectations of the parties. It added that the policies clearly
stipulate that they cover the risks of non-delivery of an entire package and that it was
petitioner itself that invited and granted the extensions and collected premiums thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause of the
subject policies in relation to the excluded risks or warranty specifically stated therein.
By way of a historical background, marine insurance developed as an all-risk coverage,
using the phrase "perils of the sea" to encompass the wide and varied range of risks that were
covered.[3]The subject policies contain the "Perils" clause which is a standard form in any
marine insurance policy. Said clause reads:

"Touching the adventures which the said MALAYAN INSURANCE CO., are content to bear, and
to take upon them in this voyage; they are of the Seas; Men-of-War, Fire, Enemies, Pirates,
Rovers, Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals, Takings of the
Sea, Arrests, Restraints and Detainments of all Kings, Princess and Peoples, of what Nation,
condition, or quality soever, Barratry of the Master and Mariners, and of all other Perils,
Losses, and Misfortunes, that have come to hurt, detriment, or damage of the said goods and
merchandise or any part thereof . AND in case of any loss or misfortune it shall be lawful to the
ASSURED, their factors, servants and assigns, to sue, labour, and travel for, in and about the
defence, safeguards, and recovery of the said goods and merchandises, and ship, & c., or any
part thereof, without prejudice to this INSURANCE; to the charges whereof the said COMPANY,
will contribute according to the rate and quantity of the sum herein INSURED. AND it is
expressly declared and agreed that no acts of the Insurer or Insured in recovering, saving, or
preserving the Property insured shall be considered as a Waiver, or Acceptance of
Abandonment. And it is agreed by the said COMPANY, that this writing or Policy of
INSURANCE shall be of as much Force and Effect as the surest Writing or Policy of
INSURANCE made in LONDON. And so the said MALAYAN INSURANCE COMPANY, INC., are
contented, and do hereby promise and bind themselves, their Heirs, Executors, Goods and
Chattel, to the ASSURED, his or their Executors, Administrators, or Assigns, for the true
Performance of the Premises; confessing themselves paid the Consideration due unto them for
this INSURANCE at and after the rate arranged." (Underscoring supplied)

The exception or limitation to the "Perils" clause and the "All other perils" clause in the
subject policies is specifically referred to as Clause 12 called the "Free from Capture & Seizure
Clause" or the F.C. & S. Clause which reads, thus:

"Warranted free of capture, seizure, arrest, restraint or detainment, and the consequences
thereof or of any attempt thereat; also from the consequences of hostilities and warlike
operations, whether there be a declaration of war or not; but this warranty shall not exclude
collision, contact with any fixed or floating object (other than a mine or torpedo), stranding,
heavy weather or fire unless caused directly (and independently of the nature of the voyage or
service which the vessel concerned or, in the case of a collision, any other vessel involved
therein is performing) by a hostile act by or against a belligerent power and for the purpose of
this warranty 'power' includes any authorities maintaining naval, military or air forces in
association with power.

Further warranted free from the consequences of civil war, revolution, insurrection, or civil
strike arising therefrom or piracy.

Should Clause 12 be deleted, the relevant current institute war clauses shall be deemed to
form part of this insurance." (Underscoring supplied)

However, the F. C. & S. Clause was deleted from the policies. Consequently, the Institute
War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of Section 1, provides:

"1. This insurance covers:

1.1 The risks excluded from the standard form of English Marine Policy by the clause
warranted free of capture, seizure, arrest, restraint or detainment, and the consequences
thereof of hostilities or warlike operations, whether there be a declaration of war or not; but
this warranty shall not exclude collision, contact with any fixed or floating object (other than a
mine or torpedo), stranding, heavy weather or fire unless caused directly (and independently of
the nature on voyage or service which the vessel concerned or, in the case of a collision any
other vessel involved therein is performing) by a hostile act by or against a belligerent power;
and for the purpose of this warranty 'power' includes any authority maintaining naval, military
or air forces in association with a power. Further warranted free from the consequences of civil
war, revolution, rebellion, insurrection, or civil strike arising therefrom, or piracy."

According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of the

Institute War Clauses (Cargo), among others, means that any "capture, arrest, detention, etc."
pertained exclusively to warlike operations if this Court strictly construes the heading of the
said Clauses. However, it also claims that the parties intended to include arrests, etc. even if it
were not the result of hostilities or warlike operations. It further claims that on the strength of
jurisprudence on the matter, the term "arrests" would only cover those arising from political or
executive acts, concluding that whether private respondent's claim is anchored on subsection
1.1 of Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of the
vessel by judicial authorities is an excluded risk.[4]
This Court cannot agree with petitioner's assertions, particularly when it alleges that in
the "Perils" Clause, it assumed the risk of arrest caused solely by executive or political acts of
the government of the seizing state and thereby excludes "arrests" caused by ordinary legal
processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses,
however, this Court agrees with the Court of Appeals and the private respondent that "arrest"
caused by ordinary judicial process is deemed included among the covered risks. This
interpretation becomes inevitable when subsection 1.1 of Section 1 of the Institute War Clauses
provided that "this insurance covers the risks excluded from the Standard Form of English
Marine Policy by the clause 'Warranted free of capture, seizure, arrest, etc. x x x'" or the F.C. &
S. Clause. Jurisprudentially, "arrests" caused by ordinary judicial process is also a risk
excluded from the Standard Form of English Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial process
is not included in the covered risk simply because the F.C. & S. Clause under the Institute War
Clauses can only be operative in case of hostilities or warlike operations on account of its
heading "Institute War Clauses." This Court agrees with the Court of Appeals when it held that
". . . Although the F.C. & S. Clause may have originally been inserted in marine policies to
protect against risks of war, (see generally G. Gilmore & C. Black, The Law of Admiralty Section
2-9, at 71-73 [2d Ed. 1975]), its interpretation in recent years to include seizure or detention
by civil authorities seems consistent with the general purposes of the clause, x x x"[5] In fact,
petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses included
"arrest" even if it were not a result of hostilities or warlike operations. [6] In this regard, since
what was also excluded in the deleted F.C. & S. Clause was "arrest" occasioned by ordinary
judicial process, logically, such "arrest" would now become a covered risk under subsection 1.1
of Section 1 of the Institute War Clauses, regardless of whether or not said "arrest" by civil
authorities occurred in a state of war.
Petitioner itself seems to be confused about the application of the F.C. & S. Clause as well
as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It stated that "the
F.C. & S. Clause was "originally incorporated in insurance policies to eliminate the risks of
warlike operations". It also averred that the F.C. & S. Clause applies even if there be no war or
warlike operations x x x"[7] In the same vein, it contended that subsection 1.1 of Section 1 of the
Institute War Clauses (Cargo) "pertained exclusively to warlike operations" and yet it also
stated that "the deletion of the F.C. & S. Clause and the consequent incorporation of
subsection 1.1 of Section 1 of the Institute War Clauses (Cargo) was to include "arrest,
etc. even if it were not a result of hostilities or warlike operations."[8]
This Court cannot help the impression that petitioner is overly straining its interpretation
of the provisions of the policy in order to avoid being liable for private respondent's claim.
This Court finds it pointless for petitioner to maintain its position that it only insures risks
of "arrest" occasioned by executive or political acts of government which is interpreted as not
referring to those caused by ordinary legal processes as contained in the "Perils" Clause;
deletes the F.C. & S. Clause which excludes risks of arrest occasioned by executive or political
acts of the government and naturally, also those caused by ordinary legal processes; and,
thereafter incorporates subsection 1.1 of Section 1 of the Institute War Clauses which now
includes in the coverage risks of arrest due to executive or political acts of a government but
then still excludes "arrests" occasioned by ordinary legal processes when subsection 1.1 of
Section 1 of said Clauses should also have included "arrests" previously excluded from the
coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and forced, as to lead to
an absurd conclusion or to render the policy nonsensical, should, by all means, be avoided.
[9]
Likewise, it must be borne in mind that such contracts are invariably prepared by the
companies and must be accepted by the insured in the form in which they are written. [10] Any
construction of a marine policy rendering it void should be avoided. [11] Such policies will,
therefore, be construed strictly against the company in order to avoid a forfeiture, unless no
other result is possible from the language used.[12]
If a marine insurance company desires to limit or restrict the operation of the general
provisions of its contract by special proviso, exception, or exemption, it should express such
limitation in clear and unmistakable language. [13] Obviously, the deletion of the F.C. & S.
Clause and the consequent incorporation of subsection 1.1 of Section 1 of the Institute War
Clauses (Cargo) gave rise to ambiguity. If the risk of arrest occasioned by ordinary judicial
process was expressly indicated as an exception in the subject policies, there would have been
no controversy with respect to the interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are construed most strongly against
the company.[14] Even an express exception in a policy is to be construed against the
underwriters by whom the policy is framed, and for whose benefit the exception is introduced.
[15]

An insurance contract should be so interpreted as to carry out the purpose for which the
parties entered into the contract which is, to insure against risks of loss or damage to the
goods. Such interpretation should result from the natural and reasonable meaning of language
in the policy.[16] Where restrictive provisions are open to two interpretations, that which is most
favorable to the insured is adopted.[17]
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.[18] 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]
In view of the foregoing, this Court sees no need to discuss the other issues presented.
WHEREFORE, the petition for review is DENIED and the decision of the Court of Appeals
is AFFIRMED.
G.R. No. 20341 September 1, 1923

DOMINGO GARCIA and THE PHILIPPINE NATIONAL BANK, plaintiffs-appellees,

vs.
THE HONGKONG FIRE & MARINE INSURANCE CO., LTD., defendant-appellant.

William and Ferrier for appellant.

Roman Lacson for the appellee Bank.
Vicente de Vera for the other appellee.

STATEMENT

After formal pleas, the plaintiff's allege that on the 19th of March, 1918, in the City of Manila,
the plaintiff, Domingo Garcia, then a merchant and owner of a bazaar known as "Las
Novedades" in the district of Legaspi, municipality and Province of Albay, entered into a
contract with the defendant whereby it insured his merchandise in the sum of P15,000 at a
premium of P300 per annum; that in consideration of such premium, the defendant issued its
fire insurance policy No. 1951 in favor of the plaintiff, not on the merchandise in the building,
but on the building which contained the merchandise; that for such reason the policy does not
contain the true agreement and intent of the parties; that the plaintiff was not the owner of,
and did not have any interest in, the building; and that the policy was so issued through error,
carelessness and negligence of the defendant.

That on august 30, 1919, Garcia executed a mortgage to the plaintiff Bank on the merchandise
insured by the defendant, and that with the consent of the defendant, the plaintiff endorsed
the policy to the Bank; that on February 6, 1920, and while the policy was in force and effect, a
fire took place which destroyed the merchandise in the building of the value of P20,000,
together with the building itself; that demand was made upon the defendant for the payment of
P15,000, as provided for in the policy, and that payment was refused. Wherefore, plaintiffs pray
judgment for that amount, with legal interest from the date of filing of the complaint, and costs.

For answer, the defendant admits the formal allegations of the complaint, and denies generally
and specifically all other allegations.

As a result of the trial, the lower court rendered judgment for the plaintiff, as prayed for in the
complaint, from which the defendant appeals and contends that the lower court erred in
denying its motion to make the complaint more definite and certain; in permitting Garcia over
its objection to testify to the contents of certain documents; in refusing to strike them from the
record; in finding that the defendant, through its agent, knew that it was the merchandise
which was insured and not the building; in failing to find the plaintiffs, and Garcia in
particular, guilty of negligence; in finding that the defendant committed error in making out the
policy to cover the building rather than the merchandise; in rendering the judgment; and in
denying defendant's motion for a new trial.

JOHNS, J.:

It appears that the policy was in the English language, of which the plaintiff Garcia is ignorant.
When he received it he noticed that the amount P15,000 was correct, and never personally
made a further investigation. He was the exclusive owner of the merchandise in the building
which, at the time of the fire, was of the probable value of P20,000. He did not own or claim
any interest in the building. Desiring to have his merchandise insured for P15,000, he wrote a
letter to "El Pilar," requesting that firm to have it insured, as a result of which, the policy in
questions was issued and delivered to him, and it was issued on the building with Garcia did
not own, and did not cover the merchandise which he did own. Desiring to obtain a loan from
the Philippine National Bank, Garcia later delivered and assigned the policy to the plaintiff
Bank as collateral security for a loan. Upon receipt of the policy, and as one of the conditions
for the making of the loan, the Bank, through its manager, addressed the following letter to the
agents of the defendant on August 6, 1919:

We beg to advise that the merchandise insured by you against fire in favor of Mr.
Domingo Garcia of Legaspi, Albay, P. I., for P15,000 for which you issued policy No.
1951, has been mortgaged to this bank together with the policy to secure a credit and
loans not to exceed P6,000 in all.
 We would appreciate very much if you have our claims against the property and policy
covering it, on account of the mortgage, entered in your records and advise us
accordingly.

Hoping to hear from you soon, we are,

Very truly yours,

This was answered by the agents August 14, 1919, as follows:

We beg to acknowledge receipt of your esteemed favor of the 6th inst., informing us that
the Hongkong Fire Insurance Company, Ltd.'s Policy in the name of Mr. Domingo
Garcia, for the sum of P15,000 has been mortgaged to your goodselves. In order that
this transaction made by officially recorded, it will be necessary to make an
endorsement upon the original policy, and we shall be glad, therefore, if you will return
this document to us as soon as convenient.

We are, Dear Sirs,

Yours faithfully.

August 18, 1919, the Bank wrote the following letter to the agents:

Complying with your request of the 13th ultimo, we beg to inclose herewith policy No.
1951 in favor of Mr. Domingo Garcia, Legaspi, Albay, for P15,000, which has been
mortgaged to this Bank to secure a credit and loan of not exceed P6,000 in all, for your
proper indorsement.

Trusting to have your prompt action in this matter, we are,

Very respectfully yours.

September 1, 1919, the agents wrote the Bank as follows:

We beg to acknowledge receipt of your favour of the 18th ultimo, enclosing Hongkong
Fire Insurance Fire Insurance Co., Ltd.'s Policy No. 1951, in the name of Mr. Domingo
Garcia, and in accordance with your request have endorsed same in your favour, and
beg to return the document herewith. Please be good enough to acknowledge safe
receipt in due course and oblige.

Yours faithfully.

It clearly appears that where the word "merchandise" was written in the letter of August 6th
above quoted, some other word had been previously written and erased, and the word
"merchandise" was the written, as it now appears.

It is contended that when the letter was written, the Bank, which then had the possession of
the policy, knew that it covered the building and did not insure the merchandise. That, having
such knowledge, it was the duty of the Bank to notify the defendant, and having failed to do so,
it cannot now contend that the policy was issued through a mistake. The fact remains that the
defendant, through its agents, received this letter, and that it recites:

We beg to advise that the merchandise insured by you against fire in favor of Mr.
Domingo Garcia, etc.

That was a personal notice to the defendant of the fact that the policy was on the merchandise.
It is pointed out that the Bank and not the defendant then had the policy, and, for such
reason, the Bank did not have notice of the error. Although the policy was in possession of the
Bank, the defendant had among its own records all of the data and information upon which the
policy was issued, and, as a matter of fact, its agents knew or should have known the kind of
property insured.

It is possible that when the Bank wrote the letter, it knew of the error in the issuance of the
policy. But that is a matter of inference or conjecture only. Outside of the appearance of the
letter itself, there is no evidence that the Bank had any acknowledge of the error.

Garcia had his dealings with the officials of the branch Bank at Legaspi where he was doing
business as a merchant, of which the officials of that Bank had knowledge. Under such facts,
the presumption of knowledge, if any, on the part of the Bank would be that the policy was on
the merchandise. Be that as it may, when the defendant received the letter from the Bank, it
knew from its own records that the policy was issued on the building, and, as a matter of fair
dealing, it should have notified the Bank that the policy was on the building. It will be noted
that the letters in question were all written several months before the fire.

In the final analysis, Garcia wanted insurance upon a stock of goods, which he owned, and he
received and paid for a policy on a building, which he did not own, and while the policy was in
force and effect, both the building, which he did not own, and the stock of merchandise, which
he did own, were completely destroyed by fire. Garcia was a well known merchant, and his
merchandise was in the building described in the policy.

For some unknown reason, the party who applied for the insurance at the instance and request
of Garcia was not called as a witness, and, as stated, that answer of the defendant is confined
to general denial, and it did not offer any evidence.

In a well-written opinion, the trial court analyzed the evidence and made findings of fact upon
which it rendered judgment for the plaintiff. It is claimed that the letters and the copy of the
telegram introduced in evidence were hearsay and not competent. If for no other purpose, they
were competent to show that Garcia wanted insurance on his merchandise and the reason why
he wanted it.

The defense is purely technical, and is founded upon the contention that plaintiff cannot
recover, because the policy covers loss on a building, and does not cover loss of merchandise.

It is very apparent that a mistake was made in the issuance of the policy.

In its opinion the trial court says:

Under these circumstances it seems clear and manifest that the insured, as well as the
manager of the National Bank at Legaspi, who was interested in the policy, because the
same secured a loan of P6,000 made to Domingo Garcia, and the corporation of Wise &
Co., Ltd., which represented the insurance company, have been in the belief that it was
not the building but the merchandise that was insured, for the reason that none of
them paid attention to the context of the policy.

The opinion of the trial court further points out that, under the pleadings and proof, there is
ground for the contention that the plaintiff would be entitled to recover on the policy for the
loss of the building.

All things considered, the judgment of the lower court is affirmed, with costs. So ordered.
G.R. No. L-36413 September 26, 1988

MALAYAN INSURANCE CO., INC., petitioner,

vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO CHOY, SAN
LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO., INC., respondents.

Freqillana Jr. for petitioner.

B.F. Estrella & Associates for respondent Martin Vallejos.

Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.

Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

PADILLA, J.:

Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-
R, dated 22 February 1973, which affirmed, with some modifications, the decision, ** dated 27
April 1970, rendered in Civil Case No. U-2021 of the Court of First Instance of Pangasinan.

The antecedent facts of the case are as follows:

On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of private
respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753, effective from 18
April 1967 to 18 April 1968, covering a Willys jeep with Motor No. ET-03023 Serial No. 351672,
and Plate No. J-21536, Quezon City, 1967. The insurance coverage was for "own damage" not
to exceed P600.00 and "third-party liability" in the amount of P20,000.00.

During the effectivity of said insurance policy, and more particularly on 19 December 1967, at
about 3:30 o'clock in the afternoon, the insured jeep, while being driven by one Juan P.
Campollo an employee of the respondent San Leon Rice Mill, Inc., collided with a passenger
bus belonging to the respondent Pangasinan Transportation Co., Inc. (PANTRANCO, for short)
at the national highway in Barrio San Pedro, Rosales, Pangasinan, causing damage to the
insured vehicle and injuries to the driver, Juan P. Campollo, and the respondent Martin C.
Vallejos, who was riding in the ill-fated jeep.

As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan Insurance
Co., Inc. and the PANTRANCO before the Court of First Instance of Pangasinan, which was
docketed as Civil Case No. U-2021. He prayed therein that the defendants be ordered to pay
him, jointly and severally, the amount of P15,000.00, as reimbursement for medical and
hospital expenses; P6,000.00, for lost income; P51,000.00 as actual, moral and compensatory
damages; and P5,000.00, for attorney's fees.

Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an excessive
speed and bumped the PANTRANCO bus which had moved to, and stopped at, the shoulder of
the highway in order to avoid the jeep; and that it had observed the diligence of a good father of
a family to prevent damage, especially in the selection and supervision of its employees and in
the maintenance of its motor vehicles. It prayed that it be absolved from any and all liability.

Defendant Sio Choy and the petitioner insurance company, in their answer, also denied
liability to the plaintiff, claiming that the fault in the accident was solely imputable to the
PANTRANCO.

Sio Choy, however, later filed a separate answer with a cross-claim against the herein
petitioner wherein he alleged that he had actually paid the plaintiff, Martin C. Vallejos, the
amount of P5,000.00 for hospitalization and other expenses, and, in his cross-claim against
the herein petitioner, he alleged that the petitioner had issued in his favor a private car
comprehensive policy wherein the insurance company obligated itself to indemnify Sio Choy, as
insured, for the damage to his motor vehicle, as well as for any liability to third persons arising
out of any accident during the effectivity of such insurance contract, which policy was in full
force and effect when the vehicular accident complained of occurred. He prayed that he be
reimbursed by the insurance company for the amount that he may be ordered to pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party complaint
against the San Leon Rice Mill, Inc. for the reason that the person driving the jeep of Sio Choy,
at the time of the accident, was an employee of the San Leon Rice Mill, Inc. performing his
duties within the scope of his assigned task, and not an employee of Sio Choy; and that, as the
San Leon Rice Mill, Inc. is the employer of the deceased driver, Juan P. Campollo, it should be
liable for the acts of its employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner
prayed that judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the
amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to reimburse
and indemnify the petitioner for any sum that it may be ordered to pay the plaintiff.

After trial, judgment was rendered as follows:

WHEREFORE, in view of the foregoing findings of this Court judgment is hereby

rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance
Co., Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:

(a) P4,103 as actual damages;

(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos

for the period of three (3) years;

(c) P5,000.00 as moral damages;

(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.

The above-named parties against whom this judgment is rendered are hereby
held jointly and severally liable. With respect, however, to Malayan Insurance
Co., Inc., its liability will be up to only P20,000.00.

As no satisfactory proof of cost of damage to its bus was presented by defendant

Pantranco, no award should be made in its favor. Its counter-claim for attorney's
fees is also dismissed for not being proved. 1

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court that Sio
Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are jointly and severally
liable for the damages awarded to the plaintiff Martin C. Vallejos. It ruled, however, that the
San Leon Rice Mill, Inc. has no obligation to indemnify or reimburse the petitioner insurance
company for whatever amount it has been ordered to pay on its policy, since the San Leon Rice
Mill, Inc. is not a privy to the contract of insurance between Sio Choy and the insurance
company. 2

Hence, the present recourse by petitioner insurance company.

The petitioner prays for the reversal of the appellate court's judgment, or, in the alternative, to
order the San Leon Rice Mill, Inc. to reimburse petitioner any amount, in excess of one-half
(1/2) of the entire amount of damages, petitioner may be ordered to pay jointly and severally
with Sio Choy.

The Court, acting upon the petition, gave due course to the same, but "only insofar as it
concerns the alleged liability of respondent San Leon Rice Mill, Inc. to petitioner, it being
understood that no other aspect of the decision of the Court of Appeals shall be reviewed,
hence, execution may already issue in favor of respondent Martin C. Vallejos against the
respondents, without prejudice to the determination of whether or not petitioner shall be
entitled to reimbursement by respondent San Leon Rice Mill, Inc. for the whole or part of
whatever the former may pay on the P20,000.00 it has been adjudged to pay respondent
Vallejos." 3

However, in order to determine the alleged liability of respondent San Leon Rice Mill, Inc. to
petitioner, it is important to determine first the nature or basis of the liability of petitioner to
respondent Vallejos, as compared to that of respondents Sio Choy and San Leon Rice Mill, Inc.

