G.R. No.
71360 July 16, 1986 there was excusable neglect, Summons in that case was served through "an employee in
DEVELOPMENT INSURANCE CORPORATION, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, and PHILIPPINE UNION REALTY
DEVELOPMENT CORPORATION, respondents.
Balgos & Perez Law Offices for petitioner.
Agustin M. Sundiam for private respondent.
CRUZ, J.:
A fire occurred in the building of the private respondent and it sued for recovery of
damages from the petitioner on the basis of an insurance contract between them. The
petitioner allegedly failed to answer on time and was declared in default by the trial court.
A judgment of default was subsequently rendered on the strength of the evidence
submitted ex parte by the private respondent, which was allowed full recovery of its
claimed damages. On learning of this decision, the petitioner moved to lift the order of
default, invoking excusable neglect, and to vacate the judgment by default. Its motion was
denied. It then went to the respondent court, which affirmed the decision of the trial
court in toto. The petitioner is now before us, hoping presumably that it will fare better
here than before the trial court and the Intermediate Appellate Court. We shall see.
On the question of default, the record argues mightily against it. It is indisputable that
summons was served on it, through its senior vice-president, on June 19,1980. On July 14,
1980, ten days after the expiration of the original 15-day period to answer (excluding July
4), its counsel filed an ex parte motion for an extension of five days within which to file its
answer. On July 18, 1980, the last day of the requested extension-which at the time had
not yet been granted-the same counsel filed a second motion for another 5-day extension,
fourteen days after the expiry of the original period to file its answer. The trial court
nevertheless gave it five days from July 14, 1980, or until July 19, 1980, within which to
file its answer. But it did not. It did so only on July 26, 1980, after the expiry of the original
and extended periods, or twenty-one days after the July 5, deadline. As a consequence, the
trial court, on motion of the private respondent filed on July 28, 1980, declared the
petitioner in default. This was done almost one month later, on August 25, 1980. Even so,
the petitioner made no move at all for two months thereafter. It was only on October 27,
1980, more than one month after the judgment of default was rendered by the trial court
on September 26, 1980, that it filed a motion to lift the order of default and vacate the
judgment by default.1
The pattern of inexcusable neglect, if not deliberate delay, is all too clear. The petitioner
has slumbered on its right and awakened too late. While it is true that in Trajano v.
Cruz,2 which it cites, this Court declared "that judgments by default are generally looked
upon with disfavor," the default judgment in that case was set aside precisely because
petitioners' office and not the person in-charge," whereas in the present case summons
was served on the vice-president of the petitioner who however refused to accept it.
Furthermore, as Justice Guerrero noted, there was no evidence showing that the
petitioners in Trajano intended to unduly delay the case.
Besides, the petitioners in Trajano had a valid defense against the complaint filed against
them, and this justified a relaxation of the procedural rules to allow full hearing on the
substantive issues raised. In the instant case, by contrast, the petitioner must just the same
fail on the merits even if the default orders were to be lifted. As the respondent Court
observed, "Nothing would be gained by having the order of default set aside considering
the appellant has no valid defense in its favor." 3
The petitioner's claim that the insurance covered only the building and not the elevators
is absurd, to say the least. This Court has little patience with puerile arguments that affront
common sense, let alone basic legal principles with which even law students are familiar.
The circumstance that the building insured is seven stories high and so had to be provided
with elevators-a legal requirement known to the petitioner as an insurance company-
makes its contention all the more ridiculous.
No less preposterous is the petitioner's claim that the elevators were insured after the
occurrence of the fire, a case of shutting the barn door after the horse had escaped, so to
speak.4 This pretense merits scant attention. Equally undeserving of serious consideration
is its submission that the elevators were not damaged by the fire, against the report of The
arson investigators of the INP5 and, indeed, its own expressed admission in its
answer6 where it affirmed that the fire "damaged or destroyed a portion of the 7th floor
of the insured building and more particularly a Hitachi elevator control panel." 7
There is no reason to disturb the factual findings of the lower court, as affirmed by the
Intermediate Appellate Court, that the heat and moisture caused by the fire damaged
although they did not actually burn the elevators. Neither is this Court justified in
reversing their determination, also factual, of the value of the loss sustained by the private
respondent in the amount of P508,867.00.
The only remaining question to be settled is the amount of the indemnity due to the private
respondent under its insurance contract with the petitioner. This will require an
examination of this contract, Policy No. RY/F-082, as renewed, by virtue of which the
petitioner insured the private respondent's building against fire for P2,500,000.00. 8
The petitioner argues that since at the time of the fire the building insured was worth
P5,800,000.00, the private respondent should be considered its own insurer for the
difference between that amount and the face value of the policy and should share pro
rata in the loss sustained. Accordingly, the private respondent is entitled to an indemnity
of only P67,629.31, the rest of the loss to be shouldered by it alone. In support of this
contention, the petitioner cites Condition 17 of the policy, which provides:
Page 1 of 33
If the property hereby insured shall, at the breaking out of any fire, be collectively of
greater value than the sum insured thereon then the insured shall be considered as being
his own insurer for the difference, and shall bear a ratable proportion of the loss
accordingly. Every item, if more than one, of the policy shall be separately subject to this
condition.

However, there is no evidence on record that the building was worth P5,800,000.00 at the
time of the loss; only the petitioner says so and it does not back up its self-serving estimate
with any independent corroboration. On the contrary, the building was insured at
P2,500,000.00, and this must be considered, by agreement of the insurer and the insured,
the actual value of the property insured on the day the fire occurred. This valuation
becomes even more believable if it is remembered that at the time the building was burned
it was still under construction and not yet completed.

The Court notes that Policy RY/F-082 is an open policy and is subject to the express
condition that:

Open Policy

This is an open policy as defined in Section 57 of the Insurance Act. In the event of loss,
whether total or partial, it is understood that the amount of the loss shall be subject to
appraisal and the liability of the company, if established, shall be limited to the actual loss,
subject to the applicable terms, conditions, warranties and clauses of this Policy, and in no
case shall exceed the amount of the policy.

As defined in the aforestated provision, which is now Section 60 of the Insurance Code,
"an open policy is one in which the value of the thing insured is not agreed upon but is left
to be ascertained in case of loss. " This means that the actual loss, as determined, will
represent the total indemnity due the insured from the insurer except only that the total
indemnity shall not exceed the face value of the policy.

The actual loss has been ascertained in this case and, to repeat, this Court will respect such
factual determination in the absence of proof that it was arrived at arbitrarily. There is no
such showing. Hence, applying the open policy clause as expressly agreed upon by the
parties in their contract, we hold that the private respondent is entitled to the payment of
indemnity under the said contract in the total amount of P508,867.00.

The refusal of its vice-president to receive the private respondent's complaint, as reported
in the sheriff's return, was the first indication of the petitioner's intention to prolong this
case and postpone the discharge of its obligation to the private respondent under this
agreement. That intention was revealed further in its subsequent acts-or inaction-which
indeed enabled it to avoid payment for more than five years from the filing of the claim
against it in 1980. The petitioner has temporized long enough to avoid its legitimate
responsibility; the delay must and does end now.

WHEREFORE, the appealed decision is affirmed in full, with costs against the petitioner.