Therefore, the two (2) principal issues to be resolved are (1) whether the trial court, as upheld
by the Court of Appeals, was correct in holding petitioner and respondents Sio Choy and San
Leon Rice Mill, Inc. "solidarily liable" to respondent Vallejos; and (2) whether petitioner is
entitled to be reimbursed by respondent San Leon Rice Mill, Inc. for whatever amount
petitioner has been adjudged to pay respondent Vallejos on its insurance policy.

As to the first issue, it is noted that the trial court found, as affirmed by the appellate court,
that petitioner and respondents Sio Choy and San Leon Rice Mill, Inc. are jointly and severally
liable to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only respondents Sio Choy
and San Leon Rice Mill, Inc, (to the exclusion of the petitioner) that are solidarily liable to
respondent Vallejos for the damages awarded to Vallejos.

It must be observed that respondent Sio Choy is made liable to said plaintiff as owner of the ill-
fated Willys jeep, pursuant to Article 2184 of the Civil Code which provides:

Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his
driver, if the former, who was in the vehicle, could have, by the use of due
diligence, prevented the misfortune it is disputably presumed that a driver was
negligent, if he had been found guilty of reckless driving or violating traffic
regulations at least twice within the next preceding two months.

If the owner was not in the motor vehicle, the provisions of article 2180 are
applicable.

On the other hand, it is noted that the basis of liability of respondent San Leon Rice Mill, Inc.
to plaintiff Vallejos, the former being the employer of the driver of the Willys jeep at the time of
the motor vehicle mishap, is Article 2180 of the Civil Code which reads:

Art. 2180. The obligation imposed by article 2176 is demandable not only for
one's own acts or omissions, but also for those of persons for whom one is
responsible.

xxx xxx xxx

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 ill any business or industry.

xxx xxx xxx

The responsibility treated in this article shall cease when the persons herein
mentioned proved that they observed all the diligence of a good father of a family
to prevent damage.

It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the principal
tortfeasors who are primarily liable to respondent Vallejos. The law states that the
responsibility of two or more persons who are liable for a quasi-delict is solidarily.4

On the other hand, the basis of petitioner's liability is its insurance contract with respondent
Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the amount of not more than
P20,000.00, this is on account of its being the insurer of respondent Sio Choy under the third
party liability clause included in the private car comprehensive policy existing between
petitioner and respondent Sio Choy at the time of the complained vehicular accident.

In Guingon vs. Del Monte, 5 a passenger of a jeepney had just alighted therefrom, when he was
bumped by another passenger jeepney. He died as a result thereof. In the damage suit filed by
the heirs of said passenger against the driver and owner of the jeepney at fault as well as
against the insurance company which insured the latter jeepney against third party liability,
the trial court, affirmed by this Court, adjudged the owner and the driver of the jeepney at fault
jointly and severally liable to the heirs of the victim in the total amount of P9,572.95 as
damages and attorney's fees; while the insurance company was sentenced to pay the heirs the
amount of P5,500.00 which was to be applied as partial satisfaction of the judgment rendered
against said owner and driver of the jeepney. Thus, in said Guingon case, it was only the owner
and the driver of the jeepney at fault, not including the insurance company, who were held
solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against liability to
third persons, such third persons can directly sue the insurer, 6 however, the direct liability of
the insurer under indemnity contracts against third party liability does not mean that the
insurer can be held solidarily liable with the insured and/or the other parties found at fault.
The liability of the insurer is based on contract; that of the insured is based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos, but it
cannot, as incorrectly held by the trial court, be made "solidarily" liable with the two principal
tortfeasors namely respondents Sio Choy and San Leon Rice Mill, Inc. For if petitioner-insurer
were solidarily liable with said two (2) respondents by reason of the indemnity contract against
third party liability-under which an insurer can be directly sued by a third party — this will
result in a violation of the principles underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of the solidary
debtors. 7 On the other hand, insurance is defined as "a contract whereby one undertakes for a
consideration to indemnify another against loss, damage, or liability arising from an unknown
or contingent event." 8

In the case at bar, the trial court held petitioner together with respondents Sio Choy and San
Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total amount of P29,103.00,
with the qualification that petitioner's liability is only up to P20,000.00. In the context of a
solidary obligation, petitioner may be compelled by respondent Vallejos to pay
the entire obligation of P29,013.00, notwithstanding the qualification made by the trial court.
But, how can petitioner be obliged to pay the entire obligation when the amount stated in its
insurance policy with respondent Sio Choy for indemnity against third party liability is only
P20,000.00? Moreover, the qualification made in the decision of the trial court to the effect that
petitioner is sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is
made solidary, is an evident breach of the concept of a solidary obligation. Thus, We hold that
the trial court, as upheld by the Court of Appeals, erred in holding petitioner, solidarily liable
with respondents Sio Choy and San Leon Rice Mill, Inc. to respondent Vallejos.

As to the second issue, the Court of Appeals, in affirming the decision of the trial court, ruled
that petitioner is not entitled to be reimbursed by respondent San Leon Rice Mill, Inc. on the
ground that said respondent is not privy to the contract of insurance existing between
petitioner and respondent Sio Choy. We disagree.

The appellate court overlooked the principle of subrogation in insurance contracts. Thus —

... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs.
Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is
entitled to be subrogated pro tanto to any right of action which the insured may
have against the third person whose negligence or wrongful act caused the loss
(44 Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan
Assurance Co., 283 U.S. 284, 75 L. ed. 1037).

The right of subrogation is of the highest equity. The loss in the first instance is
that of the insured but after reimbursement or compensation, it becomes the
loss of the insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati
Ins. Co., 22 Ohio St. 382).

Although many policies including policies in the standard form, now provide for
subrogation, and thus determine the rights of the insurer in this respect, the
equitable right of subrogation as the legal effect of payment inures to the insurer
without any formal assignment or any express stipulation to that effect in the
policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company
pays for the loss, such payment operates as an equitable assignment to the
insurer of the property and all remedies which the insured may have for the
recovery thereof. That right is not dependent upon , nor does it grow out of any
privity of contract (emphasis supplied) or upon written assignment of claim, and
payment to the insured makes the insurer assignee in equity (Shambley v. Jobe-
Blackley Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18). 9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of riot
exceeding P20,000.00, shall become the subrogee of the insured, the respondent Sio Choy; as
such, it is subrogated to whatever rights the latter has against respondent San Leon Rice Mill,
Inc. Article 1217 of the Civil Code gives to a solidary debtor who has paid the entire obligation
the right to be reimbursed by his co-debtors for the share which corresponds to each.

Art. 1217. Payment made by one of the solidary debtors extinguishes the
obligation. If two or more solidary debtors offer to pay, the creditor may choose
which offer to accept.

He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period
may be demanded.

xxx xxx xxx

In accordance with Article 1217, petitioner, upon payment to respondent Vallejos and thereby
becoming the subrogee of solidary debtor Sio Choy, is entitled to reimbursement from
respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice Mill, Inc. are
solidarily liable to the respondent Martin C. Vallejos for the amount of P29,103.00. Vallejos
may enforce the entire obligation on only one of said solidary debtors. If Sio Choy as solidary
debtor is made to pay for the entire obligation (P29,103.00) and petitioner, as insurer of Sio
Choy, is compelled to pay P20,000.00 of said entire obligation, petitioner would be entitled, as
subrogee of Sio Choy as against San Leon Rice Mills, Inc., to be reimbursed by the latter in the
amount of P14,551.50 (which is 1/2 of P29,103.00 )

WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by the
Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned. Without
pronouncement as to costs.

SO ORDERED.
G.R. No. L-22375 July 18, 1975

THE CAPITAL INSURANCE & SURETY CO., INC., petitioner,

vs.
PLASTIC ERA CO., INC., AND COURT OF APPEALS, respondents.

Salcedo, Del Rosario, Bito, Misa and Lozada for petitioner.

K.V. Faylona for Private respondent.

MARTIN, J.:

Petition for review of a decision of the Court of Appeals affirming the decision of the Court of
First Instance of Manila in Civil Case No. 47934 entitled "Plastic Era Manufacturing Co., Inc.
versus The Capital Insurance and Surety Co., Inc."

On December 17, 1960, petitioner Capital Insurance & Surety Co., Inc. (hereinafter referred to
as Capital Insurance) delivered to the respondent Plastic Era Manufacturing Co., Inc.,
(hereinafter referred to as Plastic Era) its open Fire Policy No. 22760 1 wherein the former
undertook to insure the latter's building, equipments, raw materials, products and accessories
located at Sheridan Street, Mandaluyong, Rizal. The policy expressly provides that if the
property insured would be destroyed or damaged by fire after the payment of the premiums, at
anytime between the 15th day of December 1960 and one o'clock in the afternoon of the 15th
day of December 1961, the insurance company shall make good all such loss or damage in an
amount not exceeding P100,000.00. When the policy was delivered, Plastic Era failed to pay the
corresponding insurance premium. However, through its duly authorized representative, it
executed the following acknowledgment receipt:

This acknowledged receipt of Fire Policy) NO. 22760 Premium

x x x x x) (I promise to pay)
(P2,220.00) (has been paid)
THIRTY DAYS AFTER on effective date ---------------------
(Date)

On January 8, 1961, in partial payment of the insurance premium, Plastic Era delivered to
Capital Insurance, a check2 for the amount of P1,000.00 postdated January 16, 1961 payable
to the order of the latter and drawn against the Bank of America. However, Capital Insurance
tried to deposit the check only on February 20, 1961 and the same was dishonored by the
bank for lack of funds. The records show that as of January 19, 1961 Plastic Era had a balance
of P1,193.41 with the Bank of America.

On January 18, 1961 or two days after the insurance premium became due, at about 4:00 to
5:00 o'clock in the morning, the property insured by Plastic Era was destroyed by fire. In due
time, the latter notified Capital Insurance of the loss of the insured property by fire 3 and
accordingly filed its claim for indemnity thru the Manila Adjustment Company. 4 The loss
and/or damage suffered by Plastic Era was estimated by the Manila Adjustment Company to
be P283,875. However, according to the records the same property has been insured by Plastic
Era with the Philamgen Insurance Company for P200,000.00.

In less than a month Plastic Era demanded from Capital Insurance the payment of the sum of
P100,000.00 as indemnity for the loss of the insured property under Policy No. 22760 but the
latter refused for the reason that, among others, Plastic Era failed to pay the insurance
premium.

On August 25, 1961, Plastic Era filed its complaint against Capital Insurance for the recovery
of the sum of P100,000.00 plus P25,000.00 for attorney's fees and P20,000.00 for additional
expenses. Capital Insurance filed a counterclaim of P25,000.00 as and for attorney's fees.

On November 15, 1961, the trial court rendered judgment, the dispositive portion of which
reads as follows:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the

defendant for the sum of P88,325.63 with interest at the legal rate from the
filing of the complaint and to pay the costs.
From said decision, Capital Insurance appealed to the Court of Appeals.

On December 5, 1963, the Court of Appeals rendered its decision affirming that of the trial
court. Hence, this petition for review by certiorari to this Court.

Assailing the decision of the Court of Appeals petitioner assigns the following errors, to wit:

1. THE COURT OF APPEALS ERRED IN SENTENCING PETITIONER TO PAY

PLASTIC ERA THE SUM OF P88,325.63 PLUS INTEREST, AND COST OF SUIT,
ALTHOUGH PLASTIC ERA NEVER PAID PETITIONER THE INSURANCE
PREMIUM OF P2,220.88.

2. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER SHOULD

HAVE INSTITUTED AN ACTION FOR RESCISSION OF THE INSURANCE
CONTRACT ENTERED INTO BETWEEN IT AND PLASTIC ERA BEFORE
PETITIONER COULD BE RELIEVED OF RESPONSIBILITY UNDER ITS FIRE
INSURANCE POLICY.

3. WE HAVE SHOWN ABOVE THAT PLASTIC ERA'S ACTION WAS

UNWARRANTED AND THAT THE PETITIONER SHOULD HAVE BEEN
ABSOLVED FROM THE COMPLAINT, AND CONSEQUENTLY, THE LOWER
COURT SHOULD HAVE AWARDED PETITIONER A REASONABLE SUM AND AS
ATTORNEY'S FEES P25,000.00.

The pivotal issue in this petition is whether or not a contract of insurance has been duly
perfected between the petitioner, Capital Insurance, and respondent Plastic Era. Necessarily,
the issue calls for a correct interpretation of the insurance policy which states:

This Policy of Insurance Witnesseth That in consideration of PLASTIC ERA

MANUFACTURING COMPANY, INC. hereinafter called the Insured, paying to the
Capital Insurance & Surety Co., Inc., hereinafter called the Company, the sum
of PESOS TWO THOUSAND ONE HUNDRED EIGHTY EIGHT the premium for
the first period hereinafter mentioned, for insuring against Loss or Damage by
only Fire or Lightning, as hereinafter appears, the Property hereinafter described
and contained, or described herein and not elsewhere, in the several sums
following namely: PESOS ONE HUNDRED THOUSAND ONLY, PHILIPPINE
CURRENCY; ... THE COMPANY HEREBY AGREES with the Insured but subject
to the terms and conditions endorsed or otherwise expressed hereon, which are
to be taken as part of this Policy), that if the Property described, or any part
thereof, shall be destroyed or damaged by Fire or Lightning after payment of the
Premiums, at anytime between the 15th day of December One Thousand Nine
Hundred and Sixty and 1 'clock in the afternoon of the 15th day of December
One Thousand Nine Hundred and Sixty-One of the last day of any subsequent
period in respect of which the insured, or a successor in interest to whom the
insurance is by an endorsement hereon declared to be or is otherwise continued,
shall pay to the Company and the Company shall accept the sum required for
the renewal of this Policy, the Company will pay or make good all such loss or
Damage, to an amount not exceeding during any one period of the insurance in
respect of the several matters specified, the sum; set opposite thereto
respectively, and not exceeding the whole sum of PESOS, ONE HUNDRED
THOUSAND ONLY, PHIL. CUR....

In clear and unequivocal terms the insurance policy provides that it is only upon payment of
the premiums by Plastic Era that Capital Insurance agrees to insure the properties of the
former against loss or damage in an amount not exceeding P100,000.00.

The crux of the problem then is whether at the time the insurance policy was delivered to
Plastic Era on December 17, 1960, the latter was able to pay the stipulated premium. It
appears on record that on the day the insurance policy was delivered, Plastic Era did not pay
the Capital Insurance, but instead executed an acknowledgment receipt of Policy No. 22760. In
said receipt Plastic Era promised to pay the premium within thirty (30) days from the effectivity
date of the policy on December 17, 1960 and Capital Insurance accepted it. What then is the
effect of accepting such acknowledgment receipt from the Plastic Era? Did the Capital
Insurance mean to agree to make good its undertaking under the policy if the premium could
be paid on or before January 16, 1961? And what would be the effect of the delivery to Capital
Insurance on January 8, 1961 of a postdated check (January 16, 1961) in the amount of
P1,000.00, payable to the order of the latter? Could not this have been considered a valid
payment of the insurance premium? Pursuant to Article 1249 of the New Civil Code:

xxx xxx xxx

 The delivery of promissory notes payable to order, or bills of exchange or other
mercantile documents shall produce the effect of payment only when they have
been cashed, or when through the fault of the creditor they have been impaired.

xxx xxx xxx

In the meantime, the action derived from the original obligation shall be held in
abeyance.

Under this provision the mere delivery of a bill of exchange in payment of a debt does not
immediately effect payment. It simply suspends the action arising from the original obligation
in satisfaction of which it was delivered, until payment is accomplished either actually or
presumptively.5 Tender of draft or check in order to effect payment that would extinguish the
debtor's liability should be actually cashed.6 If the delivery of the check of Plastic Era to Capital
Insurance were to be viewed in the light of the foregoing, no payment of the premium had been
effected, for it is only when the check is cashed that it is said to effect payment.

Significantly, in the case before Us the Capital Insurance accepted the promise of Plastic Era to
pay the insurance premium within thirty (30) days from the effective date of policy. By so
doing, it has implicitly agreed to modify the tenor of the insurance policy and in effect, waived
the provision therein that it would only pay for the loss or damage in case the same occurs
after the payment of the premium. Considering that the insurance policy is silent as to the
mode of payment, Capital Insurance is deemed to have accepted the promissory note in
payment of the premium. This rendered the policy immediately operative on the date it was
delivered. The view taken in most cases in the United States:

... is that although one of conditions of an insurance policy is that "it shall not
be valid or binding until the first premium is paid", if it is silent as to the mode
of payment, promissory notes received by the company must be deemed to have
been accepted in payment of the premium. In other words, a requirement for the
payment of the first or initial premium in advance or actual cash may be waived
by acceptance of a promissory note ...7

Precisely, this was what actually happened when the Capital Insurance accepted the
acknowledgment receipt of the Plastic Era promising to pay the insurance premium within
thirty (30) days from December 17, 1960. Hence, when the damage or loss of the insured
property occurred, the insurance policy was in full force and effect. The fact that the check
issued by Plastic Era in partial payment of the promissory note was later on dishonored did not
in any way operate as a forfeiture of its rights under the policy, there being no express
stipulation therein to that effect.

In the absence of express agreement or stipulation to that effect in the policy,

the non-payment at maturity of a note given for and accepted as premium on a
policy does not operate to forfeit the rights of the insured even though the note
is given for an initial premium, nor does the fact that the collection of the note
had been enjoined by the insured in any way affect the policy.8

... If the check is accepted as payment of the premium even though it turns out
to be worthless, there is payment which will prevent forfeiture. 9

By accepting its promise to pay the insurance premium within thirty (30) days from the
effectivity date of the policy — December 17, 1960 Capital Insurance had in effect extended
credit to Plastic Era. The payment of the premium on the insurance policy therefore became an
independent obligation the non-fulfillment of which would entitle Capital Insurance to recover.
It could just deduct the premium due and unpaid upon the satisfaction of the loss under the
policy. 10 It did not have the right to cancel the policy for nonpayment of the premium except by
putting Plastic Era in default and giving it personal notice to that effect. This Capital Insurance
failed to do.

... Where credit is given by an insurance company for the payment of the
premium it has no right to cancel the policy for nonpayment except by putting
the insured in default and giving him personal notice.... 11

On the contrary Capital Insurance had accepted a check for P1,000.00 from Plastic Era in
partial payment of the premium on the insurance policy. Although the check was due for
payment on January 16, 1961 and Plastic Era had sufficient funds to cover it as of January
19, 1961, Capital Insurance decided to hold the same for thirty-five (35) days before presenting
it for payment. Having held the check for such an unreasonable period of time, Capital
Insurance was estopped from claiming a forfeiture of its policy for non-payment even if the
check had been dishonored later.1äwphï1.ñët
 Where the check is held for an unreasonable time before presenting it for
payment, the insurer may be held estopped from claiming a forfeiture if the
check is dishonored. 12

Finally, it is submitted by petitioner that:

We are here concerned with a case of reciprocal obligations, and respondent

having failed to comply with its obligation to pay the insurance premium due on
the policy within thirty days from December 17, 1960, petitioner was relieved of
its obligation to pay anything under the policy, without the necessity of first
instituting an action for rescission of the contract of insurance entered into by
the parties.

But precisely in this case, Plastic Era has complied with its obligation to pay the insurance
premium and therefore Capital Insurance is obliged to make good its undertaking to Plastic
Era.

WHEREFORE, finding no reversible error in the decision appealed from, We hereby affirm the
same in toto. Costs against the petitioner.

SO ORDERED.
JOSE MARQUES and MAXILITE G.R. No. 171379
TECHNOLOGIES, INC.,
Petitioners,

- versus -
FAR EAST BANK AND TRUST COMPANY,
FAR EAST BANK INSURANCE BROKERS,
INC., and MAKATI INSURANCE COMPANY,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

FAR EAST BANK AND TRUST COMPANY G.R. No. 171419

and MAKATI INSURANCE COMPANY,
Petitioners, Present:

CARPIO, J., Chairperson,

- versus - BRION,*

PERALTA,

ABAD, and

MENDOZA, JJ.

JOSE MARQUES and MAXILITE Promulgated:

TECHNOLOGIES, INC.,
Respondents. January 10, 2011
x-----------------------------------------------------------------------------------------x

DECISION

CARPIO, J.:

The Case

These consolidated petitions for review1 assail the 31 May 2005 Decision2 and the 26 January
2006 Resolution3 of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105. The Court of
Appeals affirmed with modifications the 4 September 1998 Decision 4 of the Regional Trial Court
of Cebu City, Branch 58, in Civil Case No. CEB-18979.

The Facts

Maxilite Technologies, Inc. (Maxilite) is a domestic corporation engaged in the importation and
trading of equipment for energy-efficiency systems. Jose N. Marques (Marques) is the President
and controlling stockholder of Maxilite.
Far East Bank and Trust Co. (FEBTC)5 is a local bank which handled the financing and related
requirements of Marques and Maxilite. Marques and Maxilite maintained accounts with
FEBTC. Accordingly, FEBTC financed Maxilites capital and operational requirements through
loans secured with properties of Marques under the latters name. Among Maxilites and
Marques transactions with FEBTC were:

a. A straight loan in the name of Jose N. Marques for Maxilite at the

original principal amount of P1 million. This is secured by real estate
mortgage. From said original principal amount, the bank increased it
by P300,000.00 about 26 October 1994 to enable the wiping out of
Maxilites Trust Receipts Account and simplify the remaining accounts
into straight loan accounts.

b. A straight loan in the name of Maxilite Technologies, Inc. for a

principal amount of P2 million. This is secured with a Real Estate
Mortgage of Marques residential property.

c. Master Card transactions covering two (2) Master Card Accounts of

Marques, and

d. Local credit card transactions covering one credit card account of

Marques.6

Far East Bank Insurance Brokers, Inc. (FEBIBI) is a local insurance brokerage corporation
while Makati Insurance Company7 is a local insurance company. Both companies are
subsidiaries of FEBTC.8

On 17 June 1993, Maxilite and Marques entered into a trust receipt transaction with FEBTC,
in the sum of US$80,765.00, for the shipment of various high-technology equipment from the
United States,9 with the merchandise serving as collateral. The foregoing importation was
covered by a trust receipt document signed by Marques on behalf of Maxilite, which pertinently
reads:

The undersigned (Marques) further agree(s) to keep said merchandise insured against
fire to its full value, payable to the said bank, at the cost and expense of the
undersigned, who hereby further agree(s) to pay all charges for storage on said
merchandise or any or other expenses incurred thereon.

x x x x10

Sometime in August 1993, FEBIBI, upon the advice of FEBTC, facilitated the procurement and
processing from Makati Insurance Company of four separate and independent fire insurance
policies over the trust receipted merchandise: (1) Policy No. BR-F-1016333, issued on 15
September 1993, covering the period 12 August 1993 to 12 November 1993 in the amount
of P1,000,000.00;11 (2) Policy No. BR-F-1016888, issued on 15 September 1993 covering the
period 8 September 1993 to 8 December 1993 in the amount of P605,494.28;12 (3) Policy No.
BR-F-1016930, issued on 18 October 1993, covering the period 14 October 1993 to 12 January
1994 in the amount of P527,723.66;13 and (4) Policy No. BR-F-1018392, issued on 14
December 1993, covering the period 1 December 1993 to 1 March 1994 in the amount
of P725,000.00.14 Maxilite paid the premiums for these policies through debit arrangement.
FEBTC would debit Maxilites account for the premium payments, as reflected in statements of
accounts sent by FEBTC to Maxilite.