SO ORDERED.
Page 2 of 33
 G.R. No. L-5915 March 31, 1955
EAGLE STAR INSURANCE CO., LTD., KURR STEAMSHIP CO., INC., ROOSEVELT
STEAMSHIP AGENCY, INC., and LEIF HOEGH & COMPANY, A/S., petitioners,
vs.
CHIA YU, respondent.
Ross, Selph, Carrascoso and Janda and Delfin L. Gonzales for petitioner.
Nabong and Sese for respondent.
REYES, A., J.:
On January 15, 1946, Atkin, Kroll & Co., loaded on the S. S. Roeph Silverlight owned and
operated by Leigh Hoegh & Co., A/S, of San Francisco California, 14 bales of assorted
underwear valued at P8,085.23 consigned to Chia Yu in the City of Manila. The shipment
was insured against all risks by Eagle Star Ins. Co. of San Francisco, California, under a
policy issued to the shipper and by the latter assigned to the consignee. The vessel arrived
in Manila on February 10, 1946, and on March 4 started discharging its cargo into the
custody of the Manila Terminal Co., Inc., which was then operating the arrastre service for
the Bureau of Customs. But the 14 bales consigned to Chia Yu only 10 were delivered to
him as the remaining 3 could not be found. Three of those delivered were also found
damaged to the extent of 50 per cent.
Chia Yu claimed indemnity for the missing and damaged bales. But the claim was declined,
first, by the carrier and afterward by the insurer, whereupon Chia Yu brought the present
action against both, including their respective agents in the Philippines. Commenced in the
Court of First Instance of Manila on November 16, 1948, or more than two years after
delivery of the damaged bales and the date when the missing bales should have been
delivered, the action was resisted by the defendants principally on the ground of
prescription. But the trial court found for plaintiff and rendered judgment in his favor for
the sum claimed plus legal interest and costs. The judgment was affirmed by the Court of
Appeals, and the case is now before us on appeal by certiorari.
Except for the controversy as to the amount for which the carrier could be held liable
under the terms of the bill of lading, the only question presented for determination is
whether plaintiff's action has prescribed.
On the part of the carrier the defense of prescription is made to rest on the following
stipulation of the bill of lading:
In any event the carrier and the ship shall be discharged from all liability in respect of loss
or damage unless suit is brought within one year after the delivery of the goods or the date
when the goods should have been delivered.
The stipulation is but a repetition of a provision contained in section 3 (6) of the United
States Carriage of Goods by Sea, Act of 1936, which was adopted and made applicable to
the Philippines by Commonwealth Act 65 and by express agreement incorporated by
reference in the bill of lading. Following our decision in Chua Kuy vs. Everett Steamship
Corporation,1 G. R. No L-5554 (May 27, 1953) and in E. R. Elser, Inc., et al., vs. Court of
Appeals,. et al.,2 G. R. No. L-6517 (November 29, 1954) giving force and effect to this kind
of stipulation in bills of lading covering shipments from the United States to the
Philippines, we have to hold that plaintiff's failure to bring his action "within one year after
the delivery of the goods or the date when the goods should have been delivered"
discharged the carrier from all liability. This dispenses with the necessity of deciding how
much could be recovered from the carrier under the terms of the bill of lading.
The case for the insurer stands on a different footing, for its claim of prescription is
founded upon the terms of the policy and not upon the bill of lading. Under our law the
time limit for bringing a civil action upon a written contract is ten years after the right of
action accrues. (Sec. 43, Act 190; Art. 1144, New Civil Code.) But counsel for the insurer
claim that this statutory in the policy:
No suit action on this Policy, for the recovery of any claim, shall be sustainable in any Court
of law or equity unless the insured shall have fully complied with all the terms and
conditions of this Policy nor unless commenced with twelve (12) months next after the
happening of the loss . . .
To this we cannot agree.
In the case of E. Macias & Co. vs. China Fire Insurance & Co., Ltd., et al., 46 Phil. 345, relied
upon by the insurer, this Court held that a clause in an insurance policy providing that an
action upon the policy by the insured must be brought within a certain time is, if
reasonable, valid and will prevail over statutory limitations of the action. That decision,
however, was rendered before the passage of Act 4101, which amended the Insurance Act
by inserting the following section in chapter one thereof:
SEC. 61-A. — Any condition, stipulation or agreement in any policy of insurance, limiting
the time for commencing an action thereunder to a period of less than one year from the
time when the cause of action accrues, is void.
As "matters respecting a remedy, such as the bringing of suit, admissibility of evidence,
and statute of limitations, depend upon the law of the place where the suit is brought"
(Insular Government vs. Frank, 13 Phil. 236), any policy clause repugnant to this
amendment to the Insurance Act cannot be given effect in an action in our courts.
Examining the policy sued upon in the present case, we find that its prescriptive clause, if
given effect in accordance with the terms of the policy, would reduce the period allowed
the insured for bringing his action to less than one year. This is so because the said clause
makes the prescriptive period begin from the happening of the loss and at the same time
provides that the no suit on the policy shall be sustainable in any court unless the insured
shall have first fully complied with all the terms and conditions of the policy, among them
that which requires that, as so as the loss is determined, written claim therefor be filed
with the carrier and that the letter to the carrier and the latter's reply should be attached
to the claim papers to be sent to the insurer. It is obvious that compliance with this
condition precedent will necessarily consume time and thus shorten the period for
Page 3 of 33
bringing suit to less than one year if the period is to begin, as stated in the policy, from "the
happening of the loss." Being contrary to the law of the forum, such stipulation cannot be
given effect.
It may perhaps be suggested that the policy clause relied on by the insurer for defeating
plaintiff's action should be given the construction that would harmonize it with section
61-A of the Insurance Act by taking it to mean that the time given the insured for bringing
his suit is twelve months after the cause of action accrues. But the question then would be:
When did the cause of action accrue? On that question we agree with the court below that
plaintiff's cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real necessity
for bringing suit. As the policy provides that the insured should file his claim, first, with
the carrier and then with the insurer, he had a right to wait for his claim to be finally
decided before going to court. The law does not encourages unnecessary litigation.
suit under the prescriptive clause of the policy is twelve months after the accrual of the
cause of action.
In concluding, we may state that contractual limitations contained in insurance policies
are regarded with extreme jealousy by courts and will be strictly construed against the
insurer and should not be permitted to prevent a recovery when their just and honest
application would not produce that result. (46 C. J. S. 273.)
Wherefore, the judgment appealed from is reversed with respect to the carrier and its
agents but affirmed with respect to the insurance company and its agents, with costs
against the latter.
Pablo, Bengzon, Padilla, Jugo, Bautista Angelo, Concepcion, and Reyes, J.B.L., concur.

At this junction it should be explained that while the decision of the Court of Appeals states
that the claim against the insurance company "was finally rejected o April 22, 1947, as
correctly concluded by the court below," it is obvious from the context and we find it to be
a fact that the date meant was April 22, 1948, for this was the date when, according to the
finding of the trial court, the insurance company in London rejected the claim. The trial
court's decision says:

On September 21, 1946, after Roosevelt Steamship Agency Inc., and Manila Terminal Co.,
Inc., denied plaintiff's claim, a formal insurance claim was filed with Kerr & Co., Ltd., local
agents of Eagle Star Insurance Co., Ltd., (Exh. L.)Kerr & Co., Ltd., referred the insurance
claim to Eagle Star Insurance Co., Ltd. in London but the latter, after insistent request of
plaintiffs for action, rejected the claim on April 22, 1948, giving as its reasons the lapse of
the expiry day of the risks covered by the policy and returned the claim documents only
in August of 1948. (pp. 87-88, Record on Appeal.)

Furthermore, there is nothing in the record to show that the claim was rejected in the year
1947, either by the insurance company in London or its settling agents in the Philippines,
while on the other hand defendant's own Exhibit L-1 is indisputable proof that it was on
22nd April 1948" that the settling agents informed the claimant "that after due and careful
consideration, our Principals confirm our declination of this claim." It not appearing that
the settling agents' decision on claims against their principals were not subject to reversal
or modification by the latter, while on the contrary the insurance policy expressly
stipulates, under the heading "Important Notice," that the said agents "have authority to
certify only as to the nature, cause and extent of the damage," and it furthermore
appearing that a reiteration of plaintiffs claim was made to the principals and the latter
gave it due course since only "after due and careful consideration" did they confirm the
action taken by the agents, we conclude that, for the purpose of the present action, we
should consider plaintiff's claim to have been finally rejected by the insurer on April 22,
1948. Having been filed within twelve months form that date, the action cannot be deemed
to have prescribed even on the supposition that the period given the insured for bringing

Page 4 of 33
 G.R. No. L-24566 July 29, 1968
AGRICULTURAL CREDIT & COOPERATIVE FINANCING ADMINISTRATION
(ACCFA), plaintiff-appellant,
vs.
ALPHA INSURANCE & SURETY CO., INC., defendant-appellee,
RICARDO A. LADINES, ET AL., third party-defendants-appellees.
Deogracias E. Lerma and Esmeraldo U. Guloy for plaintiff-appellant.
L. L. Reyes for defendant-appellee.
Geronimo F. Abellera for third party defendants-appellees.
REYES, J.B.L., J.:
Appeal, on points of law, against a decision of the Court of First Instance of Manila, in its
Case No. 43372, upholding a motion to dismiss.
At issue is the question whether or not the provision of a fidelity bond that no action shall
be had or maintained thereon unless commenced within one year from the making of a
claim for the loss upon which the action is based, is valid or void, in view of Section 61-A
of the Insurance Act invalidating stipulations limiting the time for commencing an action
thereon to less than one year from the time the cause of action accrues.
Material to this decision are the following facts: 1äwphï1.ñët
According to the allegations of the complaint, in order to guarantee the Asingan Farmers'
Cooperative Marketing Association, Inc. (FACOMA) against loss on account of "personal
dishonesty, amounting to larceny or estafa of its Secretary-Treasurer, Ricardo A. Ladines,
the appellee, Alpha Insurance & Surety Company had issued, on 14 February 1958, its
bond, No. P-FID-15-58, for the sum of Five Thousand Pesos (P5,000.00) with said Ricardo
Ladines as principal and the appellee as solidary surety. On the same date, the Asingan
FACOMA assigned its rights to the appellant, Agricultural Credit Cooperative and
Financing Administration (ACCFA for short), with approval of the principal and the surety.
During the effectivity of the bond, Ricardo Ladines converted and misappropriated, to his
personal benefit, some P11,513.22 of the FACOMA funds, of which P6,307.33 belonged to
the ACCFA. Upon discovery of the loss, ACCFA immediately notified in writing the survey
company on 10 October 1958, and presented the proof of loss within the period fixed in
the bond; but despite repeated demands the surety company refused and failed to pay.
Whereupon, ACCFA filed suit against appellee on 30 May 1960.
Defendant Alpha Insurance & Surety Co., Inc., (now appellee) moved to dismiss the
complaint for failure to state a cause of action, giving as reason that (1) the same was filed
more than one year after plaintiff made claim for loss, contrary to the eighth condition of
the bond, providing as follows: .
EIGHT LIMITATION OF ACTION
No action, suit or proceeding shall be had or maintained upon this Bond unless the same
be commenced within one year from the time of making claim for the loss upon which such
action, suit or proceeding, is based, in accordance with the fourth section hereof.
(2) the complaint failed to show that plaintiff had filed civil or criminal action against
Ladines, as required by conditions 4 and 11 of the bond; and (3) that Ladines was a
necessary and indispensable party but had not been joined as such.
At first, the Court of First Instance denied dismissal; but, upon reconsideration, the court
reversed its original stand, and dismissed the complaint on the ground that the action was
filed beyond the contractual limitation period (Record on Appeal, pages 56-59).
Hence, this appeal.
We find the appeal meritorious.
A fidelity bond is, in effect, in the nature of a contract of insurance against loss from
misconduct, and is governed by the same principles of interpretation: Mechanics Savings
Bank & Trust Co. vs. Guarantee Company, 68 Fed. 459; Pao Chan Wei vs. Nemorosa, 103
Phil. 57. Consequently, the condition of the bond in question, limiting the period for
bringing action thereon, is subject to the provisions of Section 61-A of the Insurance Act
(No. 2427), as amended by Act 4101 of the pre-Commonwealth Philippine Legislature,
prescribing that —
SEC. 61-A — A condition, stipulation or agreement in any policy of insurance, limiting the
time for commencing an action thereunder to a period of less than one year from the time
when the cause of action accrues is void.
Since a "cause of action" requires, as essential elements, not only a legal right of the
plaintiff and a correlative obligation of the defendant but also "an act or omission of the
defendant in violation of said legal right" (Maao Sugar Central vs. Barrios, 79 Phil. 666),
the cause of action does not accrue until the party obligated refuses, expressly or
impliedly, to comply with its duty (in this case, to pay the amount of the bond). The year
for instituting action in court must be reckoned, therefore, from the time of appellee's
refusal to comply with its bond; it can not be counted from the creditor's filing of the claim
of loss, for that does not import that the surety company will refuse to pay. In so far,
therefore, as condition eight of the bond requires action to be filed within one year from
the filing of the claim for loss, such stipulation contradicts the public policy expressed in
Section 61-A of the Philippine Insurance Act. Condition eight of the bond, therefore, is null
and void, and the appellant is not bound to comply with its provisions.
In Eagle Star Insurance Co. vs. Chia Yu, 96 Phil. 696, 701, this Court ruled: .1äwphï1.ñët
It may perhaps be suggested that the policy clause relied on by the insurer for defeating
plaintiff's action should be given the construction that would harmonize it with section
61-A of the Insurance Act by taking it to mean that the time given the insured for bringing
Page 5 of 33
his suit is twelve months after the cause of action accrues. But the question then would be:
When did the cause of action accrue? On that question we agree with the court below that
plaintiff's cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real necessity
for bringing suit. As the policy provides that the insured should file his claim, first, with
the carrier and then with the insurer, he had a right to wait for his claim to be finally
decided before going to court. The law does not encourage unnecessary litigation.

The discouraging of unnecessary litigation must be deemed a rule of public policy,

considering the unrelieved congestion in the courts.

As a consequence of the foregoing, condition eight of the Alpha bond is null and void, and
action may be brought within the statutory period of limitation for written contracts (New
Civil Code, Article 1144). The case of Ang vs. Fulton Fire Insurance Co., 2 S.C.R.A. 945 (31
July 1961), relied upon by the Court a quo, is no authority against the views herein
expressed, since the effect of Section 61-A of the Insurance Law on the terms of the Policy
or contract was not there considered.

The condition of previous conviction (paragraph b, clause 4, of the contract) having been
deleted by express agreement and the surety having assumed solidary liability, the other
grounds of the motion to dismiss are equally untenable. A creditor may proceed against
any one of the solidary debtors, or some or all of them simultaneously (Article 1216, New
Civil Code).

WHEREFORE, the appealed order granting the motion to dismiss is reversed and set aside,
and the records are remanded to the Court of First Instance, with instructions to require
defendant to answer and thereafter proceed in conformity with the law and the Rules of
Court. Costs against appellee. So ordered.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.

Page 6 of 33
 [G.R. No. 82036. May 22, 1997]
TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner, vs. HON. COURT OF
APPEALS and VICENTE MENDOZA, respondents.
DECISION
HERMOSISIMA, JR., J.:
The petition herein seeks the review and reversal of the decision[1] of respondent Court of
Appeals[2] affirming in toto the judgment[3] of the Regional Trial Court[4] in an action for
damages[5] filed by private respondent Vicente Mendoza, Jr. as heir of his mother who was
killed in a vehicular accident.
Before the trial court, the complainant lumped the erring taxicab driver, the owner of the
taxicab, and the alleged insurer of the vehicle which featured in the vehicular accident into
one complaint. The erring taxicab was allegedly covered by a third-party liability
insurance policy issued by petitioner Travellers Insurance & Surety Corporation.
The evidence presented before the trial court established the following facts:
At about 5:30 oclock in the morning of July 20, 1980, a 78-year old woman by the name of
Feliza Vineza de Mendoza was on her way to hear mass at the Tayuman Cathedral. While
walking along Tayuman corner Gregorio Perfecto Streets, she was bumped by a taxi that
was running fast. Several persons witnessed the accident, among whom were Rolando
Marvilla, Ernesto Lopez and Eulogio Tabalno. After the bumping, the old woman was seen
sprawled on the pavement. Right away, the good Samaritan that he was, Marvilla ran
towards the old woman and held her on his lap to inquire from her what had happened,
but obviously she was already in shock and could not talk. At this moment, a private jeep
stopped. With the driver of that vehicle, the two helped board the old woman on the jeep
and brought her to the Mary Johnston Hospital in Tondo.
x x x Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street from
Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It was on
his return trip from Rizal Avenue when Lopez saw the plaintiff and his brother who were
crying near the scene of the accident. Upon learning that the two were the sons of the old
woman, Lopez told them what had happened. The Mendoza brothers were then able to
trace their mother at the Mary Johnston Hospital where they were advised by the
attending physician that they should bring the patient to the National Orthopedic Hospital
because of her fractured bones. Instead, the victim was brought to the U.S.T. Hospital
where she expired at 9:00 oclock that same morning. Death was caused by traumatic
shock as a result of the severe injuries she sustained x x x x.
x x x The evidence shows that at the moment the victim was bumped by the vehicle, the
latter was running fast, so much so that because of the strong impact the old woman was
thrown away and she fell on the pavement. x x x In truth, in that related criminal case
against defendant Dumlao x x x the trial court found as a fact that therein accused was
driving the subject taxicab in a careless, reckless and imprudent manner and at a speed
greater than what was reasonable and proper without taking the necessary precaution to
avoid accident to persons x x x considering the condition of the traffic at the place at the
time aforementioned x x x. Moreover, the driver fled from the scene of the accident and
without rendering assistance to the victim. x x x
x x x Three (3) witnesses who were at the scene at the time identified the taxi involved,
though not necessarily the driver thereof. Marvilla saw a lone taxi speeding away just after
the bumping which, when it passed by him, said witness noticed to be a Lady Love Taxi
with Plate No. 438, painted maroon, with baggage bar attached on the baggage
compartment and with an antenae[sic] attached at the right rear side.The same
descriptions were revealed by Ernesto Lopez, who further described the taxi to have x x x
reflectorized decorations on the edges of the glass at the back. x x x A third witness in the
person of Eulogio Tabalno x x x made similar descriptions although, because of the fast
speed of the taxi, he was only able to detect the last digit of the plate number which is 8. x
x x [T]he police proceeded to the garage of Lady Love Taxi and then and there they took
possession of such a taxi and later impounded it in the impounding area of the agency
concerned. x x x [T]he eyewitnesses x x x were unanimous in pointing to that Lady Love
Taxi with Plate No. 438, obviously the vehicle involved herein.
x x x During the investigation, defendant Armando Abellon, the registered owner of Lady
Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact that the vehicle was
driven last July 20, 1980 by one Rodrigo Dumlao x x x x x x It was on the basis of this
affidavit of the registered owner that caused the police to apprehend Rodrigo Dumlao, and
consequently to have him prosecuted and eventually convicted of the offense x x x. x x x
[S]aid Dumlao absconded in that criminal case, specially at the time of the promulgation
of the judgment therein so much so that he is now a fugitive from justice.[6]
Private respondent filed a complaint for damages against Armando Abellon as the owner
of the Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love taxicab that
bumped private respondents mother. Subsequently, private respondent amended his
complaint to include petitioner as the compulsory insurer of the said taxicab under
Certificate of Cover No. 1447785-3.
After trial, the trial court rendered judgment in favor of private respondent, the dispositive
portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more particularly
the Heirs of the late Feliza Vineza de Mendoza, and against defendants Rodrigo Dumlao,
Armando Abellon and Travellers Insurance and Surety Corporation, by ordering the latter
to pay, jointly and severally, the former the following amounts:
(a) The sum of P2,924.70, as actual and compensatory damages, with interest thereon at the
rate of 12% per annum from October 17, 1980, when the complaint was filed, until the said
amount is fully paid;
(b) P30,000.00 as death indemnity;
Page 7 of 33
(c) P25,000.00 as moral damages;
(d) P10,000.00 as by way of corrective or exemplary damages; and
(e) Another P10,000.00 by way of attorneys fees and other litigation expenses.
Defendants are further ordered to pay, jointly and severally, the costs of this suit.
SO ORDERED.[7]
Petitioner appealed from the aforecited decision to the respondent Court of Appeals. The
decision of the trial court was affirmed by respondent appellate court. Petitioners Motion
for Reconsideration[8] of September 22, 1987 was denied in a Resolution[9] dated February
9, 1988.
Hence this petition.
Petitioner mainly contends that it did not issue an insurance policy as compulsory insurer
of the Lady Love Taxi and that, assuming arguendo that it had indeed covered said taxicab
for third-party liability insurance, private respondent failed to file a written notice of claim
with petitioner as required by Section 384 of P.D. No. 612, otherwise known as the
Insurance Code.
We find the petition to be meritorious.
I
When private respondent filed his amended complaint to implead petitioner as party
defendant and therein alleged that petitioner was the third-party liability insurer of the
Lady Love taxicab that fatally hit private respondents mother, private respondent did not
attach a copy of the insurance contract to the amended complaint. Private respondent
does not deny this omission.
It is significant to point out at this juncture that the right of a third person to sue the insurer
depends on whether the contract of insurance is intended to benefit third persons also or
only the insured.
[A] policy x x x whereby the insurer agreed to indemnify the insured against all sums x x x
which the Insured shall become legally liable to pay in respect of: a. death of or bodily
injury to any person x x x is one for indemnity against liability; from the fact then that the
insured is liable to the third person, such third person is entitled to sue the insurer.
The right of the person injured to sue the insurer of the party at fault (insured), depends
on whether the contract of insurance is intended to benefit third persons also or on the
insured. And the test applied has been this: Where the contract provides for indemnity
against liability to third persons, then third persons to whom the insured is liable can sue
the insurer. Where the contract is for indemnity against actual loss or payment, then third
persons cannot proceed against the insurer, the contract being solely to reimburse the
insured for liability actually discharged by him thru payment to third persons, said third
persons recourse being thus limited to the insured alone.[10]
Since private respondent failed to attach a copy of the insurance contract to his complaint,