On 19 August 1994, Insurance Policy No. 1024439, covering the period 24 June 1994 to 24
June 1995, was released to cover the trust receipted merchandise. The policy relevantly
provides:
 2. This policy including any renewal thereof and/or any endorsement
thereon is not in force until the premium has been fully paid to and duly
receipted by the Company in the manner provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent,

broker or Company official, shall be deemed invalid and of no effect. 15

Finding that Maxilite failed to pay the insurance premium in the sum of P8,265.60 for
Insurance Policy No. 1024439 covering the period 24 June 1994 to 24 June 1995, FEBIBI sent
written reminders to FEBTC, dated 19 October 1994,16 24 January 1995,17 and 6 March 1995,
to debit Maxilites account.18

On 24 and 26 October 1994, Maxilite fully settled its trust receipt account.

On 9 March 1995, a fire gutted the Aboitiz Sea Transport Building along M.J. Cuenco Avenue,
Cebu City, where Maxilites office and warehouse were located. As a result, Maxilite suffered
losses amounting to at least P2.1 million, which Maxilite claimed against the fire insurance
policy with Makati Insurance Company. Makati Insurance Company denied the fire loss claim
on the ground of non-payment of premium. FEBTC and FEBIBI disclaimed any responsibility
for the denial of the claim.

Maxilite and Marques sued FEBTC, FEBIBI, and Makati Insurance Company. Maxilite prayed
for (1) actual damages totaling P2.3 million representing full insurance coverage and business
opportunity losses, (2) moral damages, and (3) exemplary damages.19 On the other hand,
Marques sought payment of actual, moral and exemplary damages, attorneys fees, and
litigation expenses. Maxilite and Marques also sought the issuance of a preliminary injunction
or a temporary restraining to enjoin FEBTC from (1) imposing penalties on their obligations; (2)
foreclosing the real estate mortage securing their straight loan accounts; and (3) initiating
actions to collect their obligations.

FEBTC, FEBIBI, and Makati Insurance Company countered that Maxilite and Marques have no
cause of action against them and essentially denied the allegations in the complaint.

The Ruling of the Trial Court

In ruling in favor of Maxilite and Marques, the Regional Trial Court of Cebu City, Branch 58,
explained:

Considering the interest of the defendant FEBTC in the property insured, hence, its
concern that the insurance policy therefor has to be effected and enforceable, and
considering that the payment of the premium thereof was the procedure adopted by
debiting the plaintiffs account, the Court is of the view that the non-payment of the
premium of the insurance policy in question was due to the fault or negligence of the
defendant FEBTC. What could have happened to the interest of the defendant FEBTC in
the insurance policy in question had the fire occurred prior to the full settlement and
payment of plaintiffs Maxilite trust receipt account? Would defendant FEBTC have
tossed the blame on the non-payment of premium to the plaintiffs?
 Although there were reminders by defendant FEBIBI of the non-payment of the
premium, the same were made by said defendant through the defendant FEBTC and
not to the plaintiffs directly. Despite said reminders, the first of which was made on
October 19, 1994 when plaintiff Maxilite has sufficient fund in its trust receipt account,
defendant FEBTC did not heed the same and more so did it not care to pay the
premium after the plaintiff Maxilite fully and finally settled its trust receipt account with
defendant FEBTC as the latter has already lost its interest in the insurance policy in
question by virtue of said full payment. But despite the non-payment of the insurance
premium, the defendant Makati Insurance did not cancel the policy in question nor
informed plaintiffs of its cancellation if the insurance premium should not be paid. Just
as defendant FEBIBI failed to notify directly the plaintiffs of the said non-payment.
Considering the relationship of the three (3) defendants herein, as undeniably sister
companies, the non-payment of the premium of the insurance policy in question should
be imputable to their fault or negligence. Under the factual milieu in the case at bar,
the Court finds it just and equitable to hold said defendants liable to pay all the
consequent damages suffered by the plaintiffs and their liability is solidary (Art. 2194,
Civil Code).20

The trial court disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered ordering the

defendants to pay jointly and severally to the plaintiff Maxilite the sum of Two Million
One Hundred Thousand Pesos (P2,100,000.00), Philippine Currency, representing the
full coverage of Insurance Policy No. 1024439 (Exh. A), as actual damages, plus interest
of 12% per annum from filing of Complaint on July 11, 1996 until fully paid, to the
plaintiff Marque[s] the sum of P400,000.00 as moral damages, to both plaintiffs the
sum of P500,000.00 as exemplary damages, the sum of P50,000.00 as attorneys fees,
the sum of P23,082.50, representing the filing fees, as litigation expenses, and to pay
the costs.

The counter-claims are hereby dismissed.

The writ of preliminary injunction is hereby made permanent.

SO ORDERED.21

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts decision, with modifications, on the following
grounds:
First, the relations among defendants with each other are closely related and so
intertwined. The said three defendants, FEBTC, FEBIBI and MICI, are sister companies.
This was never denied by the defendants themselves.

Second, the insurance coverage was the business of sister companies FEBIBI and
Makati Insurance, not with FEBTC, which has been the bank of plaintiffs which
handled the latters financing and related transactions. Stated a bit differently,
defendant FEBTC handled the financing and related requirements of plaintiffs;
defendant FEBIBI on the other hand is an insurance brokerage company of defendant
FEBTC, while Makati Insurance is the insurance (arm) company of both defendants
FEBIBI and FEBTC.

Third, defendant FEBTC caused FEBIBI to facilitate the insurance coverage of plaintiffs.
FEBIBI then asked Makati Insurance to issue the subject policy. Makati Insurance
delivered the policy to FEBIBI which it tasked with the collection of premium. FEBIBI in
turn delivered the policy to FEBTC from where it sought the payment of the premiums.

Fourth, it must be noted that the cover note and policy was supposedly issued and
made effective on June 24, 1994, when the trust receipt account was still outstanding
and the insured merchandise was still theoretically owned by the bank. Thus, for all
intents and purposes, it was to the best interest and protection of the bank to see to it
that the goods were properly covered by insurance.

Fifth, the payment of premium has never been made an issue when the subject policy
was still separated into three. Or even after the said consolidation into one policy (No.
1024439), still, payment of the premium has never become an issue.

xxxx

For another, if We were to believe defendants claim that the premium for the subject
policy was not paid, then defendants should have cancelled the policy long before. But
even up to the time the fire gutted plaintiffs warehouse in March 1995, defendants
acknowledged that the subject policy remained effective. x x x

Furthermore, there was no notice of cancellation or any communication from

defendants sent to plaintiffs that the policy shall be cancelled because of non-payment
of premiums. Thus, the more reasonable and logical conclusion is that the subject
policy was still fully in force because plaintiffs are still paying its premiums and
defendants are collecting the same through debit account.22

The Court of Appeals disposed of the case as follows:

 UPON THE VIEW WE TAKE OF THIS CASE, judgment appealed from is hereby
MODIFIED in such that:

a. the interest shall be at the rate of six percent (6%) per annum to run from the time of
demand on April 11, 1995, in accordance with Article 1589 of the Civil Code, until the
finality of this decision;

b. the moral damages of P400,000.00 is reduced to P50,000.00;

c. the exemplary damages of P500,000.00 is reduced to P50,000.00; and

d. the writ of preliminary injunction previously issued lifted and set aside.

In all other respects, judgment appealed from is AFFIRMED. Without pronouncement

as to costs.

SO ORDERED.23

Hence, these petitions.

The Issues

In G.R. No. 171379, petitioners assail the Court of Appeals reduction of (1) the interest rate
from 12% to 6% per annum to be imposed on respondents liabilities; and (2) the award of
moral and exemplary damages. Petitioners also question the portion of the Court of Appeals
judgment allowing FEBTC to foreclose the real estate mortgage securing petitioners loans and
disallowing legal compensation for the parties mutual obligations.

In G.R. No. 171419, petitioners challenge the Court of Appeals findings that (1) the premium
for the subject insurance policy has in fact been paid; (2) FEBTC, FEBIBI and Makati
Insurance Company are jointly and severally liable to pay respondents the full coverage of the
subject insurance policy despite (a) their separate juridical personalities; (b) the absence of any
fault or negligence on their part; and (c) respondents failure to prove the extent of the alleged
loss. Petitioners further impugn the award of damages and attorneys fees.

The Courts Ruling

The petition in G.R. No. 171319 lacks merit, whereas the petition in G.R. No. 171419 is
partially meritorious.

Essentially, Maxilite and Marques invoke estoppel in claiming against FEBTC, FEBIBI, and
Makati Insurance Company the face value of the insurance policy. In their complaint, Maxilite
and Marques alleged they were led to believe and they in fact believed that the settlement of
Maxilites trust receipt account included the payment of the insurance premium. 24 Maxilite and
Marques faulted FEBTC if it failed to transmit the premium payments on subject insurance
coverage contrary to its represented standard operating procedure of solely handling the
insurance coverage and past practice of debiting [Maxilites] account.25

Article 1431 of the Civil Code defines estoppel as follows:

Art. 1431. Through estoppel an admission or representation is rendered conclusive

upon the person making it, and cannot be denied or disproved as against the person
relying thereon.

Meanwhile, Section 2(a), Rule 131 of the Rules of Court provides:

SEC. 2. Conclusive presumptions. The following are instances of conclusive

presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing is true, and to act upon such belief,
he cannot, in any litigation arising out of such declaration, act or omission, be
permitted to falsify it.

In estoppel, a party creating an appearance of fact, which is false, is bound by that appearance
as against another person who acted in good faith on it.26 Estoppel is based on public policy,
fair dealing, good faith and justice.27 Its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one who reasonably relied thereon. 28 It
springs from equity, and is designed to aid the law in the administration of justice where
without its aid injustice might result.29

In Santiago Syjuco, Inc. v. Castro,30 the Court stated that estoppel may arise from silence
as well as from words. Estoppel by silence arises where a person, who by force of
circumstances is obliged to another to speak, refrains from doing so and thereby induces the
other to believe in the existence of a state of facts in reliance on which he acts to his
prejudice.31 Silence may support an estoppel whether the failure to speak is intentional or
negligent.32

Both trial and appellate courts basically agree that FEBTC is estopped from claiming that the
insurance premium has been unpaid. That FEBTC induced Maxilite and Marques to believe
that the insurance premium has in fact been debited from Maxilites account is grounded on
the the following facts: (1) FEBTC represented and committed to handle Maxilites financing and
capital requirements, including the related transactions such as the insurance of the trust
receipted merchandise; (2) prior to the subject Insurance Policy No. 1024439, the premiums for
the three separate fire insurance policies had been paid through automatic debit arrangement;
(3) FEBIBI sent FEBTC, not Maxilite nor Marques, written reminders dated 19 October 1994,
24 January 1995, and 6 March 1995 to debit Maxilites account, establishing FEBTCs
obligation to automatically debit Maxilites account for the premium amount; (4) there was no
written demand from FEBTC or Makati Insurance Company for Maxilite or Marques to pay the
insurance premium; (5) the subject insurance policy was released to Maxilite on 19 August
1994; and (6) the subject insurance policy remained uncancelled despite the alleged non-
payment of the premium, making it appear that the insurance policy remained in force and
binding.

Moreover, prior to the full settlement of the trust receipt account on 24 and 26 October 1994,
FEBTC had insurable interest over the merchandise, and thus had greater reason to debit
Maxilites account. Further, as found by the trial court, and apparently undisputed by FEBTC,
FEBIBI and Makati Insurance Company, Maxilite had sufficient funds at the time the first
reminder, dated 19 October 1994, was sent by FEBIBI to FEBTC to debit Maxilites account for
the payment of the insurance premium. Since (1) FEBTC committed to debit Maxilites account
corresponding to the insurance premium; (2) FEBTC had insurable interest over the property
prior to the settlement of the trust receipt account; and (3) Maxilites bank account had
sufficient funds to pay the insurance premium prior to the settlement of the trust receipt
account, FEBTC should have debited Maxilites account as what it had repeatedly done, as an
established practice, with respect to the previous insurance policies. However, FEBTC failed to
debit and instead disregarded the written reminder from FEBIBI to debit Maxilites account.
FEBTCs conduct clearly constitutes negligence in handling Maxilites and Marques accounts.
Negligence is defined as the omission to do something which a reasonable man, guided upon
those considerations which ordinarily regulate the conduct of human affairs, would do, or the
doing of something which a prudent man and reasonable man could not do.33

As a consequence of its negligence, FEBTC must be held liable for damages pursuant to Article
2176 of the Civil Code which states whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done. Indisputably, had the
insurance premium been paid, through the automatic debit arrangement with FEBTC,
Maxilites fire loss claim would have been approved. Hence, Maxilite suffered damage to the
extent of the face value of the insurance policy or the sum of P2.1 million.

Contrary to Maxilites and Marques view, FEBTC is solely liable for the payment of the face
value of the insurance policy and the monetary awards stated in the Court of Appeals decision.
Suffice it to state that FEBTC, FEBIBI, and Makati Insurance Company are independent and
separate juridical entities, even if FEBIBI and Makati Insurance Company are subsidiaries of
FEBTC. Absent any showing of its illegitimate or illegal functions, a subsidiarys separate
existence shall be respected, and the liability of the parent corporation as well as the
subsidiary shall be confined to those arising in their respective business. 34 Besides, the records
are bereft of any evidence warranting the piercing of corporate veil in order to treat FEBTC,
FEBIBI, and Makati Insurance Company as a single entity. Likewise, there is no evidence
showing FEBIBIs and Makati Insurance Companys negligence as regards the non-payment of
the insurance premium.

The Court agrees with the Court of Appeals in reducing the interest rate from 12% to 6% as the
obligation to pay does not arise from a loan or forbearance of money. In Eastern Shipping
Lines, Inc. v. Court of Appeals,35 the Court laid down the following guidelines for the application
of the proper interest rates:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for damages. The
provisions under Title XVIII on Damages of the Civil Code govern in determining the
measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is imposed,
as follows:

1. When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence
of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed at the
 discretion of the court at the rate of 6% per annum. No interest, however, shall be
adjudged on unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the
time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time the
demand is made, the interest shall begin to run only from the date the judgment
of the court is made (at which time the quantification of damages may be
deemed to have been reasonably ascertained). The actual base for the
computation of legal interest shall, in any case, be . . . the amount finally
adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed to be by then an equivalent to
forbearance of credit. (Emphasis supplied)

With respect to Maxilites and Marques invocation of legal compensation, we find the same
devoid of merit. Aside from their bare allegations, there is no clear and convincing evidence
that legal compensation exists in this case. In other words, Maxilite and Marques failed to
establish the essential elements of legal compensation. Therefore, Maxilites and Marques claim
of legal compensation must fail.

WHEREFORE, we AFFIRM with MODIFICATION the 31 May 2005 Decision and the 26
January 2006 Resolution of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105. Only
Far East Bank and Trust Company, and not Far East Bank Insurance Brokers, Inc. or Makati
Insurance Company, is ORDERED to PAY the face value of the subject insurance policy and
the monetary awards stated in the Court of Appeals decision.

SO ORDERED.
JOSE MARQUES and MAXILITE G.R. No. 171379
TECHNOLOGIES, INC.,
Petitioners,

- versus -
FAR EAST BANK AND TRUST COMPANY,
FAR EAST BANK INSURANCE BROKERS,
INC., and MAKATI INSURANCE COMPANY,
Respondents.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

FAR EAST BANK AND TRUST COMPANY G.R. No. 171419

and MAKATI INSURANCE COMPANY,
Petitioners, Present:

CARPIO, J., Chairperson,

- versus - BRION,*
PERALTA,
ABAD, and
MENDOZA, JJ.

JOSE MARQUES and MAXILITE Promulgated:

TECHNOLOGIES, INC.,
Respondents. January 10, 2011
x-----------------------------------------------------------------------------------------x

DECISION

CARPIO, J.:

The Case

These consolidated petitions for review1 assail the 31 May 2005 Decision2 and the 26 January
2006 Resolution3 of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105. The Court of
Appeals affirmed with modifications the 4 September 1998 Decision 4 of the Regional Trial Court
of Cebu City, Branch 58, in Civil Case No. CEB-18979.

The Facts

Maxilite Technologies, Inc. (Maxilite) is a domestic corporation engaged in the importation and
trading of equipment for energy-efficiency systems. Jose N. Marques (Marques) is the President
and controlling stockholder of Maxilite.

Far East Bank and Trust Co. (FEBTC)5 is a local bank which handled the financing and related
requirements of Marques and Maxilite. Marques and Maxilite maintained accounts with
FEBTC. Accordingly, FEBTC financed Maxilites capital and operational requirements through
loans secured with properties of Marques under the latters name. Among Maxilites and
Marques transactions with FEBTC were:

a. A straight loan in the name of Jose N. Marques for Maxilite at the original principal amount
of P1 million. This is secured by real estate mortgage. From said original principal amount, the
bank increased it by P300,000.00 about 26 October 1994 to enable the wiping out of Maxilites
Trust Receipts Account and simplify the remaining accounts into straight loan accounts.
b. A straight loan in the name of Maxilite Technologies, Inc. for a principal amount of P2
million. This is secured with a Real Estate Mortgage of Marques residential property.
c. Master Card transactions covering two (2) Master Card Accounts of Marques, and
d. Local credit card transactions covering one credit card account of Marques. 6

Far East Bank Insurance Brokers, Inc. (FEBIBI) is a local insurance brokerage corporation
while Makati Insurance Company7 is a local insurance company. Both companies are
subsidiaries of FEBTC.8

On 17 June 1993, Maxilite and Marques entered into a trust receipt transaction with FEBTC,
in the sum of US$80,765.00, for the shipment of various high-technology equipment from the
United States,9 with the merchandise serving as collateral. The foregoing importation was
covered by a trust receipt document signed by Marques on behalf of Maxilite, which pertinently
reads:

The undersigned (Marques) further agree(s) to keep said merchandise insured against fire to its
full value, payable to the said bank, at the cost and expense of the undersigned, who hereby
further agree(s) to pay all charges for storage on said merchandise or any or other expenses
incurred thereon.

x x x x10

Sometime in August 1993, FEBIBI, upon the advice of FEBTC, facilitated the procurement and
processing from Makati Insurance Company of four separate and independent fire insurance
policies over the trust receipted merchandise: (1) Policy No. BR-F-1016333, issued on 15
September 1993, covering the period 12 August 1993 to 12 November 1993 in the amount
of P1,000,000.00;11 (2) Policy No. BR-F-1016888, issued on 15 September 1993 covering the
period 8 September 1993 to 8 December 1993 in the amount of P605,494.28;12 (3) Policy No.
BR-F-1016930, issued on 18 October 1993, covering the period 14 October 1993 to 12 January
1994 in the amount of P527,723.66;13 and (4) Policy No. BR-F-1018392, issued on 14
December 1993, covering the period 1 December 1993 to 1 March 1994 in the amount
of P725,000.00.14 Maxilite paid the premiums for these policies through debit arrangement.
FEBTC would debit Maxilites account for the premium payments, as reflected in statements of
accounts sent by FEBTC to Maxilite.

On 19 August 1994, Insurance Policy No. 1024439, covering the period 24 June 1994 to 24
June 1995, was released to cover the trust receipted merchandise. The policy relevantly
provides:

2. This policy including any renewal thereof and/or any endorsement thereon is not in force
until the premium has been fully paid to and duly receipted by the Company in the manner
provided herein.

Any supplementary agreement seeking to amend this condition prepared by agent, broker or
Company official, shall be deemed invalid and of no effect.15

Finding that Maxilite failed to pay the insurance premium in the sum of P8,265.60 for
Insurance Policy No. 1024439 covering the period 24 June 1994 to 24 June 1995, FEBIBI sent
written reminders to FEBTC, dated 19 October 1994,16 24 January 1995,17 and 6 March 1995,
to debit Maxilites account.18

On 24 and 26 October 1994, Maxilite fully settled its trust receipt account.

On 9 March 1995, a fire gutted the Aboitiz Sea Transport Building along M.J. Cuenco Avenue,
Cebu City, where Maxilites office and warehouse were located. As a result, Maxilite suffered
losses amounting to at least P2.1 million, which Maxilite claimed against the fire insurance
policy with Makati Insurance Company. Makati Insurance Company denied the fire loss claim
on the ground of non-payment of premium. FEBTC and FEBIBI disclaimed any responsibility
for the denial of the claim.

Maxilite and Marques sued FEBTC, FEBIBI, and Makati Insurance Company. Maxilite prayed
for (1) actual damages totaling P2.3 million representing full insurance coverage and business
opportunity losses, (2) moral damages, and (3) exemplary damages.19 On the other hand,
Marques sought payment of actual, moral and exemplary damages, attorneys fees, and
litigation expenses. Maxilite and Marques also sought the issuance of a preliminary injunction
or a temporary restraining to enjoin FEBTC from (1) imposing penalties on their obligations; (2)
foreclosing the real estate mortage securing their straight loan accounts; and (3) initiating
actions to collect their obligations.

FEBTC, FEBIBI, and Makati Insurance Company countered that Maxilite and Marques have no
cause of action against them and essentially denied the allegations in the complaint.

The Ruling of the Trial Court

In ruling in favor of Maxilite and Marques, the Regional Trial Court of Cebu City, Branch 58,
explained:

Considering the interest of the defendant FEBTC in the property insured, hence, its concern
that the insurance policy therefor has to be effected and enforceable, and considering that the
payment of the premium thereof was the procedure adopted by debiting the plaintiffs account,
the Court is of the view that the non-payment of the premium of the insurance policy in
question was due to the fault or negligence of the defendant FEBTC. What could have
happened to the interest of the defendant FEBTC in the insurance policy in question had the
fire occurred prior to the full settlement and payment of plaintiffs Maxilite trust receipt
account? Would defendant FEBTC have tossed the blame on the non-payment of premium to
the plaintiffs?
Although there were reminders by defendant FEBIBI of the non-payment of the premium, the
same were made by said defendant through the defendant FEBTC and not to the plaintiffs
directly. Despite said reminders, the first of which was made on October 19, 1994 when
plaintiff Maxilite has sufficient fund in its trust receipt account, defendant FEBTC did not heed
the same and more so did it not care to pay the premium after the plaintiff Maxilite fully and
finally settled its trust receipt account with defendant FEBTC as the latter has already lost its
interest in the insurance policy in question by virtue of said full payment. But despite the non-
payment of the insurance premium, the defendant Makati Insurance did not cancel the policy
in question nor informed plaintiffs of its cancellation if the insurance premium should not be
paid. Just as defendant FEBIBI failed to notify directly the plaintiffs of the said non-payment.
Considering the relationship of the three (3) defendants herein, as undeniably sister
companies, the non-payment of the premium of the insurance policy in question should be
imputable to their fault or negligence. Under the factual milieu in the case at bar, the Court
finds it just and equitable to hold said defendants liable to pay all the consequent damages
suffered by the plaintiffs and their liability is solidary (Art. 2194, Civil Code). 20

The trial court disposed of the case as follows:

WHEREFORE, premises considered, judgment is hereby rendered ordering the defendants to

pay jointly and severally to the plaintiff Maxilite the sum of Two Million One Hundred
Thousand Pesos (P2,100,000.00), Philippine Currency, representing the full coverage of
Insurance Policy No. 1024439 (Exh. A), as actual damages, plus interest of 12% per annum
from filing of Complaint on July 11, 1996 until fully paid, to the plaintiff Marque[s] the sum
of P400,000.00 as moral damages, to both plaintiffs the sum of P500,000.00 as exemplary
damages, the sum of P50,000.00 as attorneys fees, the sum of P23,082.50, representing the
filing fees, as litigation expenses, and to pay the costs.