the trial court could not have been able to apprise itself of the real nature and pecuniary
limits of petitioners liability. More importantly, the trial court could not have possibly
ascertained the right of private respondent as third person to sue petitioner as insurer of
the Lady Love taxicab because the trial court never saw nor read the insurance contract
and learned of its terms and conditions.
Petitioner, understandably, did not volunteer to present any insurance contract covering
the Lady Love taxicab that fatally hit private respondents mother, considering that
petitioner precisely presented the defense of lack of insurance coverage before the trial
court. Neither did the trial court issue a subpoena duces tecum to have the insurance
contract produced before it under pain of contempt.
We thus find hardly a basis in the records for the trial court to have validly found petitioner
liable jointly and severally with the owner and the driver of the Lady Love taxicab, for
damages accruing to private respondent.
Apparently, the trial court did not distinguish between the private respondents cause of
action against the owner and the driver of the Lady Love taxicab and his cause of action
against petitioner. The former is based on torts and quasi-delicts while the latter is based
on contract. Confusing these two sources of obligations as they arise from the same act of
the taxicab fatally hitting private respondents mother, and in the face of overwhelming
evidence of the reckless imprudence of the driver of the Lady Love taxicab, the trial court
brushed aside its ignorance of the terms and conditions of the insurance contract and
forthwith found all three - the driver of the taxicab, the owner of the taxicab, and the
alleged insurer of the taxicab - jointly and severally liable for actual, moral and exemplary
damages as well as attorneys fees and litigation expenses. This is clearly a misapplication
of the law by the trial court, and respondent appellate court grievously erred in not having
reversed the trial court on this ground.
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, 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.[11]
Applying this principle underlying solidary obligation and insurance contracts, we ruled
in one case that:
In solidary obligation, the creditor may enforce the entire obligation against one of the
solidary debtors. 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.
Page 8 of 33
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 petitioners 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 P29,103.00, 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.[12]
The above principles take on more significance in the light of the counter-allegation of
petitioner that, assuming arguendo that it is the insurer of the Lady Love taxicab in
question, its liability is limited to only P50,000.00, this being its standard amount of
coverage in vehicle insurance policies. It bears repeating that no copy of the insurance
contract was ever proffered before the trial court by the private respondent,
notwithstanding knowledge of the fact that the latters complaint against petitioner is one
under a written contract. Thus, the trial court proceeded to hold petitioner liable for an
award of damages exceeding its limited liability of P50,000.00. This only shows beyond
doubt that the trial court was under the erroneous presumption that petitioner could be
found liable absent proof of the contract and based merely on the proof of reckless
imprudence on the part of the driver of the Lady Love taxicab that fatally hit private
respondents mother.
II
Petitioner did not tire in arguing before the trial court and the respondent appellate court
that, assuming arguendo that it had issued the insurance contract over the Lady Love
taxicab, private respondents cause of action against petitioner did not successfully accrue
because he failed to file with petitioner a written notice of claim within six (6) months
from the date of the accident as required by Section 384 of the Insurance Code.
At the time of the vehicular incident which resulted in the death of private respondents
mother, during which time the Insurance Code had not yet been amended by Batas
Pambansa (B.P.) Blg. 874, Section 384 provided as follows:
Any person having any claim upon the policy issued pursuant to this chapter shall, without
any unnecessary delay, present to the insurance company concerned a written notice of
claim setting forth the amount of his loss, and/or the nature, extent and duration of the
injuries sustained as certified by a duly licensed physician. Notice of claim must be filed
within six months from date of the accident, otherwise, the claim shall be deemed
waived. Action or suit for recovery of damage due to loss or injury must be brought in
proper cases, with the Commission or the Courts within one year from date of accident,
otherwise the claimants right of action shall prescribe [emphasis and underscoring
supplied].
In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De Guzman,[13] we ruled
that the one year prescription period to bring suit in court against the insurer should be
counted from the time that the insurer rejects the written claim filed therewith by the
insured, the beneficiary or the third person interested under the insurance policy. We
explained:
It is very obvious that petitioner company is trying to use Section 384 of the Insurance
Code as a cloak to hide itself from its liabilities. The facts of these cases evidently reflect
the deliberate efforts of petitioner company to prevent the filing of a formal action against
it. Bearing in mind that if it succeeds in doing so until one year lapses from the date of the
accident it could set up the defense of prescription, petitioner company made private
respondents believe that their claims would be settled in order that the latter will not find
it necessary to immediately bring suit. In violation of its duties to adopt and implement
reasonable standards for the prompt investigation of claims and to effectuate prompt, fair
and equitable settlement of claims, and with manifest bad faith, petitioner company
devised means and ways of stalling the settlement proceedings. x x x [N]o steps were taken
to process the claim and no rejection of said claim was ever made even if private
respondent had already complied with all the requirements. x x x
This Court has made the observation that some insurance companies have been inventing
excuses to avoid their just obligations and it is only the State that can give the protection
which the insuring public needs from possible abuses of the insurers.[14]
It is significant to note that the aforecited Section 384 was amended by B.P. Blg. 874 to
categorically provide that action or suit for recovery of damage due to loss or injury must
be brought in proper cases, with the Commissioner or the Courts within one
year from denial of the claim, otherwise the claimants right of action shall prescribe
[emphasis ours].[15]
We have certainly ruled with consistency that the prescriptive period to bring suit in court
under an insurance policy, begins to run from the date of the insurers rejection of the claim
filed by the insured, the beneficiary or any person claiming under an insurance
contract. This ruling is premised upon the compliance by the persons suing under an
insurance contract, with the indispensable requirement of having filed the written claim
mandated by Section 384 of the Insurance Code before and after its amendment. Absent
such written claim filed by the person suing under an insurance contract, no cause of
action accrues under such insurance contract, considering that it is the rejection of that
claim that triggers the running of the one-year prescriptive period to bring suit in court,
and there can be no opportunity for the insurer to even reject a claim if none has been filed
in the first place, as in the instant case.
The one-year period should instead be counted from the date of rejection by the insurer
as this is the time when the cause of action accrues. x x x
In Eagle Star Insurance Co., Ltd., et al. vs. Chia Yu, this Court ruled:
Page 9 of 33
The plaintiffs cause of action did not accrue until his claim was finally rejected by the
insurance company. This is because, before such final rejection, there was no real
necessity for bringing suit.

The philosophy of the above pronouncement was pointed out in the case of ACCFA vs.
Alpha Insurance and Surety Co., viz.:

Since a cause of action requires, as essential elements, not only a legal right of the plaintiff
and a correlative obligation of the defendant but also an act or omission of the defendant
in violation of said legal right, the cause of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its duty.[16]

When petitioner asseverates, thus, that no written claim was filed by private respondent
and rejected by petitioner, and private respondent does not dispute such asseveration
through a denial in his pleadings, we are constrained to rule that respondent appellate
court committed reversible error in finding petitioner liable under an insurance contract
the existence of which had not at all been proven in court. Even if there were such a
contract, private respondents cause of action can not prevail because he failed to file the
written claim mandated by Section 384 of the Insurance Code. He is deemed, under this
legal provision, to have waived his rights as against petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in Civil Case
No. 135486 are REVERSED and SET ASIDE insofar as Travellers Insurance & Surety
Corporation was found jointly and severally liable to pay actual, moral and exemplary
damages, death indemnity, attorneys fees and litigation expenses in Civil Case No.
135486. The complaint against Travellers Insurance & Surety Corporation in said case is
hereby ordered dismissed.

No pronouncement as to costs.

SO ORDERED.

Bellosillo, Vitug, and Kapunan, JJ., concur.

Padilla, (Chairman), J., on leave.

Page 10 of 33

G.R. No. 114167 July 12, 1995
COASTWISE LIGHTERAGE CORPORATION, petitioner,
vs.
COURT OF APPEALS and the PHILIPPINE GENERAL INSURANCE
COMPANY, respondents.
RESOLUTION
FRANCISCO, R., J.:
This is a petition for review of a Decision rendered by the Court of Appeals, dated
December 17, 1993, affirming Branch 35 of the Regional Trial Court, Manila in holding that
herein petitioner is liable to pay herein private respondent the amount of P700,000.00,
plus legal interest thereon, another sum of P100,000.00 as attorney's fees and the cost of
the suit.
The factual background of this case is as follows:
Pag-asa Sales, Inc. entered into a contract to transport molasses from the province of
Negros to Manila with Coastwise Lighterage Corporation (Coastwise for brevity), using the
latter's dumb barges. The barges were towed in tandem by the tugboat MT Marica, which
is likewise owned by Coastwise.
Upon reaching Manila Bay, while approaching Pier 18, one of the barges, "Coastwise 9",
struck an unknown sunken object. The forward buoyancy compartment was damaged, and
water gushed in through a hole "two inches wide and twenty-two inches long"1 As a
consequence, the molasses at the cargo tanks were contaminated and rendered unfit for
the use it was intended. This prompted the consignee, Pag-asa Sales, Inc. to reject the
shipment of molasses as a total loss. Thereafter, Pag-asa Sales, Inc. filed a formal claim with
the insurer of its lost cargo, herein private respondent, Philippine General Insurance
Company (PhilGen, for short) and against the carrier, herein petitioner, Coastwise
Lighterage. Coastwise Lighterage denied the claim and it was PhilGen which paid the
consignee, Pag-asa Sales, Inc., the amount of P700,000.00, representing the value of the
damaged cargo of molasses.
In turn, PhilGen then filed an action against Coastwise Lighterage before the Regional Trial
Court of Manila, seeking to recover the amount of P700,000.00 which it paid to Pag-asa
Sales, Inc. for the latter's lost cargo. PhilGen now claims to be subrogated to all the
contractual rights and claims which the consignee may have against the carrier, which is
presumed to have violated the contract of carriage.
The RTC awarded the amount prayed for by PhilGen. On Coastwise Lighterage's appeal to
the Court of Appeals, the award was affirmed.
Hence, this petition.
There are two main issues to be resolved herein. First, whether or not petitioner Coastwise
Lighterage was transformed into a private carrier, by virtue of the contract of
affreightment which it entered into with the consignee, Pag-asa Sales, Inc. Corollarily, if it
were in fact transformed into a private carrier, did it exercise the ordinary diligence to
which a private carrier is in turn bound? Second, whether or not the insurer was
subrogated into the rights of the consignee against the carrier, upon payment by the
insurer of the value of the consignee's goods lost while on board one of the carrier's
vessels.
On the first issue, petitioner contends that the RTC and the Court of Appeals erred in
finding that it was a common carrier. It stresses the fact that it contracted with Pag-asa
Sales, Inc. to transport the shipment of molasses from Negros Oriental to Manila and refers
to this contract as a "charter agreement". It then proceeds to cite the case of Home
Insurance Company vs. American Steamship Agencies, Inc.2 wherein this Court held: ". . . a
common carrier undertaking to carry a special cargo or chartered to a special person only
becomes a private carrier."
Petitioner's reliance on the aforementioned case is misplaced. In its entirety, the
conclusions of the court are as follows:
Accordingly, the charter party contract is one of affreightment over the whole vessel,
rather than a demise. As such, the liability of the shipowner for acts or negligence of its
captain and crew, would remain in the absence of stipulation.3
The distinction between the two kinds of charter parties (i.e. bareboat or demise and
contract of affreightment) is more clearly set out in the case of Puromines, Inc. vs. Court of
Appeals,4 wherein we ruled:
Under the demise or bareboat charter of the vessel, the charterer will generally be
regarded as the owner for the voyage or service stipulated. The charterer mans the vessel
with his own people and becomes the owner pro hac vice, subject to liability to others for
damages caused by negligence. To create a demise, the owner of a vessel must completely
and exclusively relinquish possession, command and navigation thereof to the
charterer, anything short of such a complete transfer is a contract of affreightment (time or
voyage charter party) or not a charter party at all.
On the other hand a contract of affreightment is one in which the owner of the vessel leases
part or all of its space to haul goods for others. It is a contract for special service to be
rendered by the owner of the vessel and under such contract the general owner retains
the possession, command and navigation of the ship, the charterer or freighter merely
having use of the space in the vessel in return for his payment of the charter hire. . . . .
. . . . An owner who retains possession of the ship though the hold is the property of the
charterer, remains liable as carrier and must answer for any breach of duty as to the care,
loading and unloading of the cargo. . . .
Page 11 of 33
Although a charter party may transform a common carrier into a private one, the same
however is not true in a contract of affreightment on account of the aforementioned
distinctions between the two.
Petitioner admits that the contract it entered into with the consignee was one of
affreightment.5 We agree. Pag-asa Sales, Inc. only leased three of petitioner's vessels, in
order to carry cargo from one point to another, but the possession, command and
navigation of the vessels remained with petitioner Coastwise Lighterage.
Pursuant therefore to the ruling in the aforecited Puromines case, Coastwise Lighterage,
by the contract of affreightment, was not converted into a private carrier, but remained a
common carrier and was still liable as such.
The law and jurisprudence on common carriers both hold that the mere proof of delivery
of goods in good order to a carrier and the subsequent arrival of the same goods at the
place of destination in bad order makes for a prima facie case against the carrier.
It follows then that the presumption of negligence that attaches to common carriers, once
the goods it transports are lost, destroyed or deteriorated, applies to the petitioner. This
presumption, which is overcome only by proof of the exercise of extraordinary diligence,
remained unrebutted in this case.
The records show that the damage to the barge which carried the cargo of molasses was
caused by its hitting an unknown sunken object as it was heading for Pier 18. The object
turned out to be a submerged derelict vessel. Petitioner contends that this navigational
hazard was the efficient cause of the accident. Further it asserts that the fact that the
Philippine Coastguard "has not exerted any effort to prepare a chart to indicate the
location of sunken derelicts within Manila North Harbor to avoid navigational
accidents"6 effectively contributed to the happening of this mishap. Thus, being unaware
of the hidden danger that lies in its path, it became impossible for the petitioner to avoid
the same. Nothing could have prevented the event, making it beyond the pale of even the
exercise of extraordinary diligence.
However, petitioner's assertion is belied by the evidence on record where it appeared that
far from having rendered service with the greatest skill and utmost foresight, and being
free from fault, the carrier was culpably remiss in the observance of its duties.
Jesus R. Constantino, the patron of the vessel "Coastwise 9" admitted that he was not
licensed. The Code of Commerce, which subsidiarily governs common carriers (which are
primarily governed by the provisions of the Civil Code) provides:
Art. 609. — Captains, masters, or patrons of vessels must be Filipinos, have legal capacity
to contract in accordance with this code, and prove the skill capacity and qualifications
necessary to command and direct the vessel, as established by marine and navigation laws,
ordinances or regulations, and must not be disqualified according to the same for the
discharge of the duties of the position. . . .
Clearly, petitioner Coastwise Lighterage's embarking on a voyage with an unlicensed
patron violates this rule. It cannot safely claim to have exercised extraordinary diligence,
by placing a person whose navigational skills are questionable, at the helm of the vessel
which eventually met the fateful accident. It may also logically, follow that a person
without license to navigate, lacks not just the skill to do so, but also the utmost familiarity
with the usual and safe routes taken by seasoned and legally authorized ones. Had the
patron been licensed, he could be presumed to have both the skill and the knowledge that
would have prevented the vessel's hitting the sunken derelict ship that lay on their way to
Pier 18.
As a common carrier, petitioner is liable for breach of the contract of carriage, having failed
to overcome the presumption of negligence with the loss and destruction of goods it
transported, by proof of its exercise of extraordinary diligence.
On the issue of subrogation, which petitioner contends as inapplicable in this case, we once
more rule against the petitioner. We have already found petitioner liable for breach of the
contract of carriage it entered into with Pag-asa Sales, Inc. However, for the damage
sustained by the loss of the cargo which petitioner-carrier was transporting, it was not the
carrier which paid the value thereof to Pag-asa Sales, Inc. but the latter's insurer, herein
private respondent PhilGen.
Article 2207 of the Civil Code is explicit on this point:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from
the insurance company for the injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who violated the contract. . . .
This legal provision containing the equitable principle of subrogation has been applied in
a long line of cases including Compania Maritima v. Insurance Company of North
America;7 Fireman's Fund Insurance Company v. Jamilla & Company, Inc.,8 and Pan Malayan
Insurance Corporation v. Court of Appeals,9 wherein this Court explained:
Article 2207 of the Civil Code is founded on the well-settled principle of subrogation. If the
insured property is destroyed or damaged through the fault or negligence of a party other
than the assured, then the insurer, upon payment to the assured will be subrogated to the
rights of the assured to recover from the wrongdoer to the extent that the insurer has been
obligated to pay. Payment by the insurer to the assured operated as an equitable assignment
to the former of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment of the insurance claim by the insurer.
Undoubtedly, upon payment by respondent insurer PhilGen of the amount of P700,000.00
to Pag-asa Sales, Inc., the consignee of the cargo of molasses totally damaged while being
transported by petitioner Coastwise Lighterage, the former was subrogated into all the
Page 12 of 33
rights which Pag-asa Sales, Inc. may have had against the carrier, herein petitioner
Coastwise Lighterage.

WHEREFORE, premises considered, this petition is DENIED and the appealed decision
affirming the order of Branch 35 of the Regional Trial Court of Manila for petitioner
Coastwise Lighterage to pay respondent Philippine General Insurance Company the
"principal amount of P700,000.00 plus interest thereon at the legal rate computed from
March 29, 1989, the date the complaint was filed until fully paid and another sum of
P100,000.00 as attorney's fees and costs"10 is likewise hereby AFFIRMED

SO ORDERED.

Feliciano, Romero, Melo and Vitug, JJ., concur.