The counter-claims are hereby dismissed.

The writ of preliminary injunction is hereby made permanent.

SO ORDERED.21

The Ruling of the Court of Appeals

The Court of Appeals affirmed the trial courts decision, with modifications, on the following
grounds:

First, the relations among defendants with each other are closely related and so intertwined.
The said three defendants, FEBTC, FEBIBI and MICI, are sister companies. This was never
denied by the defendants themselves.

Second, the insurance coverage was the business of sister companies FEBIBI and Makati
Insurance, not with FEBTC, which has been the bank of plaintiffs which handled the latters
financing and related transactions. Stated a bit differently, defendant FEBTC handled the
financing and related requirements of plaintiffs; defendant FEBIBI on the other hand is an
insurance brokerage company of defendant FEBTC, while Makati Insurance is the insurance
(arm) company of both defendants FEBIBI and FEBTC.

Third, defendant FEBTC caused FEBIBI to facilitate the insurance coverage of plaintiffs.
FEBIBI then asked Makati Insurance to issue the subject policy. Makati Insurance delivered
the policy to FEBIBI which it tasked with the collection of premium. FEBIBI in turn delivered
the policy to FEBTC from where it sought the payment of the premiums.

Fourth, it must be noted that the cover note and policy was supposedly issued and made
effective on June 24, 1994, when the trust receipt account was still outstanding and the
insured merchandise was still theoretically owned by the bank. Thus, for all intents and
purposes, it was to the best interest and protection of the bank to see to it that the goods were
properly covered by insurance.

Fifth, the payment of premium has never been made an issue when the subject policy was still
separated into three. Or even after the said consolidation into one policy (No. 1024439), still,
payment of the premium has never become an issue.

xxxx

For another, if We were to believe defendants claim that the premium for the subject policy was
not paid, then defendants should have cancelled the policy long before. But even up to the time
the fire gutted plaintiffs warehouse in March 1995, defendants acknowledged that the subject
policy remained effective. x x x
Furthermore, there was no notice of cancellation or any communication from defendants sent
to plaintiffs that the policy shall be cancelled because of non-payment of premiums. Thus, the
more reasonable and logical conclusion is that the subject policy was still fully in force because
plaintiffs are still paying its premiums and defendants are collecting the same through debit
account.22

The Court of Appeals disposed of the case as follows:

UPON THE VIEW WE TAKE OF THIS CASE, judgment appealed from is hereby MODIFIED in
such that:

a. the interest shall be at the rate of six percent (6%) per annum to run from the time of
demand on April 11, 1995, in accordance with Article 1589 of the Civil Code, until the finality
of this decision;

b. the moral damages of P400,000.00 is reduced to P50,000.00;

c. the exemplary damages of P500,000.00 is reduced to P50,000.00; and

d. the writ of preliminary injunction previously issued lifted and set aside.

In all other respects, judgment appealed from is AFFIRMED. Without pronouncement as to

costs.

SO ORDERED.23

Hence, these petitions.

The Issues

In G.R. No. 171379, petitioners assail the Court of Appeals reduction of (1) the interest rate
from 12% to 6% per annum to be imposed on respondents liabilities; and (2) the award of
moral and exemplary damages. Petitioners also question the portion of the Court of Appeals
judgment allowing FEBTC to foreclose the real estate mortgage securing petitioners loans and
disallowing legal compensation for the parties mutual obligations.

In G.R. No. 171419, petitioners challenge the Court of Appeals findings that (1) the premium
for the subject insurance policy has in fact been paid; (2) FEBTC, FEBIBI and Makati
Insurance Company are jointly and severally liable to pay respondents the full coverage of the
subject insurance policy despite (a) their separate juridical personalities; (b) the absence of any
fault or negligence on their part; and (c) respondents failure to prove the extent of the alleged
loss. Petitioners further impugn the award of damages and attorneys fees.

The Courts Ruling

The petition in G.R. No. 171319 lacks merit, whereas the petition in G.R. No. 171419 is
partially meritorious.

Essentially, Maxilite and Marques invoke estoppel in claiming against FEBTC, FEBIBI, and
Makati Insurance Company the face value of the insurance policy. In their complaint, Maxilite
and Marques alleged they were led to believe and they in fact believed that the settlement of
Maxilites trust receipt account included the payment of the insurance premium. 24 Maxilite and
Marques faulted FEBTC if it failed to transmit the premium payments on subject insurance
coverage contrary to its represented standard operating procedure of solely handling the
insurance coverage and past practice of debiting [Maxilites] account.25

Article 1431 of the Civil Code defines estoppel as follows:

Art. 1431. Through estoppel an admission or representation is rendered conclusive upon the
person making it, and cannot be denied or disproved as against the person relying thereon.

Meanwhile, Section 2(a), Rule 131 of the Rules of Court provides:

SEC. 2. Conclusive presumptions. The following are instances of conclusive presumptions:

(a) Whenever a party has, by his own declaration, act, or omission, intentionally and
deliberately led another to believe a particular thing is true, and to act upon such belief, he
cannot, in any litigation arising out of such declaration, act or omission, be permitted to falsify
it.
In estoppel, a party creating an appearance of fact, which is false, is bound by that appearance
as against another person who acted in good faith on it.26 Estoppel is based on public policy,
fair dealing, good faith and justice.27 Its purpose is to forbid one to speak against his own act,
representations, or commitments to the injury of one who reasonably relied thereon. 28 It
springs from equity, and is designed to aid the law in the administration of justice where
without its aid injustice might result.29

In Santiago Syjuco, Inc. v. Castro,30 the Court stated that estoppel may arise from silence
as well as from words. Estoppel by silence arises where a person, who by force of
circumstances is obliged to another to speak, refrains from doing so and thereby induces the
other to believe in the existence of a state of facts in reliance on which he acts to his
prejudice.31 Silence may support an estoppel whether the failure to speak is intentional or
negligent.32

Both trial and appellate courts basically agree that FEBTC is estopped from claiming that the
insurance premium has been unpaid. That FEBTC induced Maxilite and Marques to believe
that the insurance premium has in fact been debited from Maxilites account is grounded on
the the following facts: (1) FEBTC represented and committed to handle Maxilites financing and
capital requirements, including the related transactions such as the insurance of the trust
receipted merchandise; (2) prior to the subject Insurance Policy No. 1024439, the premiums for
the three separate fire insurance policies had been paid through automatic debit arrangement;
(3) FEBIBI sent FEBTC, not Maxilite nor Marques, written reminders dated 19 October 1994,
24 January 1995, and 6 March 1995 to debit Maxilites account, establishing FEBTCs
obligation to automatically debit Maxilites account for the premium amount; (4) there was no
written demand from FEBTC or Makati Insurance Company for Maxilite or Marques to pay the
insurance premium; (5) the subject insurance policy was released to Maxilite on 19 August
1994; and (6) the subject insurance policy remained uncancelled despite the alleged non-
payment of the premium, making it appear that the insurance policy remained in force and
binding.

Moreover, prior to the full settlement of the trust receipt account on 24 and 26 October 1994,
FEBTC had insurable interest over the merchandise, and thus had greater reason to debit
Maxilites account. Further, as found by the trial court, and apparently undisputed by FEBTC,
FEBIBI and Makati Insurance Company, Maxilite had sufficient funds at the time the first
reminder, dated 19 October 1994, was sent by FEBIBI to FEBTC to debit Maxilites account for
the payment of the insurance premium. Since (1) FEBTC committed to debit Maxilites account
corresponding to the insurance premium; (2) FEBTC had insurable interest over the property
prior to the settlement of the trust receipt account; and (3) Maxilites bank account had
sufficient funds to pay the insurance premium prior to the settlement of the trust receipt
account, FEBTC should have debited Maxilites account as what it had repeatedly done, as an
established practice, with respect to the previous insurance policies. However, FEBTC failed to
debit and instead disregarded the written reminder from FEBIBI to debit Maxilites account.
FEBTCs conduct clearly constitutes negligence in handling Maxilites and Marques accounts.
Negligence is defined as the omission to do something which a reasonable man, guided upon
those considerations which ordinarily regulate the conduct of human affairs, would do, or the
doing of something which a prudent man and reasonable man could not do.33
As a consequence of its negligence, FEBTC must be held liable for damages pursuant to Article
2176 of the Civil Code which states whoever by act or omission causes damage to another,
there being fault or negligence, is obliged to pay for the damage done. Indisputably, had the
insurance premium been paid, through the automatic debit arrangement with FEBTC,
Maxilites fire loss claim would have been approved. Hence, Maxilite suffered damage to the
extent of the face value of the insurance policy or the sum of P2.1 million.
Contrary to Maxilites and Marques view, FEBTC is solely liable for the payment of the face
value of the insurance policy and the monetary awards stated in the Court of Appeals decision.
Suffice it to state that FEBTC, FEBIBI, and Makati Insurance Company are independent and
separate juridical entities, even if FEBIBI and Makati Insurance Company are subsidiaries of
FEBTC. Absent any showing of its illegitimate or illegal functions, a subsidiarys separate
existence shall be respected, and the liability of the parent corporation as well as the
subsidiary shall be confined to those arising in their respective business. 34 Besides, the records
are bereft of any evidence warranting the piercing of corporate veil in order to treat FEBTC,
FEBIBI, and Makati Insurance Company as a single entity. Likewise, there is no evidence
showing FEBIBIs and Makati Insurance Companys negligence as regards the non-payment of
the insurance premium.

The Court agrees with the Court of Appeals in reducing the interest rate from 12% to 6% as the
obligation to pay does not arise from a loan or forbearance of money. In Eastern Shipping
Lines, Inc. v. Court of Appeals,35 the Court laid down the following guidelines for the application
of the proper interest rates:
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or
quasi-delicts is breached, the contravenor can be held liable for damages. The provisions under
Title XVIII on Damages of the Civil Code govern in determining the measure of recoverable
damages.
II. With regard particularly to an award of interest in the concept of actual and compensatory
damages, the rate of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a
loan or forbearance of money, the interest due should be that which may have been stipulated
in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum
to be computed from default, i.e., from judicial or extrajudicial demand under and subject to
the provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest
on the amount of damages awarded may be imposed at the discretion of the court at the rate of
6% per annum. No interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable certainty. Accordingly,
where the demand is established with reasonable certainty, the interest shall begin to run from
the time the claim is made judicially or extrajudicially (Art. 1169, Civil Code) but when such
certainty cannot be so reasonably established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained). The actual
base for the computation of legal interest shall, in any case, be . . . the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the
rate of legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim period being deemed to be
by then an equivalent to forbearance of credit. (Emphasis supplied)
With respect to Maxilites and Marques invocation of legal compensation, we find the same
devoid of merit. Aside from their bare allegations, there is no clear and convincing evidence
that legal compensation exists in this case. In other words, Maxilite and Marques failed to
establish the essential elements of legal compensation. Therefore, Maxilites and Marques claim
of legal compensation must fail.

WHEREFORE, we AFFIRM with MODIFICATION the 31 May 2005 Decision and the 26
January 2006 Resolution of the Court of Appeals-Cebu City in CA-G.R. CV No. 62105. Only
Far East Bank and Trust Company, and not Far East Bank Insurance Brokers, Inc. or Makati
Insurance Company, is ORDERED to PAY the face value of the subject insurance policy and
the monetary awards stated in the Court of Appeals decision.

SO ORDERED.
A.M. No. 190 October 18, 1977

RE: CLAIMS FOR BENEFITS OF THE HEIRS OF THE LATE MARIO V. CHANLIONGCO,
FIDELA B. CHANLIONGCO, MARIO B. CHANLIONGCO II, MA. ANGELINA C.
BUENAVENTURA and MARIO C. CHANLIONGCO, JR., claimants.ñé+.£ªwph!1

RESOLUTION

MAKASIAR, J.:têñ.£îhqwâ£

This matter refers to the claims for retirement benefits filed by the heirs of the late ATTY.
MARIO V. CHANLIONGCO an attorney in this Court, under the provisions of R.A. No. 1616, as
amended by R.A. No. 4986, which was approved by this Court in its resolution of August 19,
1976, effective on July 12, 1976 it a g from the records that at the time of his death on July 12,
1976, Atty. Chanliongco was more than 63 years of age, with more than 38 years of service in
the government. He did not have any pending criminal administrative or not case against him,
neither did he have any money or property accountability. The highest salary he received was
P18,700.00 per annum.

The above named flied the appellants for benefits with the accruing and with the Government
Service System.

Aside from his widow, Dra. Fidel B. Chanliongco and an only Intimate Mario it appears that
there are other deceased to namely, Mrs. Angelina C. , Jr., both born out of wedlock to
Angelina R Crespo, and duly recognized by the deceased. Except Mario, Jr., who is only 17
years of age, all the claimants are of legal age.

According to law, the benefits accruing to the deceased consist of: (1) retirement benefits; (2)
money value of terminal leave; (3) life insurance and (4) refund of retirement premium.

From the records now before US, it appears that the GSIS had already the release the life
insurance proceeds; and the refund of rent to the claimants.

What, therefore, to be settled are the retirement benefits and the money value of leave, both of
which are to be paid by this court as the deceased's last employer.

The record also shows that the late Atty. Chanliongco died ab intestato and that he filed or over
to state in his application for membership with the GSIS the beneficiary or benefits of his
retirement benefits, should he die before retirement. Hence, the retirement benefits shall
accrue to his estate and will be distributed among his Legal heirs in with the benefits on
intestate s , as in the caw of a fife if no benefit is named in the policy (Vda. de vs. GSIS, L-
28093, Jan. 30, 1971, 37 SCRA 315, 325).

Insofar therefore as the retirement benefits are WE adopt in toto, for being in accordance with
law, the GSIS determination of the amount of the retirement the kill heirs and their e shares as
indicated in its letter to US, dated March 15, 1977, to wit: ñé+.£ªwph!1

(a) Amount of retirement grautity:

1
. Total 37.57169 years
creditab
le
service

2. Pl,558.33333/m
Highest o.
rate of
salary

3. 50.14338
Gratuity
 in terms months
of
months

4.
Amount
of
gratuity
(highest

salary) P78,140,10
x (No. of
grautity
months)

(b) Legal heirs:

1
. Fidela B. widow
Chanliongco.

2. Mario B. legitimate
Chanliongco son
II.

3. Ma. illegitimate
Angelina C. child
Buenaventur
a

4. Mario illegitimate
Chanliongco child
Jr.

(c)
Distribution

(1) 8/16 P39,070.05

share to 0
Mario II

(2) 4/16 19,535.025

share to the
widow, Fidela
B.
Chanliongco
 (3) 2/16 19 535 25
share, or
P9,767.5125
each to the
two
illegitimate
children Ma.
Angelina C.
Buenaventur
a and Mario
Chanliongco,
Jr.

TOTAL P78.140.10
0

Coming now to the money value of the terminal leave, unpaid salary and 10% adjustment
pursuant to Budget Circular No. 240, dated July 22, 1974, this Court's Finance Officer, in a
memorandum dated March 23, 1977, indicated the breakdown of these items as follows:

Unpaid salary
for July 8-12,
1976 @

P1,416.66/m P22
o. 8.4
9

10% salary 54.

adj. for July 84
1-12, 1976

Money value
of terminal
leave for the

period from
July 13, 1976
to September

14,1977 @ 21,
P1,558.33 962
.54

Sub-Total P22
,92
45.
 87

Less:

Withholding P1,
Tax 400
.00

Supreme
Court

Savings &
Loan

Association 7,3 8.7

40. 40.
42 42

N P1
E 3,5
T 05.
45
P
R
O
C
E
E
D
S

It further appears that at the time of his death the late Atty. Chanliongco had an outstanding
account with the Supreme Court Savings & Loans Association in the sum of P7,340.42.
Deduction this amount plus another sum of P1,400.00, representing withhold tax due from
him, or a total of P8,740.42, from above sub-total sum of P22,245.87. WE have at the net sum
P13,505.45, available for distribute to the claimants as follows:

1
. Fidela B.
Chanliongco

a. As P
her 6,752.72
conjug
al
share
 b. As a P
legal 1,688.18
heir

2. Mario P
Chanliongco 3,376.36
II

3. Ma. 844.10
Angelina C.
Buenaventur
a

4. Mario Jr. 844.09

TOTA P13,505.4
L 5

It will be seen from the f distribution that the money value of the unused vacation and sick
leave, unpaid will and 10% adjustment due to the has been treated as conjugal property.
Accordingly, one-half (l/2) goes to the widow as her share in the conjugal hip and the other half
P6,752.725 is to be distributed to the deceased's kill him, using the same one WE used in
distributing the retirement benefits. This is so because "Vacation with pay is not a gratuity but
is compensation for services rendered." (Ramey vs. State, 296 NW 323, 296 Mich. 449).

WHEREFORE, THE CLAIMS ARE HEREBY APPROVED. THE FINANCE AND/OR DISBURSING
OFFICER OF THIS COURT IS ORDERED To pay IMMEDIATELY TO EACH AND EVERY
CLAIMANT HE VARIOUS SUMS HEREUNDER INDICATED OPPOSITE THEIR NAMES, AS
FOLLOWS:

1
. FIDELA B. CHANLIONGCO

A. HER 4/16 SHARE OF P19,535.025

RETIREMENT GRATUITY

B. HER SHARE FROM MONEY

VALUE OF TEAL LEAVE,
UNPAID SALARY AND 10%
ADJUSTMENT:

(1) AS HER CONJUGAL SHARE 6,752.72

(2) AS A LEGAL HEIR P1,688.18

TOTAL AMOUNT DUE HER P27,975.93

2. MARIO CHANLIONGCO II

A. HIS 8/16 SHARE OF P39,070.05

RETIREMENT GRATUITY

B. HIS SHARE FROM MONEY 3,376.36

VALUE OF TERMINAL LEAVE,
UNPAID SALARY AND 10%
ADJUSTMENT

TOTAL AMOUNT DUE HIM P42,446.41

3. MA. ANGELINA C.
BUENAVENTURA:

A. HER 2/16 SHARE OF P9,767.51

RETIREMENT GRATUITY

B. HER SHARE FROM MONEY 844.10

VALUE OF TERMINAL LEAVE,
UNPAID SALARY AND 10%
ADJUSTMENT

TOTAL AMOUNT DUE HER P10,611.61

4. MARIO CHANLIONGCO JR.

TO BE PAID THROUGH HIS
MOTHER AND NATURAL
GUARDIAN, ANGELINA
CRESPO):

A. HIS 2/16 SHARE OF P9,767.51

RETIREMENT GRATUITY

B. HIS SHARE FROM MONEY 844.10

VALUE OF TERMINAL LEAVE,
UNPAID SALARY AND 10%
ADJUSTMENT
 TOTAL AMOUNT DUE HIM P10,611.61

SO ORDERED.

Castro, C.J., Barredo, Antonio, Muñ;oz Palma, Concepcion, Jr., Martin, Santos, Fernandez and
Guerrero, JJ., concur.1äwphï1.ñët

Fernando, J., is on leave.

Separate Opinions

AQUINO, J., concurring:

I concur. The provisions on legitime are found under the rubric of testamentary succession.
That does not mean that the legitime is taken into account only in testamentary succession.
The legitime must also be taken into consideration in legal succession.

There may be instances, like the instant case, where in legal succession the estate is
distributed according to the rules on legitime without applying the rules on intestate ion. The
reason is that sometimes the estate is not even sufficient to satisfy the legitimes. The legitimes
of the primary compulsory heirs, like a child or descendant, should first be satisfied.

In this case the decedent's legal heirs are his legitimate child, his widow and two intimate
children. His estate is partitioned among those heirs by giving them their respective time.

The legitimate child gets one-half of the estate as his legitime which is regarded as his share as
a legal heir Art 888, Civil Code).

The widow's legitime is one-fourth of the estate. That represents also her share as a legal heir
(Art. 892, 1st sentence, Civil Code).

The remaining one-fourth of the estate, which is the free portion, goes to the illegitimate
children in equal shares, as their legitime, Pursuant to the provision that 'the legitimate of the
illegitimate children shall be taken from the portion of the estate at the free disposal of the
testator, provoked that in no case shall the total legitime of such illegitimate children exceed
that free portion, and that the legitime of the surviving spouse must first be fully satisfied par.,
art. 895, Civil Code).

The rule in Santillon vs. Miranda, L-19281, June 30, 1965, 14 SCRA 563, that when the
surviving spouse concurs with only one legitimate child, the spouse is entitled to one-half of
the estate and the gets the other half, t to article 996 of the Civil Code, does not apply to the
case because here intimate children concur with the surviving spouse and the intimate child.

In this case, to divide the estate between the surviving spouse and the ligitemate child that
deprive the illegitimate children of their legitime.

So, the decendent's estate is distributed in the proportion of 1/2 for the legitimate child, 1/4
for the widow and 1/8 each for the two illegitimate children.

Also not of possible application to this case is the rule that the legal of an acknowledge natural
child is 1/2 of the legitime of the legitimate child of that the of the spurious child is 2/5 of that
of the of the intimate child or 4/5 of that of that of the acknowledged natural child.

The rule be applied because the estate is not sufficient to cover legitimes of all compulsory
heirs. That is one of the flaws of the law of succession.

A situation as in the instant case may arise where the illegitimate children get less than their
legitime.
With respect to the decendant's unpaid salary and the money value of his leave, the same are
conjugal properties because of the rule that property "obtained by the or work, or as salary of
the spouses, or either of them", is conjugal in character (Art. 153[2], Civil Code).

Separate Opinions

AQUINO, J., concurring:

I concur. The provisions on legitime are found under the rubric of testamentary succession.
That does not mean that the legitime is taken into account only in testamentary succession.
The legitime must also be taken into consideration in legal succession.

There may be instances, like the instant case, where in legal succession the estate is
distributed according to the rules on legitime without applying the rules on intestate ion. The
reason is that sometimes the estate is not even sufficient to satisfy the legitimes. The legitimes
of the primary compulsory heirs, like a child or descendant, should first be satisfied.

In this case the decedent's legal heirs are his legitimate child, his widow and two intimate
children. His estate is partitioned among those heirs by giving them their respective time.

The legitimate child gets one-half of the estate as his legitime which is regarded as his share as
a legal heir Art 888, Civil Code).

The widow's legitime is one-fourth of the estate. That represents also her share as a legal heir
(Art. 892, 1st sentence, Civil Code).

The remaining one-fourth of the estate, which is the free portion, goes to the illegitimate
children in equal shares, as their legitime, Pursuant to the provision that 'the legitimate of the
illegitimate children shall be taken from the portion of the estate at the free disposal of the
testator, provoked that in no case shall the total legitime of such illegitimate children exceed
that free portion, and that the legitime of the surviving spouse must first be fully satisfied par.,
art. 895, Civil Code).