Page 13 of 33
 [G.R. No. 110597. May 8, 1996]
SERVICEWIDE SPECIALISTS, INCORPORATED, petitioner, vs. THE HON. COURT OF
APPEALS, RICARDO TRINIDAD and ELISA TRINIDAD, respondents.
SYLLABUS
1. CIVIL LAW; SPECIAL CONTRACTS; CHATTEL MORTGAGE; THERE IS NO PROVISION
IN THE CHATTEL MORTGAGE CONTRACT AUTHORIZING THE MORTGAGEE TO
APPLY THE PAYMENTS MADE TO IT FOR THE PAYMENT OF THE CHATTEL TO THE
PAYMENT OF THE INSURANCE PREMIUMS; CASE AT BAR.- While it is true that the
Chattel Mortgage does not say that notice to the mortgagor of the renewal of the insurance
premium by the mortgagee is necessary, at the same time, there is no provision that
authorizes petitioner to apply the payments made to it for the payment of the chattel to
the payment of the said premiums. From the records of the case, it is clear that private
respondents had fully paid for the car. This fact was never rebutted by petitioner; it was
the insurance premiums pertaining to the two-year period from July 29, 1984 to July 29,
1986 that petitioner claims were not paid.
2. ID.; ID.; ID.; DEFAULT BY THE MORTGAGORS IN EFFECTING RENEWAL OF THE
INSURANCE AS A CONDITION BEFORE THE MORTGAGEE MAY EFFECT RENEWAL OF
THE SAME; PRIOR NOTICE TO THE MORTGAGORS BY THE MORTGAGEE IS
NECESSARY TO CONSIDER THE LATTER IN DEFAULT. - Both the Regional Trial Court
and the Court of Appeals found that before the mortgagee (petitioner) may effect the
renewal of insurance, two conditions must be met: (1) Default by the mortgagor (private
respondents) in effecting renewal of the insurance and (2) failure to deliver the policy with
endorsement to petitioner. The Court notes an additional element of the provisions
regarding the renewal of the insurance; specifically, that petitioner was under no
obligation to effect the same. In other words, petitioner as mortgagee was not duty-bound
to renew the insurance in the event that private respondents failed to do so; it was merely
optional on its part. The question now arises whether private respondents were in default
for failing to have the car covered by insurance for the period in question. Private
respondents claim that the car was duly covered and the Court finds no evidence on record
showing this assertion to be false. Petitioner has averred, however, that the insurance
taken by private respondents was only for third-party liability and not the comprehensive
insurance required. If petitioner was aware that the insurance coverage was inadequate,
why did it not inform private respondent about it? After all, since petitioner was under no
obligation to effect renewal thereof, it is but logical that it should relay to private
respondents any defect of the insurance coverage before itself assuming the
same. Furthermore, even if the car were not covered with the proper insurance, there is
nothing in the provisions of the Chattel Mortgage that authorizes petitioner to apply
previous payments for the car to the insurance. What is stated is: "x x x that any money so
disbursed by the mortgagee shall be added to the principal indebtedness hereby secured x
x x." Clear is it that petitioner is not obligated to convert any of the installments made by
private respondents for the car to the payment for the renewal of the insurance. Should it
decide to do so, it has to send notice to private respondents who had already paid in full
the principal indebtedness in question. When petitioner wrote private respondents the
November 8, 1985 demand letter regarding non-payment of the installments, no mention
was made of unpaid insurance premiums. Thus, private respondents were quite justified
in ignoring the same since, to the best of their knowledge, they had already paid for the
car in full.
3. ID.; DAMAGES; AWARD OF ATTORNEY'S FEES; NOT PROPER IN CASE AT BAR.
- Article 2208 of the Civil Code allows attorney's fees to be awarded by a court when its
claimant is compelled to litigate with third persons or to incur expenses to protect his
interest by reason of an unjustified act or omission on the part of the party from whom it
is sought. To be sure, private respondents were forced to litigate to protect their rights but
as we have previously held: "where no sufficient showing of bad faith would be reflected
in a party's persistence in a case other than an erroneous conviction of the righteousness
of his cause, attorney's fee shall not be recovered as cost." Attorney's fees cannot be
awarded to a party simply because the judgment was favorable to it, for that amounts to
imposing a premium on the right to redress grievances in Court. When it has not been
sufficiently established that the complaint was filed to harass the other party or when an
action was filed in the sincere belief that the cause was meritorious, an award of attorney's
fees is not proper.
APPEARANCES OF COUNSEL
Laboguis, Loyola, Atienza, Felipe, Santos & Associates for petitioner.
Dominador R. Santiago for private respondents.
DECISION
ROMERO, J.:
Petitioner seeks review of the decision[1] of the Court of Appeals affirming the decision of
the Regional Trial Court of Manila which (1) dismissed the complaint for replevin and
damages filed by petitioner before the Metropolitan Trial Court of Manila and (2) ordered
petitioner to pay private respondents P10,000.00 as attorney's fees, P2,000.00 as litigation
expenses plus costs of the suit.
The facts show that on August 1, 1983, private respondent spouses Ricardo and Elisa
Trinidad purchased one unit Isuzu Gemini car, 1983 model, yellow in color, from
Autoworld Sales Corporation. The price was P98,156.00 payable in 24 equal monthly
installments of P4,089.00 every 15th of each month beginning September 1983 to August
15, 1985.
To secure payment thereof, the Trinidads executed on the same date a promissory note
and a deed of chattel mortgage on the subject car in favor of Autoworld Sales Corporation.
Also on the same date, Autoworld assigned its interests on the promissory note and chattel
mortgage to Filinvest Credit Corporation (Filinvest). These assignments were made with
due notice to private respondents.
Page 14 of 33
On April 15, 1984, private respondents delivered seventeen (17) checks to Filinvest Credit
Corporation in full payment of the car. The checks were in the same amount of P3,969.00
each, sixteen of which were postdated to be applied for the remaining installments from
April 15, 1984 to August 15, 1985. Proper receipts were issued by Filinvest Credit
Corporation to private respondents and all documents regarding ownership of the car
were released to them. Private respondents immediately used the car as a taxi, a fact
known to the vendor.
On November 8, 1985, Filinvest assigned all its rights and interests on the promissory note
and chattel mortgage in favor of petitioner.
On November 18, 1985, private respondent Ricardo Trinidad received a demand letter
from petitioner dated November 8, 1985 stating that an assignment of credit had been
made by Filinvest in its favor and that the Trinidads had not paid two successive
installments on the car which had matured on July 15 and August 15, 1985. No mention
was made in the letter that Filinvest had paid insurance premiums to Perla Compania de
Seguros to insure the car against loss and damage corresponding to two years, i.e., from
July 29, 1984 to July 29, 1985 and July 29, 1985 to July 29, 1986. Private respondents were
also never informed by Filinvest that their installment payments on the car were
converted to premium payments on the insurance.
After informing private respondents that they failed to pay the last two consecutive
monthly installments, petitioner demanded that either they pay the whole remaining
balance of P6,977.67, including accrued interest, or return possession of the car to
petitioner.
When private respondents refused to pay the amount demanded or to return the car,
petitioner filed an action for replevin and damages with the Metropolitan Trial Court,
Branch V, Manila. The sole issue resolved by the trial court was whether private
respondents were liable for the payment of the insurance premiums effected by petitioner.
On July 24, 1990, a decision was rendered by the trial court in favor of petitioner, the
dispositive portion of which states:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff ordering the
defendants to pay plaintiff jointly and severally the sum of P6,977.67 plus interest thereon
at the rate of 24% per annum from January 8, 1986 until fully paid. To pay the sum of
P4,773.04 as attorney's fees.
SO ORDERED.[2]
Private respondents appealed to the Regional Trial Court of Manila, Branch 46. The RTC
found that a renewal of insurance (caused by Filinvest on the mortgaged chattel) was
issued twice by Perla Compania de Seguros, Inc. in the name of Ricardo Trinidad for
private car loss and damage. On both occasions, no notice was made whatsoever to private
respondents that Filinvest was applying the installment payments made by them for the
car to the payment of the insurance premiums. Furthermore, no notice was made to
private respondents that Filinvest had assigned the promissory note and chattel mortgage
to petitioner.
The RTC held that petitioner had no cause of action against private respondents because
the latter issued the checks with the understanding that they were to be applied to the
payment in full of the car and that the same were all duly encashed by petitioner. No prior
demand having been made on private respondents for the payment of the insurance
premiums, the RTC held that the complaint was not a just suit and dismissed the
complaint, awarding P10,000.00 for attorney's fees, P2,000.00 as expenses for litigation
plus costs of the suit to private respondents.
Petitioner appealed to the Court of Appeals, which affirmed the decision of the Regional
Trial Court.
Hence, this petition.
The central issue in this case is: whether or not petitioner should have applied the
installment payments made by private respondents for the payment of the car to the
payment of the insurance premiums without prior notice to private respondents.
The provision in the Chattel Mortgage subject of the controversy states:
"The said MORTGAGOR covenants and agrees that he will cause the property/ies herein
above mortgaged to be insured against loss or damage by accident, theft and fire for a
period of one year from date thereof and every year thereafter until the mortgage
obligation is fully paid with an insurance company, or companies acceptable to the
MORTGAGEE in an amount not less than the outstanding balance of the mortgage
obligation; that he will make all loss, if any, under such policy or policies, payable to the
MORTGAGEE or its assigns as its interest may appear and forewith deliver such policy or
policies to the MORTGAGEE, the said MORTGAGOR further covenants and agrees that in
default of his affecting or renewing such insurance and delivering the policies so endorsed
to the MORTGAGEE within five (5) days after the execution of this mortgage or the expiry
date of the insurance the MORTGAGEE, may, at his option, but without any obligation to do
so effect such insurance or obtain such renewal for the account of the MORTGAGOR and that
any money so disbursed by the MORTGAGEE shall be added to the principal indebtedness
hereby secured and shall become due and payable at the time for thepayment of
the immediately coming or following installment to be due under the note aforesaid after
the date of such insurance renewal and shall bear interest at the same rate as the principal
indebtedness."[3](Italics supplied)
Petitioner contends that the matter about the notice is deemed waived by private
respondents because the car should be fully covered at all times. Petitioner claims that if,
as stated in the Chattel Mortgage, private respondents failed to renew the insurance,
petitioner is entitled to renew the same for the account of private respondents without
any notice to them.
The petition is unmeritorious.
Page 15 of 33
While it is true that the Chattel Mortgage does not say that notice to the mortgagor of the
renewal of the insurance premium by the mortgagee is necessary, at the same time, there
is no provision that authorizes petitioner to apply the payments made to it for the payment
of the chattel to the payment of the said premiums. From the records of the case, it is clear
that private respondents had fully paid for the car. This fact was never rebutted by
petitioner; it was the insurance premiums pertaining to the two-year period from July 29,
1984 to July 29, 1986 that petitioner claims were not paid.
Article 2208 of the Civil Code allows attorney's fees to be awarded by a court when its
claimant is compelled to litigate with third persons or to incur expenses to protect his
interest by reason of an unjustified act or omission on the part of the party from whom it
is sought. To be sure, private respondents were forced to litigate to protect their rights but
as we have previously held: "where no sufficient showing of bad faith would be reflected
in a party's persistence in a case other than an erroneous conviction of the righteousness
of his cause, attorney's fee shall not be recovered as cost.[4]

Both the Regional Trial Court and the Court of Appeals found that before the mortgagee
(petitioner) may effect the renewal of insurance, two conditions must be met: (1) Default
by the mortgagor (private respondents) in effecting renewal of the insurance and (2)
failure to deliver the policy with endorsement to petitioner.
The Court notes an additional element of the provisions regarding the renewal of the
insurance; specifically, that petitioner was under no obligation to effect the same. In other
words, petitioner as mortgagee was not duty-bound to renew the insurance in the event
that private respondents failed to do so; it was merely optional on its part.
Attorney's fees cannot be awarded to a party simply because the judgment was favorable
to it, for that amounts to imposing a premium on the right to redress grievances in Court.[5]
When it has not been sufficiently established that the complaint was filed to harass the
other party or when an action was filed in the sincere belief that the cause was
meritorious, an award of attorney's fees is not proper.[6]
The Court, therefore, deletes the award of P10,000.00 to private respondents as attorney's
fees.

The question now arises whether private respondents were in default for failing to have
the car covered by insurance for the period in question. Private respondents claim that the
car was duly covered and the Court finds no evidence on record showing this assertion to
be false. Petitioner has averred, however, that the insurance taken by private respondents
was only for third-party liability and not the comprehensive insurance required.
WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED with the
modification that the award of P10,000.00 as attorney's fees is hereby DELETED.
SO ORDERED.
Regalado (Chairman), Puno, Mendoza, and Torres, Jr., JJ., concur.

If petitioner was aware that the insurance coverage was inadequate, why did it not inform
private respondent about it? After all, since petitioner was under no obligation to effect
renewal thereof, it is but logical that it should relay to private respondents any defect of
the insurance coverage before itself assuming the same.

Furthermore, even if the car were not covered with the proper insurance, there is nothing
in the provisions of the Chattel Mortgage that authorizes petitioner to apply previous
payments for the car to the insurance. What is stated is: "x x x that any money so disbursed
by the mortgagee shall be added to the principal indebtedness hereby secured x x x" (Italics
supplied).Clear is it that petitioner is not obligated to convert any of the installments made
by private respondents for the car to the payment for the renewal of the insurance. Should
it decide to do so, it has to send notice to private respondents who had already paid in full
the principal indebtedness in question.

When petitioner wrote private respondents the November 8, 1985 demand letter
regarding non-payment of the installments, no mention was made of unpaid insurance
premiums. Thus, private respondents were quite justified in ignoring the same since, to
the best of their knowledge, they had already paid for the car in full.

Finally, while we agree with the appellate court that the complaint against private
respondent should be dismissed, we find that the award of P10,000.00 as attorney's fees
to them to be erroneous.

Page 16 of 33
 G.R. No. 102253 June 2, 1995
SOUTH SEA SURETY AND INSURANCE COMPANY, INC., petitioner,
vs.
HON. COURT OF APPEALS and VALENZUELA HARDWOOD AND INDUSTRIAL
SUPPLY, INC., respondents.
RESOLUTION
VITUG, J.:
Two issues on the subject of insurance are raised in this petition, that assails the decision,
that assails the decision of the Court of Appeals. (in CA-G.R. NO. CV-20156),
the first dealing on the requirement of premium payment and the second relating to the
agency relationship of parties under that contract.
The court litigation started when Valenzuela Hardwood and Industrial Supply, Inc.
("Hardwood"), filed with the Regional, Trial Court of the National Capital Judicial Region,
Branch l71 in Valenzuela, Metro Manila, a complaint for the recovery of the value of lost
logs and freight charges from Seven Brothers Shipping Corporation or, to the extent of its
alleged insurance cover, from South Sea Surety and insurance Company.
The factual backdrop is described briefly by the appellate court thusly:
It appears that on 16 January 1984, plaintiff [Valenzuela Hardwood and Industrial Supply,
Inc.] entered into an agreement with the defendant Seven Brothers whereby the latter
undertook to load on board its vessel M/V Seven Ambassador the former's lauan round
logs numbering 940 at the port of Maconacon, Isabela for shipment to Manila.
On 20 January 1984, plaintiff insured the logs, against loss and/or, damage with defendant
South Sea Surety and Insurance Co., Inc. for P2,000,000.00 end the latter issued its Marine
Cargo Insurance Policy No. 84/24229 for P2,000,000.00 on said date.
On 24 January 1984, the plaintiff gave the check in payment of the premium on the
insurance policy to Mr. Victorio Chua.
In the meantime, the said vessel M/V Seven Ambassador sank on 25 January 1984
resulting in the loss of the plaintiffs insured logs.
On 30 January 1984, a check for P5,625.00 (Exh. "E") to cover payment of the premium
and documentary stamps due on the policy was tendered to the insurer but was not
accepted. Instead, the South Sea Surety and Insurance Co., Inc. cancelled the insurance
policy it issued as of the date of inception for non-payment of the premium due in
accordance with Section 77 of the Insurance Code.
On 2 February 1984, plaintiff demanded from defendant South Sea Surety and Insurance
Co., Inc. the payment of the proceeds of the policy but the latter denied liability under the
policy. Plaintiff likewise filed a formal claim with defendant Seven Brothers Shipping
Corporation for the value of the lost logs but the latter denied the claim.1
In its decision, dated 11 May 1988, the trial court rendered judgment in favor of plaintiff
Hardwood.
On appeal perfected by both the shipping firm and the insurance company, the Court of
Appeals affirmed the judgment of the court a quo only against the insurance corporation;
in absolving the shipping entity from liability, the appellate court ratiocinated:
The primary issue to be resolved before us is whether defendants shipping corporation
and the surety company are liable to the plaintiff for the latter's lost logs.
It appears that there is a stipulation in the charter party that the ship owner would be
exempted from liability in case of loss.
The court a quo erred in applying the provisions of the Civil Code on common carriers to
establish the liability of the shipping corporation. The provisions on common carriers
should not be applied where the carrier is not acting as such but as a private carrier.
Under American jurisprudence, a common carrier undertaking to carry a special or
chartered to a special person only, becomes a private carrier.
As a private carrier, a stipulation exempting the owner from liability even for the
negligence of its agent is valid (Home Insurance Company, Inc. vs. American Steamship
Agencies, Inc., 23 SCRA 24).
The shipping corporation should not therefore be held liable for the loss of the logs.2
In this petition for review on certiorari brought by South Sea Surety and Insurance Co.,
Inc., petitioner argues that it likewise should have been freed from any liability to
Hardwood. It faults the appellate court (a) for having Supposedly disregarded Section 77
of the insurance Code and (b) for holding Victorio Chua to have been an authorized
representative of the insurer.
Section 77 of the Insurance Code provides:
Sec. 77. An insurer is entitled to payment of the premium as soon as the thing insured is
exposed to the peril insured against. Notwithstanding any agreement to the contrary, no
policy or contract of insurance issued by an insurance company is valid and binding unless
and until the premium thereof has been paid, except in the case of a life or an industrial
life policy whenever the grace period provision applies.
Undoubtedly, the payment of the premium is a condition precedent to, and essential for,
the efficaciousness of the contract. The only two statutorily provided exceptions are (a) in
case the insurance coverage relates to life or industrial life (health) insurance when a
grace period applies and (b) when the insurer makes a written acknowledgment of the
receipt of premium, this acknowledgment being declared by law to be then conclusive
Page 17 of 33
evidence of the premium payment (Secs. 77-78, Insurance Code). The appellate court,
contrary to what the petition suggests, did not make any pronouncement to the contrary.
Indeed, it has said:
Concerning the issue as to whether there is a valid contract of insurance between plaintiff-
appellee and defendant-appellant South Sea Surety and Insurance Co., Inc., Section 77 of
the Insurance Code explicitly provides that notwithstanding any agreement to the
contrary, no policy issued by an insurance company is valid and binding unless and until
premium thereof has been paid. It is therefore important to determine whether at the time
of the loss, the premium was already paid.3
No attempt becloud the issues can disguise the fact that the sole question raised in the
instant petition is really evidentiary in nature, i.e., whether or not Victorio Chua, in
receiving the check for the insurance premium prior to the occurrence of the risk insured
against has so acted as an agent of petitioner. The appellate court, like the trial court, has
found in the affirmative. Said the appellate court:
In the instant case, the Marine Cargo Insurance Policy No. 84/24229 was issued by
defendant insurance company on 20 January 1984. At the time the vessel sank on 25
January 1984 resulting in the loss of the insured logs, the insured had already delivered to
Victorio Chua the check in payment of premium. But, as Victorio Chua testified, it was only
in the morning of 30 January 1984 or 5 days after the vessel sank when his messenger
tendered the check to defendant South Sea Surety and Insurance Co., Inc. (TSN, pp. 3-27,
16-17, 22 October 1985).
The pivotal issue to be resolved to determine the liability, of the surety corporation is
whether Mr. Chua acted as an agent of the surety company or of the insured when he
received the check for insurance premiums.
broker to receive on its behalf payment of any premium which is due on such policy of
contract of insurance at the time of its issuance or delivery or which becomes due thereon.
On cross-examination in behalf of South Sea Surety and Insurance Co., Inc. Mr. Chua
testified that the marine cargo insurance policy for the plaintiff's logs was delivered to him
on 21 January 1984 at his office to be delivered to the plaintiff.
When the appellant South Sea Surety and Insurance Co., Inc. delivered to Mr. Chua the
marine cargo insurance policy for the plaintiffs logs, he is deemed to have been authorized
by the South Sea Surety and Insurance Co., Inc. to receive the premium which is due on its
behalf.
When therefore the insured logs were lost, the insured had already paid the premium to
an agent of the South Sea Surety and Insurance Co., Inc., which is consequently liable to
pay the insurance proceeds under the policy it issued to the insured.4
We see no valid reason to discard the factual conclusions of the appellate court. Just as so
correctly pointed out by private respondent, it is not the function of this Court to assess
and evaluate all over again the evidence, testimonial and documentary, adduced by the
parties particularly where, such as here, the findings of both the trial court and the
appellate court on the matter coincide.
WHEREFORE, the resolution, dated 01 February 1993, granting due course to the petition
is RECALLED, and the petition is DENIED. Costs against petitioner.
SO ORDERED.
Feliciano, Romero, Melo and Francisco, JJ., concur.