The rule in Santillon vs. Miranda, L-19281, June 30, 1965, 14 SCRA 563, that when the
surviving spouse concurs with only one legitimate child, the spouse is entitled to one-half of
the estate and the gets the other half, t to article 996 of the Civil Code, does not apply to the
case because here intimate children concur with the surviving spouse and the intimate child.

In this case, to divide the estate between the surviving spouse and the ligitemate child that
deprive the illegitimate children of their legitime.

So, the decendent's estate is distributed in the proportion of 1/2 for the legitimate child, 1/4
for the widow and 1/8 each for the two illegitimate children.

Also not of possible application to this case is the rule that the legal of an acknowledge natural
child is 1/2 of the legitime of the legitimate child of that the of the spurious child is 2/5 of that
of the of the intimate child or 4/5 of that of that of the acknowledged natural child.

The rule be applied because the estate is not sufficient to cover legitimes of all compulsory
heirs. That is one of the flaws of the law of succession.

A situation as in the instant case may arise where the illegitimate children get less than their
legitime.

With respect to the decendant's unpaid salary and the money value of his leave, the same are
conjugal properties because of the rule that property "obtained by the or work, or as salary of
the spouses, or either of them", is conjugal in character (Art. 153[2], Civil Code).
G.R. No. 90273-75 November 15, 1989

FINMAN GENERAL ASSURANCE CORP., petitioner,

vs.
WILLIAM INOCENCIO, ET AL. AND EDWIN CARDONES, THE ADMINISTRATOR,
PHILIPPINE OVERSEAS AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF
LABOR AND EMPLOYMENT, respondents.

David I. Unay, Jr. for petitioner.

RESOLUTION

FELICIANO, J.:

Pan Pacific Overseas Recruiting Services, Inc. ("Pan Pacific") is a private, fee-charging,
recruitment and employment agency. T in accordance with the requirements of Section 4, Rule
II, Book II of the Rules and Regulations of the Philippine Overseas Employment Administration
(POEA), Pan Pacific posted a surety bond issued by petitioner Finman General Assurance
Corporation ("Finman") and was granted a license to operate by the POEA.

Private respondents William Inocencio, Perfecto Palero, Jr., Edwin Cardones and one Edwin
Hernandez filed with the POEA separate complaints against Pan Pacific for violation of Articles
32 and 34 (a) of the Labor Code, as amended and for refund of placement fees paid to Pan
Pacific. The complainants alleged that Pan Pacific charged and collected such fees from them
but did not secure employment for them.

Acting on the complaints, the POEA Administrator motu proprio impleaded petitioner Finman
as party respondent in its capacity as surety for Pan Pacific. Separate summonses were served
upon Finman and Pan Pacific. The return of the summons served on Pan Pacific at its official
address registered in the POEA records, showed that Pan Pacific had moved out therefrom; no
prior notice of transfer or change of address was furnished by Pan Pacific to the POEA as
required under POEA rules. The POEA considered that constructive service of the complaints
had been effected upon Pan Pacific and proceeded accordingly.

For its part, petitioner Finman filed an answer denying liability and pleading, by way of special
and affirmative defenses, that: (1) the POEA had no "jurisdiction over surety bonds," that
jurisdiction being vested in the Insurance Commission or the regular courts; (2) it (Finman)
had not violated Articles 32 and 34 (a) of the Labor Code and complainants' claims had
accrued during the suspension of the principal obligor, Pan Pacific; (3) complainants had no
cause of action against Finman, since it was not privy to the transactions between them and
Pan Pacific and had not received any moneys from them; and (4) the amounts claimed by
complainants had been paid by them as deposits and not as placement fees.

A hearing was held by the POEA on 14 April 1988, at which time complainants presented their
evidence. Petitioner Finman, though notified of this hearing, did not appear.

On 30 May 1989, the POEA Administrator issued an Order which, in its dispositive portion,
said:

WHEREFORE, premises considered, respondents are hereby ordered to pay

jointly and severally complainants' claims as follows:
 1. William Inocencio P6,000 .00

2. Perfecto Palero, Sr. P5,500 .00

3. Edwin Cardones P2,000 .00

Respondent agency is ordered to release Cardones' passport, the expenses or

obtaining the same of which (sic) shall be deducted from the amount of
P2,000.00 as it appears that it was respondent agency who applied for the
processing thereof. The claim of Edwin Hernandez is dismissed without
prejudice.

For the established violations respondent agency is hereby imposed a penalty

fine in the amount of P60,000.00. Further, the ban earlier imposed upon it is
herein reiterated.

SO ORDERED.

Petitioner Finman went on appeal to the Secretary of Labor insisting that: (1) the POEA had no
authority to implead petitioner as party respondent in the proceedings before the POEA; and
that (2) the POEA had no authority to enforce directly the surety bond against petitioner. In an
Order dated 3 August 1989, the Secretary of Labor upheld the POEA Order appealed from and
denied the appeal for lack of merit.

Petitioner Finman now comes before this Court on a Petition for certiorari with prayer for
preliminary injunction or temporary restraining order, raising much the same issues it had
already ventilated before the POEA and the Secretary of Labor. It is contended once again by
petitioner Finman that the POEA had no authority to implead petitioner in the proceedings
commenced by private respondents: and that the POEA was not authorized to require, in those
same proceedings, petitioner to pay private respondents' claims for refund against Pan Pacific
on the basis of the surety bond issued by petitioner.

Petitioner's contentions are interrelated and will be dealt with together. They are, however,
quite bereft of merit and must be rejected.

Petitioner cannot seriously dispute the direct and solidary nature of its obligations under its
own surety bond. Under Section 176 of the Insurance Code, as amended, the liability of a
surety in a surety bond is joint and several with the principal obligor. Petitioner's bond was
posted by Pan Pacific in compliance with the requirements of Article 31 of the Labor Code,
which states that —

Art. 31. Bonds. — All applicants for license or authority shall post such cash
and surety bonds as determined by the Secretary of Labor to guarantee
compliance with prescribed recruitment procedures, rules and regulations, and
terms and, conditions of employment as appropriate.

The Secretary of Labor shall have the exclusive power to determine, decide,
order or direct payment from, or application of, the cash and surety bond for
any claim or injury covered and guaranteed by the bonds. (Emphasis supplied).

The tenor and scope of petitioner Finman's obligations under the bond it issued are set out in
broad ranging terms by Section 4, Rule II, Book I of the POEA Rules and Regulations:

Section 4. Payment of Fees and Posting of Bonds. — Upon approval of the

application by the Minister, the applicant shall pay an annual license fee of
P6,000.00. It shall also post a cash bond of P100,000.00 and a surety bond of
P150,000.00 from a bonding company acceptable to the Administration duly
accredited by the Office of the Insurance Commission. The bonds shall answer
for all valid and legal claims arising from violations of the conditions for the grant
and use of the license or authority and contracts of employment. The bonds shall
likewise guarantee compliance with the provisions of the Labor Code and its
implementing rules and regulations relating to recruitment and placement, the
rules of the Administration and relevant issuances of the Ministry and all
liabilities which the Administration may impose. The surety bonds shall include
the condition that notice of garnishment to the principal is notice to the
surety. 1 (Emphasis supplied).

While petitioner Finman has refrained from attaching a copy of the bond it had issued to its
Petition for Certiorari, there can be no question that the conditions of the Finman surety bond
Pan Pacific had posted with the POEA include the italicized portions of Section 4, Rule 11,
Book I quoted above. It is settled doctrine that the conditions of a bond specified and required
in the provisions of the statute or regulation providing for the submission of the bond, are
incorporated or built into all bonds tendered under that statute or regulation, even though not
there set out in printer's ink. 2

In the case at bar, the POEA held, and the Secretary of Labor affirmed, that Pan Pacific had
violated Article 32 of the Labor Code, as amended

Article 32. Fees to be paid by workers. — Any person applying with a private fee
charging employment agency for employment assistance shall not be charged
any fee until he has obtained employment through its efforts or has actually
commenced employment. Such fee shall be always covered with the approved
receipt clearly showing the amount paid. The Secretary of Labor shall
promulgate a schedule of allowable fees. (Emphasis supplied).

as well as Article 34 (a) of the same Code:

Article 34. Prohibited practices. — It shall be unlawful for any individual, entity,
licensee, or holder of authority:

(a) To charge or accept, directly or indirectly, any amount than that specified in
the schedule of allowable fees prescribed by the Secretary of Labor, or to make a
worker pay any amount greater than actually received by him as a loan or
advance. (Emphasis supplied)

There is, hence, no question that, both under the Labor Code 3 and the POEA Rules and
Regulations, 4 Pan Pacific had violated at least one of the conditions for the grant and
continued use of the recruitment license granted to it. There can, similarly, be no question that
the POEA Administrator and the Secretary of Labor are authorized to require Pan Pacific to
refund the placement fees it had charged private respondents without securing employment for
them and to impose the fine of P60,000.00 upon Pan Pacific. Article 36 of the Labor Code
authorizes the Secretary of Labor "to restrict and regulate" the recruitment and placement
activities of agencies like Pan Pacific and "to issue orders and promulgate rules and regulations
to carry out the objectives and implement the provisions of [Title I on "Recruitment and
Placement of Workers]," including of course, Article 32 on "Fees to be paid by workers," quoted
earlier. Upon the other hand, Section 13 of Rule VI, Book I of the POEA Rules and Regulations
expressly authorize the POEA Administrator or the Secretary of Labor to impose fines "in
addition to or in lieu of the penalties of suspension or cancellation" of the violator recruitment
agency's license.

If Pan Pacific is liable to private respondents for the refunds claimed by them and to the POEA
for the fine of P60,000.00, and if petitioner Finman is solidarily liable with Pan Pacific under
the operative terms of the bond, it must follow that Finman is liable both to the private
respondents and to the POEA. Petitioner Finman asserts, however, that the POEA had no
authority to implead it in the proceedings against Pan Pacific.

We are not persuaded by this assertion. Clearly, petitioner Finman is a party-in-interest in,
certainly a proper party to, the proceedings private respondents had initiated against Pan
Pacific the principal obligor. Since Pan Pacific had thoughtfully refrained from notifying the
POEA of its new address and from responding to the complaints, petitioner Finman may well I
be regarded as an indispensable party to the proceedings before the POEA. Whether Finman
was an indepensable or merely a proper party to the proceedings, we believe and so hold that
the POEA could properly implead it as party respondent either upon the request of the private
respondents or, as it happened, motu propio. Such is the situation under the Revised Rules of
Court 5 and the application thereof, directly or by analogy, by the POEA can certainly not be
regarded as arbitrary, oppressive or capricious.

The fundamental argument of Finman is that its liability under its own bond must be
determined and enforced, not by the POEA or the Secretary of Labor, but rather by the
Insurance Commission or by the regular courts. Once more, we are not moved by petitioner's
argument.

There appears nothing so special or unique about the determination of a surety's liability under
its bond as to restrict that determination to the Office of the Insurance Commissioner and to
the regular courts of justice exclusively. The exact opposite is strongly stressed by the second
paragraph of Article 31 of the Labor Code:

Art. 31. Bonds. — ... ...

 The secretary of Labor shall have the exclusive power to determine, decide, order
or direct payment from, or application of, the cash or surety bond for any claim or
injury covered and guaranteed by the bonds. (Emphasis supplied)

We believe and so hold that to compel the POEA and private respondents the beneficiaries of
Finman's bond-to go to the Insurance Commissioner or to a regular court of law to enforce that
bond, would be to collide with the public policy which requires prompt resolution of claims
against private recruitment and placement agencies. The Court will take judicial notice of the
appealing frequency with which some, perhaps many, of such agencies have cheated workers
avid for overseas employment by, e.g., collecting placement fees without securing employment
for them at all, extracting exorbitant fees or "kickbacks" from those for whom employment is
actually obtained, abandoning hapless and unlettered workers to exploitative foreign
principals, and so on. Cash and surety bonds are required by the POEA and its predecessor
agencies from recruitment and employment companies precisely as a means of ensuring
prompt and effective recourse against such companies when held liable for applicants or
workers' claims. Clearly that public policy will be effectively negated if POEA and the
Department of Labor and Employment were held powerless to compel a surety company to
make good on its solidary undertaking in the same quasi-judicial proceeding where the liability
of the principal obligor, the recruitment or employment agency, is determined and fixed and
where the surety is given reasonable opportunity to present any defenses it or the principal
obligor may be entitled to set up. Petitioner surety whose liability to private respondents and
the POEA is neither more nor less than that of Pan Pacific, is not entitled to another or
different procedure for determination or fixing of that liability than that which Pan Pacific is
entitled and subject to.

WHEREFORE, the Petition for certiorari with prayer for preliminary injunction or temporary
restraining order is hereby DISMISSED for lack of merit. Costs against petitioner. This
Resolution is immediately executory.
G.R. No. L-47593 December 29, 1943

THE INSULAR LIFE ASSURANCE CO., LTD., petitioner,

vs.
SERAFIN D. FELICIANO ET AL., respondents.

Manuel Roxas and Araneta, Zaragoza, Araneta and Bautista for petitioner.
Deflfin Joven and Pablo Lorenzo for respondents.
Ramirez and Ortigas as amici curiae.

OZAETA, J.:

In a four-to-three decision promulgated on September 13, 1941, 1 this Court affirmed the
judgment of the Court of Appeals in favor of the respondents and against the petitioner for the
sum of P25,000, representing the value of two insurance policies issued by the petitioner on
the life of Evaristo Feliciano. A motion to reconsider and set aside said decision has been filed
by the petitioner, and both parties have submitted exhaustive and luminous written arguments
in support of their respective contentions.

The facts of the case are set forth in the majority and dissenting opinions heretofore handed
down by this Court, the salient points of which may be briefly restated as follows:

Evaristo Feliciano, who died on September 29, 1935, was suffering with advanced pulmonary
tuberculosis when he signed his applications for insurance with the petitioner on October 12,
1934. On that same date Doctor Trepp, who had taken X-ray pictures of his lungs, informed
the respondent Dr. Serafin D. Feliciano, brother of Evaristo, that the latter "was already in a
very serious ad practically hopeless condition." Nevertheless the question contained in the
application — "Have you ever suffered from any ailment or disease of the lungs, pleurisy,
pneumonia or asthma?" — appears to have been answered , "No" And above the signature of
the applicant, following the answers to the various questions propounded to him, is the
following printed statement:1awphil.net

I declare on behalf of myself and of any person who shall have or claim any interest in
any policy issued hereunder, that each of the above answers is full, complete and true,
and that to the best of my knowledge and belief I am a proper subject for life insurance.
(Exhibit K.)

The false answer above referred to, as well as the others, was written by the Company's
soliciting agent Romulo M. David, in collusion with the medical examiner Dr. Gregorio Valdez,
for the purpose of securing the Company's approval of the application so that the policy to be
issued thereon might be credited to said agent in connection with the inter-provincial contest
which the Company was then holding among its soliciting agents to boost the sales of its
policies. Agent David bribed Medical Examiner Valdez with money which the former borrowed
from the applicant's mother by way of advanced payment on the premium, according to the
finding of the Court of Appeals. Said court also found that before the insured signed the
application he, as well as the members of his family, told the agent and the medical examiner
that he had been sick and coughing for some time and that he had gone three times to the
Santol Sanatorium and had X-ray pictures of his lungs taken; but that in spite of such
information the agent and the medical examiner told them that the applicant was a fit subject
for insurance.

Each of the policies sued upon contains the following stipulations:

This policy and the application herefor constitute the entire contract between the
parties hereto. . . . Only the President, or the Manager, acting jointly with the Secretary
or Assistant Secretary (and then only in writing signed by them) have power in behalf of
the Company to issue permits, or to modify this or any contract, or to extend the same
time for making any premium payment, and the Company shall not be bound by any
promise or representation heretofore or hereafter given by any person other than the
above-named officials, and by them only in writing and signed conjointly as stated.

The application contains, among others, the following statements:

18. — I [the applicant] hereby declare that all the above statements and answers as well
as all those that I may make to the Company's Medical Examiner in continuation of this
application, to be complete, true and correct to the best of my knowledge and belief, and
I hereby agree as follows:

1. That his declaration, with the answers to be given by me to the Medical

Examiner, shall be the basis of the policy and form part of same.

xxx xxx xxx

3. That the said policy shall not take effect until the first premium has been paid and
the policy has been delivered to and accepted by me, while I am in good health.

4. That the agent taking this application has no authority to make, modify or discharge
contracts, or to waive any of the Company's rights or requirements.

5. My acceptance of any policy issued on this application will constitute a ratification by

me of any corrections in or additions to this application made by the Company in the
space provided "For Home Office Corrections or Additions Only." I agree that
photographic copy of this applications as corrected or added to shall constitute
sufficient notice to me of the changes made. (Emphasis added.)

The petitioner insists that upon the facts of the case the policies in question are null and void
ab initio and that all that the respondents are entitled to is the refund of the premiums paid
thereon. After a careful re-examination of the facts and the law, we are persuaded that
petitioner's contention is correct. To the reasons adduced in the dissenting opinion heretofore
published, we only desire to add the following considerations:

When Evaristo Feliciano, the applicant for insurance, signed the application in blank and
authorized the soliciting agent and/or medical examiner of the Company to write the answers
for him, he made them his own agents for that purpose, and he was responsible for their acts
in that connection. If they falsified the answers for him, he could not evade the responsibility
for he falsification. He was not supposed to sign the application in blank. He knew that the
answers to the questions therein contained would be "the basis of the policy," and for that
every reason he was required with his signature to vouch for truth thereof.

Moreover, from the facts of the case we cannot escape the conclusion that the insured acted in
connivance with the soliciting agent and the medical examiner of the Company in accepting the
policies in question. Above the signature of the applicant is the printed statement or
representation: " . . . I am a proper subject for life insurance." In another sheet of the same
application and above another signature of the applicant was also printed this statement: "That
the said policy shall not take effect until he first premium has been paid and the policy as been
delivered to and accepted by me, while I am in good health." When the applicant signed the
application he was "having difficulty in breathing, . . . with a very high fever." He had gone
three times to the Santol Sanatorium and had X-ray pictures taken of his lungs. He therefore
knew that he was not "a proper subject for life insurance." When he accepted the policy, he
knew that he was not in good health. Nevertheless, he not only accepted the first policy of
P20,000 but then and there applied for and later accepted another policy of P5,000.

We cannot bring ourselves to believe that the insured did not take the trouble to read the
answers contained in the photostatic copy of the application attached to and made a part of the
policy before he accepted it and paid the premium thereon. He must have notice that the
answers to the questions therein asked concerning his clinical history were false, and yet he
accepted the first policy and applied for another. In any event, he obligated himself to read the
policy when he subscribed to this statement: "My acceptance of any policy issued on this
application will constitute a ratification by me of any corrections in or additions to this
application made by the Company . . ." By accepting the policy he became charged with
knowledge of its contents, whether he actually read it or not. He could not ostrich-like hide his
head from it in order to avoid his part of the bargain and at the same time claim the benefit
thereof. He knew, or was chargeable with knowledge, from the very terms of the two policies
sued upon (one of which is printed in English and the other in Spanish) that the soliciting
agent and the medical examiner had no power to bind the Company by any verbal promise or
oral representation. The insured, therefore, had no right to rely — and we cannot believe he
relied in good faith — upon the oral representation. The insured, therefore, had no right to rely
— and we cannot believe he relied in good faith — upon the oral representation of said agent
and medical examiner that he (the applicant) was a fit subject for insurance notwithstanding
that he had been and was still suffering with advanced pulmonary tuberculosis.

From all the facts and circumstances of this case, we are constrained to conclude that the
insured was a coparticipant, and coresponsible with Agent David and Medical Examiner
Valdez, in the fraudulent procurement of the policies in question and that by reason thereof
said policies are void ab initio.

Wheretofore, the motion for reconsideration is sustained and the judgment of the Court of
Appeals is hereby reversed. Let another judgment be entered in favor of the respondents and
against the petitioner for the refund of the premiums amounting to P1,389, with legal interest
thereon from the date of the complaint, and without any finding as to costs.

Moran, Paras and Bocobo, JJ., concur.

Separate Opinions

YULO, C.J., concurring:

I can find no quarrel with the legal considerations and conclusions set forth in the original
decision promulgated by this Court. As general rules of law they find full support not only in
reason and in logic, but also in simple human sense of justice. More so, modern and
complicated practices attendant to the ever growing trade in life insurance demand the strictest
accountability by insurance companies for acts of their authorized agents. In this way only may
the State afford reasonable protection to the unwary public from abuse by such organizations
as may be found to be of questionable moral standards.

But a careful consideration of the evidentiary facts as set forth in the decision of the Court of
Appeals leads me to conclude that the ends of justice would not be serve by the application to
the present case of the rules so enunciated. Rather, to serve the ends of justice the case of the
respondents should be removed from the protection of such rules.

The subject of the insurance policies under consideration is the life of the assured. It is
contended by his beneficiaries that they took these policies on the basis of a life expectancy of
a person gravely stricken with tuberculosis. They have consistently made protestations that
they had so informed the agents of the insurance company. But the policies were issued upon
the life of the assured, as a perfectly normal and healthy person. The error is vital and goes to
the very existence of the contract itself. Who is responsible for the error?

The direct cause, of course, is the false recitals in the application for insurance. While it is true
that it was the agents of the insurance company who filled out such application, yet it was the
assured who, by signing the application in blank, made it possible for the said agents to
procure the issuance of the policies on the basis of false information, in order to suit their own
purposes. Upon the admitted facts, I am of the opinion that in justice and in equity, the
responsibility for the falsifications made by the insurance agents in the preparation of the
insurance application should be laid at the door of the assured and his beneficiaries.

I vote with the majority in granting the motion for reconsideration and in reversing the decision
under review.

HONTIVEROS, J., dissenting:

The reasons given in the dissenting opinion in this case, as published in the Official Gazette of
October 4, 1941 (pp. 2847 to 2855), supplemented by those in the resolution of the majority on
the motion for reconsideration, do not seem to me sufficient to overthrow the decision rendered
by the Court of First Instance, confirmed by the Court of Appeals, and sustained by this
Supreme court in its decision of September 18, 1941. The alleged connivance between the
insured Evaristo Feliciano, the agent Romulo M. David, and the medical examiner Dr. Gregorio
Valdez not only does not clearly appear of record, but on the contrary is denied in the finding of
facts of the court a quo and of the Court of Appeals which cannot be reviewed or altered by this
Court.

The mere fact that the insured signed at the bottom of the application for insurance when some
of its lines intended for answers to certain questions were still in blank, answers which
according to the evidence and to the findings of the two inferior courts he had grounds to
believe will be made in accordance with the information which he and his family had given to
agent David and to Dr. Valdez, does not convert these two persons into agents of the insured in
a way as to make the latter responsible for the acts of the former. That the photostatic copies of
said forms which are attached to the policies object of this case are almost illegible, is a fact
which should be taken into account, together with the other fact that Evaristo Feliciano does
not know English, the language in which those documents are written. In support of this
dissenting opinion, the following authorities may be cited:

The mere failure of the insured to inform himself of the insertion of false answers in the
application which has been filled out by the agent of the insurer does not convict him of
lack of good faith. (Vol. 5, Cooley's Briefs on Insurance, 2nd Ed., p. 4136, and many
cases cited.)

The insured is not chargeable with such negligence as will render him liable for false
answers inserted by the agent merely because he signed the application in blank and
trusted the agent to fill out by the agent, without reading it. (Id., p. 4136, and many
cases cited.)

An illiterate person or one who does not understand the English language (as is the
case with Evaristo Feliciano) is not guilty of inexcusable negligence in failing to read the
application or having it read to him, nor can it be said that such person deliberately
made a false statement because he did not read over the application. (81 ALR 865, 866,
W. 117 ALR 796.)

Nor can it be said that the assured, who has fully, frankly, truthfully, and in good faith
answered all the required questions, is guilty of negligence in signing, without reading,
the application which is thereupon prepared by the agent. He is justified in assuming
that the agent, has, with equal good faith, truthfully recorded the answers give. He may
well say to the Company: 'You accredited this man to me as your representative, and I
signed the application thus prepared by him, relying upon the character which you gave
him, when you commissioned him to come to me as your agent. If he acted dishonestly
in the matter, you, and not I, must suffer the consequences . . .! (Germania Life Ins.
Co. vs. Lunkeheimer [1931] Ind., 538; 26 N. E., 1052)

In such case the acceptance of the policy, with this application attached, does not
require the insured to institute an investigation into its provisions, or the conditions
upon which is was issued, to ascertain whether the agent has acted in good faith, since,
under such circumstances, the insured may rely upon the presumption that he has
been honestly dealt with the insurer. (Otto vs. Hartford Ins. Co., 38 Minn., 423).

Besides, the principles that the insured is not bound to know the contents of the
application, and may rely on the agent's assurances that his answers have been
correctly written will, of course, apply with special force where the insured is illiterate
and unable to read, or is ignorant of the language. (Vol. 5, Cooley's Briefs on Insurance,
2nd Ed. p. 4138, cases cited.)

And also where the photostatic copies of the application embodied in the policy are
practically illegible, the insured is not bound to know the contents of the application.
(New York Ins. Co. vs. Holpem D.C. 57 Fed. 2nd, 200).

According to the great weight of authority, if an agent of the insurer, after obtaining
from an applicant for insurance a correct and truthful answer to interrogations
contained in the application for insurance, without knowledge of the applicant fills in
false answers, either fraudulently or otherwise, the insurer cannot assert the falsity of
such answers as a defense to the liability on the policy and this is generally without
regard to the subject matter of the answers or the nature of the agent's duties or
limitations on his authority, at least if not brought to the attention of the applicant. It is
equally well settled that if a correct representation is made in a written application, or
 the insurance agent issuing the policy is appraised of the true facts concerning the
matter in question, as for instance the title to the insured premises, but the agent
inserts an incorrect statement in the policy, the insurer cannot rely upon the error in
avoidance of its liability". Home Ins. Co. vs. Mendenhall, 154 Ill., 452, 45 NE., 1078, 36
LRA., 374; Phoenix Ins. Co. vs. Tucker, 92 Ill., 64, 34 Am Rep., 106; Commercial Ins. Co.
vs. Spanknoble, 52 Ill., 53, 4 Am. Report, 582; Young vs. Hartford F. Ins. Co. 45 Iowa,
377, 24 Am. Rep., 754; Welsh vs. London Assur. 151 Pa., 607, 25 A, 142, 21 Am St.
Rep., 726 — (Taken from Am Juris. on Insurance Vol. 29, par. 843).

An insured may be justified in signing an application in blank at the request of the

insurer's agent, who agrees to fill it in from data furnished by the insured or from an
old application. In fact, an insurer cannot urge the falsity of representations contained
in the policy issued, or in the application, where such representations were inserted
therein, either by the company or its agent, after the application was signed, without
the knowledge or consent of the insured, who has made no such representations.
(Couch on Insurance, Vol. 4, par. 842 b.)

I believe that the motion for reconsideration presented in this case should be denied, not only
because of the weighty reasons relied upon in the decision which it attacks, but also because a
dangerous precedent would otherwise be established, for, with the destruction of the
confidence which the public has hitherto reposed in the duly accredited agents of insurance
companies and in their examining physicians, this branch of the economic life of the people
will have to be unfavorably affected.
 [G.R. No. 113899. October 13, 1999]

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner vs. COURT OF APPEALS AND
MEDARDA V. LEUTERIO, respondents.

DECISION
QUISUMBING, J.:

This petition for review, under Rule 45 of the Rules of Court, assails the Decision [1] dated
May 17, 1993, of the Court of Appeals and its Resolution [2] dated January 4, 1994 in CA-G.R.
CV No. 18341. The appellate court affirmed in toto the judgment of the Misamis Oriental
Regional Trial Court, Branch 18, in an insurance claim filed by private respondent against
Great Pacific Life Assurance Co. The dispositive portion of the trial courts decision reads:

WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE

ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to
Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE
PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX
THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages,
attorneys fees and litigation expenses in the complaint and counterclaim, with costs against
the defendant and dismissing the complaint in respect to the plaintiffs, other than the widow-
beneficiary, for lack of cause of action.[3]

The facts, as found by the Court of Appeals, are as follows:

A contract of group life insurance was executed between petitioner Great Pacific Life
Assurance Corporation (hereinafter Grepalife) and Development Bank of the Philippines
(hereinafter DBP). Grepalife agreed to insure the lives of eligible housing loan mortgagors of
DBP.
On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP
applied for membership in the group life insurance plan. In an application form, Dr. Leuterio
answered questions concerning his health condition as follows:
7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure,
cancer, diabetes, lung, kidney or stomach disorder or any other physical impairment?
Answer: No. If so give details ___________.
8. Are you now, to the best of your knowledge, in good health?
Answer: [ x ] Yes [ ] No.[4]
On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of
Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to eighty-six
thousand, two hundred (P86,200.00) pesos.
On August 6, 1984, Dr. Leuterio died due to massive cerebral hemorrhage. Consequently,
DBP submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio
was not physically healthy when he applied for an insurance coverage on November 15,
1983. Grepalife insisted that Dr. Leuterio did not disclose he had been suffering from
hypertension, which caused his death. Allegedly, such non-disclosure constituted concealment
that justified the denial of the claim.
On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio,
filed a complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against
Grepalife for Specific Performance with Damages. [5] During the trial, Dr. Hernando Mejia, who
issued the death certificate, was called to testify. Dr. Mejias findings, based partly from the
information given by the respondent widow, stated that Dr. Leuterio complained of headaches
presumably due to high blood pressure. The inference was not conclusive because Dr. Leuterio
was not autopsied, hence, other causes were not ruled out.
On February 22, 1988, the trial court rendered a decision in favor of respondent widow
and against Grepalife. On May 17, 1993, the Court of Appeals sustained the trial courts
decision. Hence, the present petition.Petitioners interposed the following assigned errors:
"1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE TO
THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A PARTY
TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF PLAINTIFFS HUSBAND WILFREDO
LEUTERIO ONE OF ITS LOAN BORROWERS, INSTEAD OF DISMISSING THE CASE
AGAINST DEFENDANT-APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF
ACTION.
2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.
3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO
DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO
SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN
ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANT-
APPELLANT.
4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO
CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE
CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO.[6]
Synthesized below are the assigned errors for our resolution:
1. Whether the Court of Appeals erred in holding petitioner liable to DBP as
beneficiary in a group life insurance contract from a complaint filed by the widow of
the decedent/mortgagor?
2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that
he had hypertension, which would vitiate the insurance contract?
3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of
eighty six thousand, two hundred (P86,200.00) pesos without proof of the actual
outstanding mortgage payable by the mortgagor to DBP.
Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the
real party in interest, hence the trial court acquired no jurisdiction over the case. It argues that
when the Court of Appeals affirmed the trial courts judgment, Grepalife was held liable to pay
the proceeds of insurance contract in favor of DBP, the indispensable party who was not joined
in the suit.
To resolve the issue, we must consider the insurable interest in mortgaged properties and
the parties to this type of contract. The rationale of a group insurance policy of mortgagors,
otherwise known as the mortgage redemption insurance, is a device for the protection of both
the mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such form
of contract so that in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance will be applied to the
payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the
obligation.[7] In a similar vein, ample protection is given to the mortgagor under such a concept
so that in the event of death; the mortgage obligation will be extinguished by the application of
the insurance proceeds to the mortgage indebtedness. [8] Consequently, where the mortgagor
pays the insurance premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagors interest, and the mortgagor continues to be a
party to the contract. In this type of policy insurance, the mortgagee is simply an appointee of
the insurance fund, such loss-payable clause does not make the mortgagee a party to the
contract.[9]
Section 8 of the Insurance Code provides:

Unless the policy provides, where a mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not
cease to be a party to the original contract, and any act of his, prior to the loss, which would
otherwise avoid the insurance, will have the same effect, although the property is in the hands
of the mortgagee, but any act which, under the contract of insurance, is to be performed by the
mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had
been performed by the mortgagor.

The insured private respondent did not cede to the mortgagee all his rights or interests in
the insurance, the policy stating that: In the event of the debtors death before his indebtedness
with the Creditor [DBP] shall have been fully paid, an amount to pay the outstanding
indebtedness shall first be paid to the creditor and the balance of sum assured, if there is any,
shall then be paid to the beneficiary/ies designated by the debtor. [10]When DBP submitted the
insurance claim against petitioner, the latter denied payment thereof, interposing the defense
of concealment committed by the insured. Thereafter, DBP collected the debt from the
mortgagor and took the necessary action of foreclosure on the residential lot of private
respondent.[11] In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins. Co.[12] we held:

Insured, being the person with whom the contract was made, is primarily the proper person to
bring suit thereon. * * * Subject to some exceptions, insured may thus sue, although the policy
is taken wholly or in part for the benefit of another person named or unnamed, and although it
is expressly made payable to another as his interest may appear or otherwise. * * * Although a
policy issued to a mortgagor is taken out for the benefit of the mortgagee and is made payable
to him, yet the mortgagor may sue thereon in his own name, especially where the mortgagees
interest is less than the full amount recoverable under the policy, * * *.

And in volume 33, page 82, of the same work, we read the following:

Insured may be regarded as the real party in interest, although he has assigned the policy for
the purpose of collection, or has assigned as collateral security any judgment he may obtain. [13]

And since a policy of insurance upon life or health may pass by transfer, will or succession
to any person, whether he has an insurable interest or not, and such person may recover it
whatever the insured might have recovered, [14] the widow of the decedent Dr. Leuterio may file
the suit against the insurer, Grepalife.
The second assigned error refers to an alleged concealment that the petitioner interposed
as its defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to
disclose that he had hypertension, which might have caused his death. Concealment exists
where the assured had knowledge of a fact material to the risk, and honesty, good faith, and
fair dealing requires that he should communicate it to the assured, but he designedly and
intentionally withholds the same.[15]
Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia,
as supported by the information given by the widow of the decedent. Grepalife asserts that Dr.
Mejias technical diagnosis of the cause of death of Dr. Leuterio was a duly documented
hospital record, and that the widows declaration that her husband had possible hypertension
several years ago should not be considered as hearsay, but as part of res gestae.
On the contrary the medical findings were not conclusive because Dr. Mejia did not
conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia stated
that he had no knowledge of Dr. Leuterios any previous hospital confinement. [16] Dr. Leuterios
death certificate stated that hypertension was only the possible cause of death. The private
respondents statement, as to the medical history of her husband, was due to her unreliable
recollection of events. Hence, the statement of the physician was properly considered by the
trial court as hearsay.
The question of whether there was concealment was aptly answered by the appellate court,
thus:

The insured, Dr. Leuterio, had answered in his insurance application that he was in good
health and that he had not consulted a doctor or any of the enumerated ailments, including
hypertension; when he died the attending physician had certified in the death certificate that
the former died of cerebral hemorrhage, probably secondary to hypertension. From this report,
the appellant insurance company refused to pay the insurance claim. Appellant alleged that
the insured had concealed the fact that he had hypertension.

Contrary to appellants allegations, there was no sufficient proof that the insured had suffered
from hypertension. Aside from the statement of the insureds widow who was not even sure if
the medicines taken by Dr. Leuterio were for hypertension, the appellant had not proven nor
produced any witness who could attest to Dr. Leuterios medical history...

xxx
Appellant insurance company had failed to establish that there was concealment made by the
insured, hence, it cannot refuse payment of the claim.[17]

The fraudulent intent on the part of the insured must be established to entitle the insurer
to rescind the contract.[18] Misrepresentation as a defense of the insurer to avoid liability is an
affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the insurer. [19] In the case at bar, the petitioner failed to clearly and
satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance.
And that brings us to the last point in the review of the case at bar. Petitioner claims that
there was no evidence as to the amount of Dr. Leuterios outstanding indebtedness to DBP at
the time of the mortgagors death.Hence, for private respondents failure to establish the same,
the action for specific performance should be dismissed. Petitioners claim is without merit. A
life insurance policy is a valued policy. [20] Unless the interest of a person insured is susceptible
of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon
life or health is the sum fixed in the policy.[21] The mortgagor paid the premium according to the
coverage of his insurance, which states that:

The policy states that upon receipt of due proof of the Debtors death during the terms of this
insurance, a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtors death before his indebtedness with the creditor shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be paid to the Creditor and the
balance of the Sum Assured, if there is any shall then be paid to the beneficiary/ies designated
by the debtor.[22] (Emphasis omitted)

However, we noted that the Court of Appeals decision was promulgated on May 17,
1993. In private respondents memorandum, she states that DBP foreclosed in 1995 their
residential lot, in satisfaction of mortgagors outstanding loan. Considering this supervening
event, the insurance proceeds shall inure to the benefit of the heirs of the deceased person or
his beneficiaries. Equity dictates that DBP should not unjustly enrich itself at the expense of
another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the insurance proceeds,
after it already foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterios
heirs represented by his widow, herein private respondent Medarda Leuterio.
WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of
Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is
ORDERED to pay the insurance proceeds amounting to Eighty-six thousand, two hundred
(P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon
presentation of proof of prior settlement of mortgagors indebtedness to Development Bank of
the Philippines. Costs against petitioner.
SO ORDERED.
G.R. No. 200784 August 7, 2013

MALAYAN INSURANCE COMPANY, INC., PETITIONER,

vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.

DECISION

MENDOZA, J.:

Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court is the
October 27, 2011 Decision1 of the Court of Appeals (CA), which affirmed with modification the
September 17, 2009 Decision2 of the Regional Trial Court, Branch 15, Manila (RTC), and its
February 24, 2012 Resolution3 denying the motion for reconsideration filed by petitioner
Malayan Insurance Company., Inc. (Malayan).

The Facts

The undisputed factual antecedents were succinctly summarized by the CA as follows:

On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance Policy No. F-
00227-000073 to PAP Co., Ltd. (PAP Co.) for the latter’s machineries and equipment located at
Sanyo Precision Phils. Bldg., Phase III, Lot 4, Block 15, PEZA, Rosario, Cavite (Sanyo Building).
The insurance, which was for Fifteen Million Pesos (?15,000,000.00) and effective for a period
of one (1) year, was procured by PAP Co. for Rizal Commercial Banking Corporation (RCBC),
the mortgagee of the insured machineries and equipment.

After the passage of almost a year but prior to the expiration of the insurance coverage, PAP
Co. renewed the policy on an "as is" basis. Pursuant thereto, a renewal policy, Fire Insurance
Policy No. F-00227-000079, was issued by Malayan to PAP Co. for the period May 13, 1997 to
May 13, 1998.

On October 12, 1997 and during the subsistence of the renewal policy, the insured
machineries and equipment were totally lost by fire. Hence, PAP Co. filed a fire insurance claim
with Malayan in the amount insured.

In a letter, dated December 15, 1997, Malayan denied the claim upon the ground that, at the
time of the loss, the insured machineries and equipment were transferred by PAP Co. to a
location different from that indicated in the policy. Specifically, that the insured machineries
were transferred in September 1996 from the Sanyo Building to the Pace Pacific Bldg., Lot 14,
Block 14, Phase III, PEZA, Rosario, Cavite (Pace Pacific). Contesting the denial, PAP Co. argued
that Malayan cannot avoid liability as it was informed of the transfer by RCBC, the party duty-
bound to relay such information. However, Malayan reiterated its denial of PAP Co.’s claim.
Distraught, PAP Co. filed the complaint below against Malayan. 4

Ruling of the RTC

On September 17, 2009, the RTC handed down its decision, ordering Malayan to pay PAP
Company Ltd (PAP) an indemnity for the loss under the fire insurance policy as well as for
attorney’s fees. The dispositive portion of the RTC decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff.

Defendant is hereby ordered:

a)

To pay plaintiff the sum of FIFTEEN MILLION PESOS (₱15,000,000.00) as and for indemnity
for the loss under the fire insurance policy, plus interest thereon at the rate of 12% per annum
from the time of loss on October 12, 1997 until fully paid;

b)

To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (Ph₱500,000.00) as and by
way of attorney’s fees; [and,]

c)

To pay the costs of suit.

SO ORDERED.5

The RTC explained that Malayan is liable to indemnify PAP for the loss under the subject fire
insurance policy because, although there was a change in the condition of the thing insured as
a result of the transfer of the subject machineries to another location, said insurance company
failed to show proof that such transfer resulted in the increase of the risk insured against. In
the absence of proof that the alteration of the thing insured increased the risk, the contract of
fire insurance is not affected per Article 169 of the Insurance Code.

The RTC further stated that PAP’s notice to Rizal Commercial Banking Corporation (RCBC)
sufficiently complied with the notice requirement under the policy considering that it was
RCBC which procured the insurance. PAP acted in good faith in notifying RCBC about the
transfer and the latter even conducted an inspection of the machinery in its new location.

Not contented, Malayan appealed the RTC decision to the CA basically arguing that the trial
court erred in ordering it to indemnify PAP for the loss of the subject machineries since the
latter, without notice and/or consent, transferred the same to a location different from that
indicated in the fire insurance policy.

Ruling of the CA

On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC decision
but deleted the attorney’s fees. The decretal portion of the CA decision reads:

WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan Insurance

Company must indemnify PAP Co. Ltd the amount of Fifteen Million Pesos (Ph₱15,000,000.00)
for the loss under the fire insurance policy, plus interest thereon at the rate of 12% per annum
from the time of loss on October 12, 1997 until fully paid. However, the Five Hundred
Thousand Pesos (Ph₱500,000.00) awarded to PAP Co., Ltd. as attorney’s fees is DELETED.
With costs.

SO ORDERED.6

The CA wrote that Malayan failed to show proof that there was a prohibition on the transfer of
the insured properties during the efficacy of the insurance policy. Malayan also failed to show
that its contractual consent was needed before carrying out a transfer of the insured
properties. Despite its bare claim that the original and the renewed insurance policies
contained provisions on transfer limitations of the insured properties, Malayan never cited the
specific provisions.

The CA further stated that even if there was such a provision on transfer restrictions of the
insured properties, still Malayan could not escape liability because the transfer was made
during the subsistence of the original policy, not the renewal policy. PAP transferred the
insured properties from the Sanyo Factory to the Pace Pacific Building (Pace Factory) sometime
in September 1996. Therefore, Malayan was aware or should have been aware of such transfer
when it issued the renewal policy on May 14, 1997. The CA opined that since an insurance
policy was a contract of adhesion, any ambiguity must be resolved against the party that
prepared the contract, which, in this case, was Malayan.
Finally, the CA added that Malayan failed to show that the transfer of the insured properties
increased the risk of the loss. It, thus, could not use such transfer as an excuse for not paying
the indemnity to PAP. Although the insurance proceeds were payable to RCBC, PAP could still
sue Malayan to enforce its rights on the policy because it remained a party to the insurance
contract.

Not in conformity with the CA decision, Malayan filed this petition for review anchored on the
following

GROUNDS

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE
WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT AND THUS RULING IN THE QUESTIONED
DECISION AND RESOLUTION THAT PETITIONER MALAYAN IS LIABLE UNDER THE
INSURANCE CONTRACT BECAUSE:

CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER MALAYAN WAS

ABLE TO PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF THE RENEWAL POLICY
ISSUED TO RESPONDENT PAP CO., THERE IS AN AFFIRMATIVE WARRANTY OR A
REPRESENTATION MADE BY THE INSURED THAT THE "LOCATION OF THE RISK" WAS AT
THE SANYO BUILDING. IT IS LIKEWISE UNDISPUTED THAT WHEN THE RENEWAL POLICY
WAS ISSUED TO RESPONDENT PAP CO., THE INSURED PROPERTIES WERE NOT AT THE
SANYO BUILDING BUT WERE AT A DIFFERENT LOCATION, THAT IS, AT THE PACE FACTORY
AND IT WAS IN THIS DIFFERENT LOCATION WHEN THE LOSS INSURED AGAINST
OCCURRED. THESE SET OF UNDISPUTED FACTS, BY ITSELF ALREADY ENTITLES
PETITIONER MALAYAN TO CONSIDER THE RENEWAL POLICY AS AVOIDED OR RESCINDED
BY LAW, BECAUSE OF CONCEALMENT, MISREPRESENTATION AND BREACH OF AN
AFFIRMATIVE WARRANTY UNDER SECTIONS 27, 45 AND 74 IN RELATION TO SECTION 31
OF THE INSURANCE CODE, RESPECTIVELY.

RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT COMMIT
CONCEALMENT, MISREPRESENTATION OR BREACH OF AN AFFIRMATIVE WARRANTY
WHEN IT FAILED TO PROVE THAT IT INFORMED PETITIONER MALAYAN THAT THE
INSURED PROPERTIES HAD BEEN TRANSFERRED TO A LOCATION DIFFERENT FROM
WHAT WAS INDICATED IN THE INSURANCE POLICY.

IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE CONDITIONS
AND LIMITATIONS TO THE RENEWAL POLICY WHICH ARE THE REASONS WHY ITS CLAIM
WAS DENIED IN THE FIRST PLACE. IN FACT, THE BEST PROOF THAT RESPONDENT PAP
CO. RECOGNIZES THESE CONDITIONS AND LIMITATIONS IS THE FACT THAT ITS ENTIRE
EVIDENCE FOCUSED ON ITS FACTUAL ASSERTION THAT IT SUPPOSEDLY NOTIFIED
PETITIONER MALAYAN OF THE TRANSFER AS REQUIRED BY THE INSURANCE POLICY.

MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE WAS AN

INCREASE IN RISK BECAUSE OF THE UNILATERAL TRANSFER OF THE INSURED
PROPERTIES. IN FACT, THIS PIECE OF EVIDENCE WAS UNREBUTTED BY RESPONDENT
PAP CO.

II

THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND
ESTABLISHED DECISIONS OF THE HONORABLE COURT WHEN IT IMPOSED INTEREST AT
THE RATE OF TWELVE PERCENT (12%) INTEREST FROM THE TIME OF THE LOSS UNTIL
FULLY PAID.

JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY IS NOT A

LOAN OR FORBEARANCE OF MONEY FROM WHICH A BREACH ENTITLES A PLAINTIFF TO
AN AWARD OF INTEREST AT THE RATE OF TWELVE PERCENT (12%) PER ANNUM.

MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE SHOULD NOT
HAVE BEEN APPLIED BY THE COURT OF APPEALS BECAUSE THERE WAS NEVER ANY
FINDING THAT PETITIONER MALAYAN UNJUSTIFIABLY REFUSED OR WITHHELD THE
PROCEEDS OF THE INSURANCE POLICY BECAUSE IN THE FIRST PLACE, THERE WAS A
LEGITIMATE DISPUTE OR DIFFERENCE IN OPINION ON WHETHER RESPONDENT PAP CO.
COMMITTED CONCEALMENT, MISREPRESENTATION AND BREACH OF AN AFFIRMATIVE
WARRANTY WHICH ENTITLES PETITIONER MALAYAN TO RESCIND THE INSURANCE POLICY
AND/OR TO CONSIDER THE CLAIM AS VOIDED.
 III

THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE
WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
AGREED WITH THE TRIAL COURT AND HELD IN THE QUESTIONED DECISION THAT THE
PROCEEDS OF THE INSURANCE CONTRACT IS PAYABLE TO RESPONDENT PAP CO.
DESPITE THE EXISTENCE OF A MORTGAGEE CLAUSE IN THE INSURANCE POLICY.

IV

THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND
JURISPRUDENCE WHEN IT HELD IN THE QUESTIONED DECISION AND RESOLUTION THAT
THE INTERPRETATION MOST FAVORABLE TO THE INSURED SHALL BE ADOPTED. 7

Malayan basically argues that it cannot be held liable under the insurance contract because
PAP committed concealment, misrepresentation and breach of an affirmative warranty under
the renewal policy when it transferred the location of the insured properties without informing
it. Such transfer affected the correct estimation of the risk which should have enabled Malayan
to decide whether it was willing to assume such risk and, if so, at what rate of premium. The
transfer also affected Malayan’s ability to control the risk by guarding against the increase of
the risk brought about by the change in conditions, specifically the change in the location of
the risk.

Malayan claims that PAP concealed a material fact in violation of Section 27 of the Insurance
Code8 when it did not inform Malayan of the actual and new location of the insured properties.
In fact, before the issuance of the renewal policy on May 14, 1997, PAP even informed it that
there would be no changes in the renewal policy. Malayan also argues that PAP is guilty of
breach of warranty under the renewal policy in violation of Section 74 of the Insurance
Code9 when, contrary to its affirmation in the renewal policy that the insured properties were
located at the Sanyo Factory, these were already transferred to the Pace Factory. Malayan adds
that PAP is guilty of misrepresentation upon a material fact in violation of Section 45 of the
Insurance Code10 when it informed Malayan that there would be no changes in the original
policy, and that the original policy would be renewed on an "as is" basis.

Malayan further argues that PAP failed to discharge the burden of proving that the transfer of
the insured properties under the insurance policy was with its knowledge and consent.
Granting that PAP informed RCBC of the transfer or change of location of the insured
properties, the same is irrelevant and does not bind Malayan considering that RCBC is a
corporation vested with separate and distinct juridical personality. Malayan did not consent to
be the principal of RCBC. RCBC did not also act as Malayan’s representative.

With regard to the alleged increase of risk, Malayan insists that there is evidence of an increase
in risk as a result of the unilateral transfer of the insured properties. According to Malayan, the
Sanyo Factory was occupied as a factory of automotive/computer parts by the assured and
factory of zinc & aluminum die cast and plastic gear for copy machine by Sanyo Precision
Phils., Inc. with a rate of 0.449% under 6.1.2 A, while Pace Factory was occupied as factory
that repacked silicone sealant to plastic cylinders with a rate of 0.657% under 6.1.2 A.

PAP’s position

On the other hand, PAP counters that there is no evidence of any misrepresentation,
concealment or deception on its part and that its claim is not fraudulent. It insists that it can
still sue to protect its rights and interest on the policy notwithstanding the fact that the
proceeds of the same was payable to RCBC, and that it can collect interest at the rate of 12%
per annum on the proceeds of the policy because its claim for indemnity was unduly delayed
without legal justification.

The Court’s Ruling

The Court agrees with the position of Malayan that it cannot be held liable for the loss of the
insured properties under the fire insurance policy.

As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP obtained
a ?15,000,000.00 fire insurance policy from Malayan covering its machineries and equipment
effective for one (1) year or until May 13, 1997; that the policy expressly stated that the insured
properties were located at "Sanyo Precision Phils. Building, Phase III, Lots 4 & 6, Block 15,
EPZA, Rosario, Cavite"; that before its expiration, the policy was renewed 11 on an "as is" basis
for another year or until May 13, 1998; that the subject properties were later transferred to the
Pace Factory also in PEZA; and that on October 12, 1997, during the effectivity of the renewal
policy, a fire broke out at the Pace Factory which totally burned the insured properties.
The policy forbade the removal of the insured properties unless sanctioned by Malayan

Condition No. 9(c) of the renewal policy provides:

9. Under any of the following circumstances the insurance ceases to attach as regards the
property affected unless the insured, before the occurrence of any loss or damage, obtains the
sanction of the company signified by endorsement upon the policy, by or on behalf of the
Company:

xxx xxx xxx

(c) If property insured be removed to any building or place other than in that which is herein
stated to be insured.12

Evidently, by the clear and express condition in the renewal policy, the removal of the insured
property to any building or place required the consent of Malayan. Any transfer effected by the
insured, without the insurer’s consent, would free the latter from any liability.

The respondent failed to notify, and to obtain the consent of, Malayan regarding the removal

The records are bereft of any convincing and concrete evidence that Malayan was notified of the
transfer of the insured properties from the Sanyo factory to the Pace factory. The Court has
combed the records and found nothing that would show that Malayan was duly notified of the
transfer of the insured properties.

What PAP did to prove that Malayan was notified was to show that it relayed the fact of transfer
to RCBC, the entity which made the referral and the named beneficiary in the policy. Malayan
and RCBC might have been sister companies, but such fact did not make one an agent of the
other. The fact that RCBC referred PAP to Malayan did not clothe it with authority to represent
and bind the said insurance company. After the referral, PAP dealt directly with Malayan.

The respondent overlooked the fact that during the November 9, 2006 hearing, 13 its counsel
stipulated in open court that it was Malayan’s authorized insurance agent, Rodolfo Talusan,
who procured the original policy from Malayan, not RCBC. This was the reason why Talusan’s
testimony was dispensed with.

Moreover, in the previous hearing held on November 17, 2005,14 PAP’s hostile witness,
Alexander Barrera, Administrative Assistant of Malayan, testified that he was the one who
procured Malayan’s renewal policy, not RCBC, and that RCBC merely referred fire insurance
clients to Malayan. He stressed, however, that no written referral agreement exists between
RCBC and Malayan. He also denied that PAP notified Malayan about the transfer before the
renewal policy was issued. He added that PAP, through Maricar Jardiniano (Jardiniano),
informed him that the fire insurance would be renewed on an "as is basis." 15

Granting that any notice to RCBC was binding on Malayan, PAP’s claim that it notified RCBC
and Malayan was not indubitably established. At best, PAP could only come up with the
hearsay testimony of its principal witness, Branch Manager Katsumi Yoneda (Mr. Yoneda), who
testified as follows:

What did you do as Branch Manager of Pap Co. Ltd.?

What I did I instructed my Secretary, because these equipment was bank loan and because of
the insurance I told my secretary to notify.

To notify whom?

I told my Secretary to inform the bank.

You are referring to RCBC?

A

Yes, sir.

xxxx

After the RCBC was informed in the manner you stated, what did you do regarding the new
location of these properties at Pace Pacific Bldg. insofar as Malayan Insurance Company is
concerned?

After that transfer, we informed the RCBC about the transfer of the equipment and also
Malayan Insurance but we were not able to contact Malayan Insurance so I instructed again
my secretary to inform Malayan about the transfer.

Who was the secretary you instructed to contact Malayan Insurance, the defendant in this
case?

Dory Ramos.

How many secretaries do you have at that time in your office?

Only one, sir.

Do you know a certain Maricar Jardiniano?

Yes, sir.

Why do you know her?

Because she is my secretary.

So how many secretaries did you have at that time?

Two, sir.

What happened with the instruction that you gave to your secretary Dory Ramos about the
matter of informing the defendant Malayan Insurance Co of the new location of the insured
properties?

A
She informed me that the notification was already given to Malayan Insurance.

Aside from what she told you how did you know that the information was properly relayed by
the said secretary, Dory Ramos, to Malayan Insurance?

I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.

Now after you were told by your secretary, Dory Ramos, that she was able to inform Malayan
Insurance Company about the transfer of the properties insured to the new location, do you
know what happened insofar this information was given to the defendant Malayan Insurance?

I heard that someone from Malayan Insurance came over to our company.

Did you come to know who was that person who came to your place at Pace Pacific?

I do not know, sir.

How did you know that this person from Malayan Insurance came to your place?

It is according to the report given to me.

Who gave that report to you?

Dory Ramos.

Was that report in writing or verbally done?

Verbal.16 [Emphases supplied]

The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no personal
knowledge of the notice to either Malayan or RCBC. PAP should have presented his secretaries,
Dory Ramos and Maricar Jardiniano, at the witness stand. His testimony alone was unreliable.

Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the insured properties
were transferred to a different location only after the renewal of the fire insurance policy.

COURT

When did you transfer the machineries and equipments before the renewal or after the renewal
of the insurance?
A

After the renewal.

COURT

You understand my question?

Yes, Your Honor.17 [Emphasis supplied]

This enfeebles PAP’s position that the subject properties were already transferred to the Pace
factory before the policy was renewed.

The transfer from the Sanyo Factory to the PACE Factory increased the risk.

The courts below held that even if Malayan was not notified thereof, the transfer of the insured
properties to the Pace Factory was insignificant as it did not increase the risk.

Malayan argues that the change of location of the subject properties from the Sanyo Factory to
the Pace Factory increased the hazard to which the insured properties were exposed. Malayan
wrote:

With regards to the exposure of the risk under the old location, this was occupied as factory of
automotive/computer parts by the assured, and factory of zinc & aluminum die cast, plastic
gear for copy machine by Sanyo Precision Phils., Inc. with a rate of 0.449% under 6.1.2 A. But
under Pace Pacific Mfg. Corporation this was occupied as factory that repacks silicone sealant
to plastic cylinders with a rate of 0.657% under 6.1.2 A. Hence, there was an increase in the
hazard as indicated by the increase in rate.18

The Court agrees with Malayan that the transfer to the Pace Factory exposed the properties to
a hazardous environment and negatively affected the fire rating stated in the renewal policy.
The increase in tariff rate from 0.449% to 0.657% put the subject properties at a greater risk of
loss. Such increase in risk would necessarily entail an increase in the premium payment on
the fire policy.

Unfortunately, PAP chose to remain completely silent on this very crucial point. Despite the
importance of the issue, PAP failed to refute Malayan’s argument on the increased risk.

Malayan is entitled to rescind the insurance contract

Considering that the original policy was renewed on an "as is basis," it follows that the renewal
policy carried with it the same stipulations and limitations. The terms and conditions in the
renewal policy provided, among others, that the location of the risk insured against is at the
Sanyo factory in PEZA. The subject insured properties, however, were totally burned at the
Pace Factory. Although it was also located in PEZA, Pace Factory was not the location
stipulated in the renewal policy. There being an unconsented removal, the transfer was at
PAP’s own risk. Consequently, it must suffer the consequences of the fire. Thus, the Court
agrees with the report of Cunningham Toplis Philippines, Inc., an international loss adjuster
which investigated the fire incident at the Pace Factory, which opined that "[g]iven that the
location of risk covered under the policy is not the location affected, the policy will, therefore,
not respond to this loss/claim."19

It can also be said that with the transfer of the location of the subject properties, without notice
and without Malayan’s consent, after the renewal of the policy, PAP clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides:

Section 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.

Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a
contract of insurance."
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind the
insurance contract in case of an alteration in the use or condition of the thing insured. Section
168 of the Insurance Code provides, as follows:

Section 68. An alteration in the use or condition of a thing insured from that to which it is
limited by the policy made without the consent of the insurer, by means within the control of
the insured, and increasing the risks, entitles an insurer to rescind a contract of fire insurance.

Accordingly, an insurer can exercise its right to rescind an insurance contract when the
following conditions are present, to wit:

1) the policy limits the use or condition of the thing insured;

2) there is an alteration in said use or condition;

3) the alteration is without the consent of the insurer;

4) the alteration is made by means within the insured’s control; and

5) the alteration increases the risk of loss.20

In the case at bench, all these circumstances are present. It was clearly established that the
renewal policy stipulated that the insured properties were located at the Sanyo factory; that
PAP removed the properties without the consent of Malayan; and that the alteration of the
location increased the risk of loss.

WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby REVERSED
and SET ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby declared NOT liable for
the loss of the insured machineries and equipment suffered by PAP Co., Ltd.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice
 [G.R. No. 118889. March 23, 1998]

FGU INSURANCE CORPORATION, petitioner, vs., COURT OF APPEALS, FILCAR

TRANSPORT, INC., and FORTUNE INSURANCE CORPORATION, respondents.

DECISION
BELLOSILLO, J.:

For damages suffered by a third party, may an action based on quasi-delict prosper against
a rent-a-car company and, consequently, its insurer for fault or negligence of the car lessee in
driving the rented vehicle?
This was a two-car collision at dawn. At around 3 o'clock of 21 April 1987, two (2) vehicles,
both Mitsubishi Colt Lancers, cruising northward along Epifanio de los Santos Avenue,
Mandaluyong City, figured in a traffic accident. The car bearing Plate No. PDG 435 owned by
Lydia F. Soriano was being driven at the outer lane of the highway by Benjamin Jacildone,
while the other car, with PlateNo. PCT 792, owned by respondent FILCAR Transport, Inc.
(FILCAR), and driven by Peter Dahl-Jensen as lessee, was at the center lane, left of the other
vehicle. Upon approaching the corner ofPioneer Street, the car owned by FILCAR swerved to the
right hitting the left side of the car of Soriano. At that time Dahl-Jensen, a Danish tourist, did
not possess a Philippine driver's license.[1]
As a consequence, petitioner FGU Insurance Corporation, in view of its insurance contract
with Soriano, paid the latter P25,382.20. By way of subrogation,[2] it sued Dahl-Jensen and
respondent FILCAR as well as respondent Fortune Insurance Corporation (FORTUNE) as
insurer of FILCAR for quasi-delict before the Regional Trial Court of Makati City.
Unfortunately, summons was not served on Dahl-Jensen since he was no longer staying at
his given address; in fact, upon motion of petitioner, he was dropped from the complaint.
On 30 July 1991 the trial court dismissed the case for failure of petitioner to substantiate
its claim of subrogation.[3]
On 31 January 1995 respondent Court of Appeals affirmed the ruling of the trial court
although based on another ground, i.e., only the fault or negligence of Dahl-Jensen was
sufficiently proved but not that of respondent FILCAR.[4] In other words, petitioner failed to
establish its cause of action for sum of money based on quasi-delict.
In this appeal, petitioner insists that respondents are liable on the strength of the ruling in
MYC-Agro-Industrial Corporation v. Vda. de Caldo[5] that the registered owner of a vehicle is
liable for damages suffered by third persons although the vehicle is leased to another.
We find no reversible error committed by respondent court in upholding the dismissal of
petitioner's complaint. The pertinent provision is Art. 2176 of the Civil Code which
states: "Whoever by act or omission causes damage to another, there being fault or negligence,
is obliged to pay for the damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called a quasi-delict x x x x"
To sustain a claim based thereon, the following requisites must concur: (a) damage
suffered by the plaintiff; (b) fault or negligence of the defendant; and, (c) connection of cause
and effect between the fault or negligence of the defendant and the damage incurred by the
plaintiff.[6]
We agree with respondent court that petitioner failed to prove the existence of the second
requisite, i.e., fault or negligence of defendant FILCAR, because only the fault or negligence of
Dahl-Jensen was sufficiently established, not that of FILCAR. It should be noted that the
damage caused on the vehicle of Soriano was brought about by the circumstance that Dahl-
Jensen swerved to the right while the vehicle that he was driving was at the center lane. It is
plain that the negligence was solely attributable to Dahl-Jensen thus making the damage
suffered by the other vehicle his personal liability. Respondent FILCAR did not have any
participation therein.
Article 2180 of the same Code which deals also with quasi-delict provides:

The obligation imposed by article 2176 is demandable not only for one's own acts or omissions,
but also for those of persons for whom one is responsible.

The father and, in case of his death or incapacity, the mother, are responsible for the damages
caused by the minor children who live in their company.

Guardians are liable for damages caused by the minors or incapacitated persons who are
under their authority and live in their company.

The owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions.

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.

The State is responsible in like manner when it acts through a special agent; but not when the
damage has been caused by the official to whom the task done properly pertains, in which case
what is provided in article 2176 shall be applicable.

Lastly, teachers or heads of establishments of arts and trades shall be liable for damages
caused by their pupils and students or apprentices, so long as they remain in their custody.

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.

The liability imposed by Art. 2180 arises by virtue of a presumption juris tantum of
negligence on the part of the persons made
responsible thereunder, derived from their failure to exercise due care and vigilance over the
acts of subordinates to prevent them from causing damage. [7] Yet, as correctly observed by
respondent court, Art. 2180 is hardly applicable because none of the
circumstances mentioned therein obtains in the case under consideration. Respondent FILCAR
being engaged in a rent-a-car business was only the owner of the car leased to Dahl-Jensen. As
such, there was no vinculum juris between them as employer and employee. Respondent
FILCAR cannot in any way be responsible for the negligent act of Dahl-Jensen, the former not
being an employer of the latter.
We now correlate par. 5 of Art. 2180 with Art. 2184 of the same Code which provides: "In
motor vehicle mishap, the owner is solidarily liable with his driver, if the former, who was in
the vehicle, could have by the use of due diligence, prevented the misfortune x x x x If the
owner was not in the motor vehicle, the provisions of article 2180 are applicable." Obviously,
this provision of Art. 2184 isneither applicable because of the absence of master-driver
relationship between respondent FILCAR and Dahl-Jensen. Clearly, petitioner has no cause of
action against respondent FILCAR on the basis of quasi-delict; logically, its claim against
respondent FORTUNE can neither prosper.
Petitioner's insistence on MYC-Agro-Industrial Corporation is rooted in a misapprehension
of our ruling therein. In that case, the negligent and reckless operation of the truck owned by
petitioner corporation caused injuries to several persons and damage to property. Intending to
exculpate itself from liability, the corporation raised the defense that at the time of the
collision it had no morecontrol over the vehicle as it was leased to another; and, that the
driver was not its employee but of the lessee. The trial court was not persuaded as it found that
the true nature of the alleged lease contract was nothing more than a disguise effected by the
corporation to relieve itself of the burdens and responsibilities of an employer. We upheld this
finding and affirmed the declaration of joint and several liability of the corporation with its
driver.
WHEREFORE, the petition is DENIED. The decision of respondent Court of Appeals dated
31 January 1995 sustaining the dismissal of petitioner's complaint by the trial court is
AFFIRMED.Costs against petitioner.
SO ORDERED.

G.R. No. L-44059 October 28, 1977

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,

vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:

This is a novel question in insurance law: Can a common-law wife named as beneficiary in the
life insurance policy of a legally married man claim the proceeds thereof in case of death of the
latter?

On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co.,
Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the
same amount Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in
his policy. He to her as his wife.

On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a
failing branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to
pay the coverage in the total amount of P11,745.73, representing the face value of the policy in
the amount of P5,882.00 plus the additional benefits for accidental death also in the amount of
P5,882.00 and the refund of P18.00 paid for the premium due November, 1969, minus the
unpaid premiums and interest thereon due for January and February, 1969, in the sum of
P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured Buenaventura C.
Ebrado were merely living as husband and wife without the benefit of marriage.

Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts
that she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T.
Ebrado.

In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life
Assurance Co., Ltd. commenced an action for Interpleader before the Court of First Instance of
Rizal on April 29, 1970.

After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which,
a pre-trial order was entered reading as follows: ñé+.£ªwph!1
 During the pre-trial conference, the parties manifested to the court. that there is
no possibility of amicable settlement. Hence, the Court proceeded to have the
parties submit their evidence for the purpose of the pre-trial and make
admissions for the purpose of pretrial. During this conference, parties Carponia
T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the deceased
Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six —
(legitimate) namely; Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all
surnamed Ebrado; 2) that during the lifetime of the deceased, he was insured
with Insular Life Assurance Co. Under Policy No. 009929 whole life plan, dated
September 1, 1968 for the sum of P5,882.00 with the rider for accidental death
benefit as evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant
Pascuala and Exhibit 7 for Carponia Ebrado; 3) that during the lifetime of
Buenaventura Ebrado, he was living with his common-wife, Carponia Ebrado,
with whom she had 2 children although he was not legally separated from his
legal wife; 4) that Buenaventura in accident on October 21, 1969 as evidenced
by the death Exhibit 3 and affidavit of the police report of his death Exhibit 5; 5)
that complainant Carponia Ebrado filed claim with the Insular Life Assurance
Co. which was contested by Pascuala Ebrado who also filed claim for the
proceeds of said policy 6) that in view ofthe adverse claims the insurance
company filed this action against the two herein claimants Carponia and
Pascuala Ebrado; 7) that there is now due from the Insular Life Assurance Co.
as proceeds of the policy P11,745.73; 8) that the beneficiary designated by the
insured in the policy is Carponia Ebrado and the insured made reservation to
change the beneficiary but although the insured made the option to change the
beneficiary, same was never changed up to the time of his death and the wife did
not have any opportunity to write the company that there was reservation to
change the designation of the parties agreed that a decision be rendered based
on and stipulation of facts as to who among the two claimants is entitled to the
policy.

Upon motion of the parties, they are given ten (10) days to file their
simultaneous memoranda from the receipt of this order.

SO ORDERED.

On September 25, 1972, the trial court rendered judgment declaring among others, Carponia
T. Ebrado disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado
and directing the payment of the insurance proceeds to the estate of the deceased insured. The
trial court held: ñé+.£ªwph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of
such guilt or commission of those acts be made in a separate independent
action brought for the purpose. The guilt of the donee (beneficiary) may be
proved by preponderance of evidence in the same proceeding (the action brought
to declare the nullity of the donation).

It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for
the disqualification and incapacity to exist and that it is only necessary that
such fact be established by preponderance of evidence in the trial. Since it is
agreed in their stipulation above-quoted that the deceased insured and
defendant Carponia T. Ebrado were living together as husband and wife without
being legally married and that the marriage of the insured with the other
defendant Pascuala Vda. de Ebrado was valid and still existing at the time the
insurance in question was purchased there is no question that defendant
Carponia T. Ebrado is disqualified from becoming the beneficiary of the policy in
question and as such she is not entitled to the proceeds of the insurance upon
the death of the insured.

From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11,
1976, the Appellate Court certified the case to Us as involving only questions of law.

We affirm the judgment of the lower court.

1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new
Insurance Code (PD No. 612, as amended) does not contain any specific provision grossly
resolutory of the prime question at hand. Section 50 of the Insurance Act which provides that
"(t)he insurance shag be applied exclusively to the proper interest of the person in whose name
it is made" 1 cannot be validly seized upon to hold that the mm includes the beneficiary. The
word "interest" highly suggests that the provision refers only to the "insured" and not to the
beneficiary, since a contract of insurance is personal in character. 2 Otherwise, the prohibitory
laws against illicit relationships especially on property and descent will be rendered nugatory,
as the same could easily be circumvented by modes of insurance. Rather, the general rules of
civil law should be applied to resolve this void in the Insurance Law. Article 2011 of the New
Civil Code states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed by the
general rules of the civil law regulating contracts. 3 And under Article 2012 of the same Code,
"any person who is forbidden from receiving any donation under Article 739 cannot be named
beneficiary of a fife insurance policy by the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred from receiving donations from each other.
Article 739 of the new Civil Code provides: ñé+.£ªwph!1

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at

the time of donation;

Those made between persons found guilty of the same criminal offense, in
consideration thereof;

3. Those made to a public officer or his wife, descendants or ascendants by

reason of his office.

In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilt of the donee may be
proved by preponderance of evidence in the same action.

2. In essence, a life insurance policy is no different from a civil donation insofar as the
beneficiary is concerned. Both are founded upon the same consideration: liberality. A
beneficiary is like a donee, because from the premiums of the policy which the insured pays
out of liberality, the beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the new Civil Code should equally operate in life
insurance contracts. The mandate of Article 2012 cannot be laid aside: any person who cannot
receive a donation cannot be named as beneficiary in the life insurance policy of the person
who cannot make the donation. 5 Under American law, a policy of life insurance is considered
as a testament and in construing it, the courts will, so far as possible treat it as a will and
determine the effect of a clause designating the beneficiary by rules under which wins are
interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a barrier
between common law spouses in record to Property relations since such hip ultimately
encroaches upon the nuptial and filial rights of the legitimate family There is every reason to
hold that the bar in donations between legitimate spouses and those between illegitimate ones
should be enforced in life insurance policies since the same are based on similar consideration
As above pointed out, a beneficiary in a fife insurance policy is no different from a donee. Both
are recipients of pure beneficence. So long as manage remains the threshold of family laws,
reason and morality dictate that the impediments imposed upon married couple should
likewise be imposed upon extra-marital relationship. If legitimate relationship is circumscribed
by these legal disabilities, with more reason should an illicit relationship be restricted by these
disabilities. Thus, in Matabuena v. Cervantes, 7 this Court, through Justice Fernando,
said: ñé+.£ªwph!1

If the policy of the law is, in the language of the opinion of the then Justice
J.B.L. Reyes of that court (Court of Appeals), 'to prohibit donations in favor of
the other consort and his descendants because of and undue and improper
pressure and influence upon the donor, a prejudice deeply rooted in our ancient
law;" por-que no se enganen desponjandose el uno al otro por amor que han de
consuno' (According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the
rationale 'No Mutuato amore invicem spoliarentur' the Pandects (Bk, 24, Titl. 1,
De donat, inter virum et uxorem); then there is very reason to apply the same
prohibitive policy to persons living together as husband and wife without the
benefit of nuptials. For it is not to be doubted that assent to such irregular
connection for thirty years bespeaks greater influence of one party over the
other, so that the danger that the law seeks to avoid is correspondingly
increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad
Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest
the condition 6f those who incurred guilt should turn out to be better.' So long
as marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.
 It is hardly necessary to add that even in the absence of the above
pronouncement, any other conclusion cannot stand the test of scrutiny. It would
be to indict the frame of the Civil Code for a failure to apply a laudable rule to a
situation which in its essentials cannot be distinguished. Moreover, if it is at all
to be differentiated the policy of the law which embodies a deeply rooted notion
of what is just and what is right would be nullified if such irregular relationship
instead of being visited with disabilities would be attended with benefits.
Certainly a legal norm should not be susceptible to such a reproach. If there is
every any occasion where the principle of statutory construction that what is
within the spirit of the law is as much a part of it as what is written, this is it.
Otherwise the basic purpose discernible in such codal provision would not be
attained. Whatever omission may be apparent in an interpretation purely literal
of the language used must be remedied by an adherence to its avowed objective.

4. We do not think that a conviction for adultery or concubinage is exacted before the
disabilities mentioned in Article 739 may effectuate. More specifically, with record to the
disability on "persons who were guilty of adultery or concubinage at the time of the donation,"
Article 739 itself provides: ñé+.£ªwph!1

In the case referred to in No. 1, the action for declaration of nullity may be
brought by the spouse of the donor or donee; and the guilty of the donee may be
proved by preponderance of evidence in the same action.

The underscored clause neatly conveys that no criminal conviction for the offense is a
condition precedent. In fact, it cannot even be from the aforequoted provision that a
prosecution is needed. On the contrary, the law plainly states that the guilt of the party may be
proved "in the same acting for declaration of nullity of donation. And, it would be sufficient if
evidence preponderates upon the guilt of the consort for the offense indicated. The quantum of
proof in criminal cases is not demanded.

In the caw before Us, the requisite proof of common-law relationship between the insured and
the beneficiary has been conveniently supplied by the stipulations between the parties in the
pre-trial conference of the case. It case agreed upon and stipulated therein that the deceased
insured Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six
legitimate children; that during his lifetime, the deceased insured was living with his common-
law wife, Carponia Ebrado, with whom he has two children. These stipulations are nothing less
than judicial admissions which, as a consequence, no longer require proof and cannot be
contradicted. 8 A fortiori, on the basis of these admissions, a judgment may be validly rendered
without going through the rigors of a trial for the sole purpose of proving the illicit liaison
between the insured and the beneficiary. In fact, in that pretrial, the parties even agreed "that a
decision be rendered based on this agreement and stipulation of facts as to who among the two
claimants is entitled to the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T.
Ebrado is hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado
in his life insurance policy. As a consequence, the proceeds of the policy are hereby held
payable to the estate of the deceased insured. Costs against Carponia T. Ebrado.

SO ORDERED.
 [G.R. No. 106999. June 20, 1996]

PHILIPPINE HOME ASSURANCE CORPORATION, petitioner, vs. COURT OF APPEALS and

EASTERN SHIPPING LINES, INC., respondents.

DECISION
KAPUNAN, J.:

Eastern Shipping Lines, Inc. (ESLI) loaded on board SS Eastern Explorer in Kobe, Japan,
the following shipment for carriage to Manila and Cebu, freight pre-paid and in good order and
condition, viz: (a) two (2) boxes internal combustion engine parts, consigned to William Lines,
Inc. under Bill of Lading No. 042283; (b) ten (10) metric tons (334 bags) ammonium chloride,
consigned to Orca's Company under Bill of Lading No. KCE-12; (c) two hundred (200) bags
Glue 300, consigned to Pan Oriental Match Company under Bill of Lading No. KCE-8; and (d)
garments, consigned to Ding Velayo under Bills of Lading Nos. KMA-73 and KMA-74.
While the vessel was off Okinawa, Japan, a small flame was detected on the acetylene
cylinder located in the accommodation area near the engine room on the main deck level. As
the crew was trying to extinguish the fire, the acetylene cylinder suddenly exploded sending a
flash of flame throughout the accommodation area, thus causing death and severe injuries to
the crew and instantly setting fire to the whole superstructure of the vessel. The incident forced
the master and the crew to abandon the ship.
Thereafter, SS Eastern Explorer was found to be a constructive total loss and its voyage
was declared abandoned.
Several hours later, a tugboat under the control of Fukuda Salvage Co. arrived near the
vessel and commenced to tow the vessel for the port of Naha, Japan.
Fire fighting operations were again conducted at the said port. After the fire was
extinguished, the cargoes which were saved were loaded to another vessel for delivery to their
original ports of destination. ESLI charged port. After the fire was extinguished, the cargoes
which were saved were loaded to another vessel for delivery to their original ports of
destination. ESLI charged the consignees several amounts corresponding to additional freight
and salvage charges, as follows: (a) for the goods covered by Bill of Lading No. 042283, ESLI
charged the consignee the sum of P1,927.65, representing salvage charges assessed against
the goods; (b) for the goods covered by Bill of Lading No. KCE-12, ESLI charged the consignee
the sum of P2,980.64 for additional freight and P826.14 for salvage charges against the goods;
(c) for the goods covered by Bill of Lading No. KCE-8, ESLI charged the consignee the sum of
P3,292.26 for additional freight and P4,130.68 for salvage charges against the goods; and (d)
for the goods under Bills of Lading Nos. KMA-73 and KMA-74, ESLI charged the consignee the
sum of P8,337.06 for salvage charges against the goods.
 The charges were all paid by Philippine Home Assurance Corporation (PHAC) under protest
for and in behalf of the consignees.
PHAC, as subrogee of the consignees, thereafter filed a complaint before the Regional Trial
Court of Manila, Branch 39, against ESLI to recover the sum paid under protest on the ground
that the same were actually damages directly brought about by the fault, negligence, illegal act
and/or breach of contract of ESLI.
In its answer, ESLI contended that it exercised the diligence required by law in the
handling, custody and carriage of the shipment; that the fire was caused by an unforeseen
event; that the additional freight charges are due and demandable pursuant to the Bill of
Lading;[1] and that salvage charges are properly collectible under Act No. 2616, known as the
Salvage Law.
The trial court dismissed PHAC's complaint and ruled in favor of ESLI ratiocinating thus:
The question to be resolved is whether or not the fire on the vessel which was caused by
the explosion of an acetylene cylinder loaded on the same was the fault or negligence of the
defendant.
Evidence has been presented that the SS "Eastern Explorer" was a seaworthy vessel
(Deposition of Jumpei Maeda, October 23, 1980, p. 3) and before the ship loaded the Acetylene
Cylinder No. NCW 875, the same has been tested, checked and examined and was certified to
have complied with the required safety measures and standards (Deposition of Senjei Hayashi,
October 23, 1980, pp. 2-3). When the fire was detected by the crew, fire fighting operations was
immediately conducted but due to the explosion of the acetylene cylinder, the crew were unable
to contain the fire and had to abandon the ship to save their lives and were saved from
drowning by passing vessels in the vicinity. The burning of the vessel rendering it a
constructive total loss and incapable of pursuing its voyage to the Philippines was, therefore,
not the fault or negligence of defendant but a natural disaster or calamity which nobody would
like to happen. The salvage operations conducted by Fukuda Salvage Company (Exhibits "4-A"
and "6-A") was perfectly a legal operation and charges made on the goods recovered were
legitimate charges.

Act No. 2616, otherwise known as the Salvage Law, is thus applicable to the case at
bar. Section 1 of Act No. 2616 states:

"Section 1. When in case of shipwreck, the vessel or its cargo shall be beyond the control of the
crew, or shall have been abandoned by them, and picked up and conveyed to a safe place by
other persons, the latter shall be entitled to a reward for the salvage.

Those who, not being included in the above paragraph, assist in saving a vessel or its cargo
from shipwreck, shall be entitled to like reward."

In relation to the above provision, the Supreme Court has ruled in Erlanger & Galinger v.
Swedish East Asiatic Co., Ltd., 34 Phil. 178, that three elements are necessary to a valid
salvage claim, namely (a) a marine peril (b) service voluntarily rendered when not required as
an existing duty or from a special contract and (c) success in whole or in part, or that the
service rendered contributed to such success.

The above elements are all present in the instant case. Salvage charges may thus be assessed
on the cargoes saved from the vessel. As provided for in Section 13 of the Salvage Law, "The
expenses of salvage, as well as the reward for salvage or assistance, shall be a charge on the
things salvaged or their value." In Manila Railroad Co. v. Macondray Co., 37 Phil. 583, it was
also held that "when a ship and its cargo are saved together, the salvage allowance should be
charged against the ship and cargo in the proportion of their respective values, the same as in
a case of general average . . ." Thus, the "compensation to be paid by the owner of the cargo is
in proportion to the value of the vessel and the value of the cargo saved." (Atlantic Gulf and
Pacific Co. v. Uchida Kisen Kaisha, 42 Phil. 321). (Memorandum for Defendant, Records, pp.
212-213).

With respect to the additional freight charged by defendant from the consignees of the
goods, the same are also validly demandable.
As provided by the Civil Code:

"Article 1174. Except in cases expressly specified by law, or when it is otherwise declared by
stipulation, or when the nature of the obligation require the assumption or risk, no person
shall be responsible for those events which could not be foreseen, or which though foreseen,
were inevitable."

"Article 1266. The debtor in obligations to do shall also be released when the prestation
becomes legally or physically impossible without the fault of the obligor."
 The burning of "EASTERN EXPLORER" while off Okinawa rendered it physically impossible
for defendant to comply with its obligation of delivering the goods to their port of destination
pursuant to the contract of carriage. Under Article 1266 of the Civil Code, the physical
impossibility of the prestation extinguished defendant's obligation.
It is but legal and equitable for the defendant therefore, to demand additional freight from
the consignees for forwarding the goods from Naha, Japan to Manila and Cebu City on board
another vessel, the "EASTERN MARS." This finds support under Article 844 of the Code of
Commerce which provides as follows:

"Article 844. A captain who may have taken on board the goods saved from the wreck shall
continue his course to the port of destination; and on arrival should deposit the same, with
judicial intervention at the disposal of their legitimate owners. x x x

The owners of the cargo shall defray all the expenses of this arrival as well as the payment of
the freight which, after taking into consideration the circumstances of the case, may be fixed
by agreement or by a judicial decision."

Furthermore, the terms and conditions of the Bill of Lading authorize the imposition of
additional freight charges in case of forced interruption or abandonment of the voyage. At the
dorsal portion of the Bills of Lading issued to the consignees is this stipulation:

"12. All storage, transshipment, forwarding or other disposition of cargo at or from a port of
distress or other place where there has been a forced interruption or abandonment of the
voyage shall be at the expense of the owner, shipper, consignee of the goods or the holder of
this bill of lading who shall be jointly and severally liable for all freight charges and expenses of
every kind whatsoever, whether payable in advance or not that may be incurred by the cargo in
addition to the ordinary freight, whether the service be performed by the named carrying vessel
or by carrier's other vessels or by strangers. All such expenses and charges shall be due and
payable day by day immediately when they are incurred."

The bill of lading is a contract and the parties are bound by its terms (Govt. of the
Philippine Islands vs. Ynchausti and Co., 40 Phil. 219). The provision quoted is binding upon
the consignee.
Defendant therefore, can validly require payment of additional freight from the
consignee. Plaintiff can not thus recover the additional freight paid by the consignee to
defendant. (Memorandum for Defendant, Record, pp. 215-216).[2]
On appeal to the Court of Appeals, respondent court affirmed the trial court's findings and
conclusions,[3] hence, the present petition for review before this Court on the following errors:

I. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL THE TRIAL

COURT'S FINDINGS THAT THE BURNING OF THE SS "EASTERN EXPLORER," RENDERING IT
A CONSTRUCTIVE TOTAL LOSS, IS A NATURAL DISASTER OR CALAMITY WHICH NOBODY
WOULD LIKE TO HAPPEN, DESPITE EXISTING JURISPRUDENCE TO THE CONTRARY.

II. THE RESPONDENT COURT ARBITRARILY RULED THAT THE BURNING OF THE SS
"EASTERN EXPLORER" WAS NOT THE FAULT AND NEGLIGENCE OF RESPONDENT
EASTERN SHIPPING LINES.

III. THE RESPONDENT COURT COMMITTED GRAVE ABUSE OF DISCRETION IN RULING

THAT DEFENDANT HAD EXERCISED THE EXTRAORDINARY DILIGENCE IN THE VIGILANCE
OVER THE GOODS AS REQUIRED BY LAW.

IV. THE RESPONDENT COURT ARBITRARILY RULED THAT THE MARINE NOTE OF PROTEST
AND STATEMENT OF FACTS ISSUED BY THE VESSEL'S MASTER ARE NOT HEARSAY
DESPITE THE FACT THAT THE VESSEL'S MASTER, CAPT. LICAYLICAY WAS NOT
PRESENTED IN COURT, WITHOUT EXPLANATION WHATSOEVER FOR HIS NON-
PRESENTATION, THUS, PETITIONER WAS DEPRIVED OF ITS RIGHT TO CROSS-EXAMINE
THE AUTHOR THEREOF.

V. THE RESPONDENT COURT ERRONEOUSLY ADOPTED WITH APPROVAL THE TRIAL

COURT'S CONCLUSION THAT THE EXPENSES OR AVERAGES INCURRED IN SAVING THE
CARGO CONSTITUTE GENERAL AVERAGE.

VI. THE RESPONDENT COURT ERRONEOUSLY ADOPTED THE TRIAL COURT'S RULING THAT
PETITIONER WAS LIABLE TO RESPONDENT CARRIER FOR ADDITIONAL FREIGHT AND
SALVAGE CHARGES.[4]

It is quite evident that the foregoing assignment of errors challenges the findings of fact
and the appreciation of evidence made by the trial court and later affirmed by respondent
court. While it is a well-settled rule that only questions of law may be raised in a petition for
review under Rule 45 of the Rules of Court, it is equally well-settled that the same admits of
the following exceptions, namely:(a) when the conclusion is a finding grounded entirely on
speculation, surmises or conjectures; (b) when the inference made is manifestly mistaken,
absurd or impossible; (c) where there is a grave abuse of discretion; (d) when the judgment is
based on a misapprehension of facts; (e) when the findings of fact are conflicting; (f) when the
Court of Appeals, in making its findings, went beyond the issues of the case and the same is
contrary to the admissions of both appellant and appellee; (g) when the findings of the Court of
Appeals are contrary to those of the trial court; (h) when the findings of fact are conclusions
without citation of specific evidence on which they are based; (i) when the facts set forth in the
petition as well as in the petitioners' main and reply briefs are nor disputed by the
respondents; and (j) when the finding of fact of the Court of Appeals is premised on the
supposed absence of evidence and is contradicted by the evidence on record. [5] Thus, if there is
a showing, as in the instant case, that the findings complained of are totally devoid of support
in the records, or that they are so glaringly erroneous as to constitute grave abuse of
discretion, the same may be properly reviewed and evaluated by this Court.
It is worthy to note at the outset that the goods subject of the present controversy were
neither lost nor damaged in transit by the fire that razed the carrier. In fact, the said goods
were all delivered to the consignees, even if the transshipment took longer than
necessary. What is at issue therefore is not whether or not the carrier is liable for the loss,
damage, or deterioration of the goods transported by them but who, among the carrier,
consignee or insurer of the goods, is liable for the additional charges or expenses incurred by
the owner of the ship in the salvage operations and in the transshipment of the goods via a
different carrier.
In absolving respondent carrier of any liability, respondent Court of Appeals sustained the
trial court's finding that the fire that gutted the ship was a natural disaster or
calamity. Petitioner takes exception to this conclusion and we agree.
In our jurisprudence, fire may not be considered a natural disaster or calamity since it
almost always arises from some act of man or by human means. It cannot be an act of God
unless caused by lightning or a natural disaster or casualty not attributable to human agency.
[6]

In the case at bar, it is not disputed that a small flame was detected on the acetylene
cylinder and that by reason thereof, the same exploded despite efforts to extinguish the
fire. Neither is there any doubt that the acetylene cylinder, obviously fully loaded, was stored in
the accommodation area near the engine room and not in a storage area considerably far, and
in a safe distance, from the engine room. Moreover, there was no showing, and none was
alleged by the parties, that the fire was caused by a natural disaster or calamity not
attributable to human agency. On the contrary, there is strong evidence indicating that the
acetylene cylinder caught fire because of the fault and negligence of respondent ESLI, its
captain and its crew.
First, the acetylene cylinder which was fully loaded should not have been stored in the
accommodation area near the engine room where the heat generated therefrom could cause the
acetylene cylinder to explode by reason of spontaneous combustion. Respondent ESLI should
have easily foreseen that the acetylene cylinder, containing highly inflammable material, was in
a real danger of exploding because it was stored in close proximity to the engine room.
Second, respondent ESLI should have known that by storing the acetylene cylinder in the
accommodation area supposed to be reserved for passengers, it unnecessarily exposed its
passengers to grave danger and injury. Curious passengers, ignorant of the danger the tank
might have on humans and property, could have handled the same or could have lighted and
smoke cigarettes while repairing in the accommodation area.
Third, the fact that the acetylene cylinder was checked, tested and examined and
subsequently certified as having complied with the safety measures and standards by qualified
experts[7] before it was loaded in the vessel only shows to a great extent that negligence was
present in the handling of the acetylene cylinder after it was loaded and while it was on board
the ship. Indeed, had the respondent and its agents not been negligent in storing the acetylene
cylinder near the engine room, then that same would not have leaked and exploded during the
voyage.
Verily, there is no merit in the finding of the trial court to which respondent court
erroneously agreed that the fire was not fault or negligence of respondent but a natural
disaster or calamity. The records are simply wanting in this regard.
Anent petitioner's objection to the admissibility of Exhibits "4" and "5", the Statement of
Facts and the Marine Note of Protest issued by Captain Tiburcio A. Licaylicay, we find the same
impressed with merit because said documents are hearsay evidence. Capt. Licaylicay, Master of
S.S. Eastern Explorer who issued the said documents, was not presented in court to testify to
the truth of the facts he stated therein; instead, respondent ESLI presented Junpei Maeda, its
Branch Manager in Tokyo and Yokohama, Japan, who evidently had no personal knowledge of
the facts stated in the documents at issue. It is clear from Section 36, Rule 130 of the Rules of
Court that any evidence, whether oral or documentary, is hearsay if its probative value is not
based on the personal knowledge of the witness but on the knowledge of some other person not
on the witness stand. Consequently, hearsay evidence, whether objected to or not, has no
probative value unless the proponent can show that the evidence falls within the exceptions to
the hearsay evidence rule.[8] It is excluded because the party against whom it is presented is
deprived of his right and opportunity to cross-examine the persons to whom the statements or
writings are attributed.
On the issue of whether or not respondent court committed an error in concluding that the
expenses incurred in saving the cargo are considered general average, we rule in the
affirmative. As a rule, general or gross averages include all damages and expenses which are
deliberately caused in order to save the vessel, its cargo, or both at the same time, from a real
and known risk.[9] While the instant case may technically fall within the purview of the said
provision, the formalities prescribed under Article 813[10] and 814[11] of the Code of Commerce in
order to incur the expenses and cause the damage corresponding to gross average were not
complied with. Consequently, respondent ESLI's claim for contribution from the consignees of
the cargo at the time of the occurrence of the average turns to naught.
Prescinding from the foregoing premises, it indubitably follows that the cargo consignees
cannot be made liable to respondent carrier for additional freight and salvage
charges. Consequently, respondent carrier must refund to herein petitioner the amount it paid
under protest for additional freight and salvage charges in behalf of the consignee.
WHEREFORE, the judgment appealed from is hereby REVERSED and SET
ASIDE. Respondent Eastern Shipping Lines, Inc. is ORDERED to return to petitioner Philippine
Home Assurance Corporation the amount it paid under protest in behalf of the consignees
herein.
SO ORDERED.