Appellant surety company insists that Mr. Chua is an administrative assistant for the past
ten years and an agent for less than ten years of the Columbia Insurance Brokers, Ltd. He
is paid a salary as a administrative assistant and a commission as agent based on the
premiums he turns over to the broker. Appellant therefore argues that Mr. Chua, having
received the insurance premiums as an agent of the Columbia Insurance Broker, acted as
an agent of the insured under Section 301 of the Insurance Code which provides as follows:

Sec. 301. Any person who for any compensation, commission or other thing of value, acts,
or aids in soliciting, negotiating or procuring the making of any insurance contract or in
placing risk or taking out insurance, on behalf of an insured other than himself, shall be an
insurance broker within the intent of this Code, and shall thereby become liable to all the
duties requirements, liabilities and penalties to which an insurance broker is subject.

The appellees, upon the other hand, claim that the second paragraph of Section 306 of the
Insurance Code provide as follows:

Sec. 306. . . . Any insurance company which delivers to an insurance agent or insurance
broker a policy or contract of insurance shall be deemed to have authorized such agent or

Page 18 of 33
 G.R. No. L-109937 March 21, 1994
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS, represented by
CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION INSURANCE
POOL, respondents.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.
QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court to
reverse and set aside the decision of the Court of Appeals in CA-G.R CV No. 26434 and its
resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I On March 10, 1990, the trial court rendered a decision in favor of respondent Estate and
In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-in-law,
applied for a loan of P500,000.00 with the Development Bank of the Philippines (DBP),
Basilan Branch. As the principal mortgagor, Dans, then 76 years of age, was advised by
DBP to obtain a mortgage redemption insurance (MRI) with the DBP Mortgage
Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4, 1987
and released on August 11, 1987. From the proceeds of the loan, DBP deducted the amount
of P1,476.00 as payment for the MRI premium. On August 15, 1987, Dans accomplished
and submitted the "MRI Application for Insurance" and the "Health Statement for DBP MRI
Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10 percent, was
credited by DBP to the savings account of the DBP MRI Pool. Accordingly, the DBP MRI
Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed this
information to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool notified DBP
that Dans was not eligible for MRI coverage, being over the acceptance age limit of 60 years
at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late husband's
MRI application. The DBP offered to refund the premium of P1,476.00 which the deceased
had paid, but Candida Dans refused to accept the same, demanding payment of the face
value of the MRI or an amount equivalent to the loan. She, likewise, refused to accept an ex
gratia settlement of P30,000.00, which the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix, filed a
complaint with the Regional Trial Court, Branch I, Basilan, against DBP and the insurance
pool for "Collection of Sum of Money with Damages." Respondent Estate alleged that Dans
became insured by the DBP MRI Pool when DBP, with full knowledge of Dans' age at the
time of application, required him to apply for MRI, and later collected the insurance
premium thereon. Respondent Estate therefore prayed: (1) that the sum of P139,500.00,
which it paid under protest for the loan, be reimbursed; (2) that the mortgage debt of the
deceased be declared fully paid; and (3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the former asserting a
cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits
submitted by respondent Estate. As a result of these admissions, the trial court narrowed
down the issues and, without opposition from the parties, found the case ripe for summary
judgment. Consequently, the trial court ordered the parties to submit their respective
position papers and documentary evidence, which may serve as basis for the judgment.
against DBP. The DBP MRI Pool, however, was absolved from liability, after the trial court
found no privity of contract between it and the deceased. The trial court declared DBP in
estoppel for having led Dans into applying for MRI and actually collecting the premium
and the service fee, despite knowledge of his age ineligibility. The dispositive portion of
the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance of justice and
equity, the Court finds judgment for the plaintiff and against Defendant DBP, ordering the
latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of interest
as amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest accumulated or
otherwise to have been settled, satisfied or set-off by virtue of the insurance coverage of
the late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other expenses,
and other relief just and equitable.
The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The
Cross-claim of Defendant DBP is likewise dismissed (Rollo, p. 79)
Page 19 of 33
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992, the
appellate court affirmed in toto the decision of the trial court. The DBP's motion for
reconsideration was denied in a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement for
DBP MRI Pool" (Exh. "5-Bank") with the following declaration:
I hereby declare and agree that all the statements and answers contained herein are true,
complete and correct to the best of my knowledge and belief and form part of my
application for insurance. It is understood and agreed that no insurance coverage shall be
effected unless and until this application is approved and the full premium is paid during
my continued good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when the
application shall be approved by the insurance pool; and (2) when the full premium is paid
during the continued good health of the applicant. These two conditions, being joined
conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI Pool.
The pool, however, did not approve the application of Dans. There is also no showing that
it accepted the sum of P1,476.00, which DBP credited to its account with full knowledge
that it was payment for Dan's premium. There was, as a result, no perfected contract of
insurance; hence, the DBP MRI Pool cannot be held liable on a contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the borrower, to secure
MRI coverage. Instead of allowing Dans to look for his own insurance carrier or some other
form of insurance policy, DBP compelled him to apply with the DBP MRI Pool for MRI
coverage. When Dan's loan was released on August 11, 1987, DBP already deducted from
the proceeds thereof the MRI premium. Four days latter, DBP made Dans fill up and sign
his application for MRI, as well as his health statement. The DBP later submitted both the
application form and health statement to the DBP MRI Pool at the DBP Main Building,
Makati Metro Manila. As service fee, DBP deducted 10 percent of the premium collected
by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the second
as an insurance agent.
As an insurance agent, DBP made Dans go through the motion of applying for said
insurance, thereby leading him and his family to believe that they had already fulfilled all
the requirements for the MRI and that the issuance of their policy was forthcoming.
Apparently, DBP had full knowledge that Dan's application was never going to be
approved. The maximum age for MRI acceptance is 60 years as clearly and specifically
provided in Article 1 of the Group Mortgage Redemption Insurance Policy signed in 1984
by all the insurance companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such is not
personally liable to the party with whom he contracts, unless he expressly binds himself
or exceeds the limits of his authority without giving such party sufficient notice of his
powers."
The DBP is not authorized to accept applications for MRI when its clients are more than
60 years of age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible for MRI
coverage because of his advanced age, DBP exceeded the scope of its authority when it
accepted Dan's application for MRI by collecting the insurance premium, and deducting its
agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon whether the
third person is aware of the limits of the agent's powers. There is no showing that Dans
knew of the limitation on DBP's authority to solicit applications for MRI.
If the third person dealing with an agent is unaware of the limits of the authority conferred
by the principal on the agent and he (third person) has been deceived by the non-
disclosure thereof by the agent, then the latter is liable for damages to him (V Tolentino,
Commentaries and Jurisprudence on the Civil Code of the Philippines, p. 422 [1992], citing
Sentencia [Cuba] of September 25, 1907). The rule that the agent is liable when he acts
without authority is founded upon the supposition that there has been some wrong or
omission on his part either in misrepresenting, or in affirming, or concealing the authority
under which he assumes to act (Francisco, V., Agency 307 [1952], citing Hall v. Lauderdale,
46 N.Y. 70, 75). Inasmuch as the non-disclosure of the limits of the agency carries with it
the implication that a deception was perpetrated on the unsuspecting client, the
provisions of Articles 19, 20 and 21 of the Civil Code of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his duties, act
with justice give everyone his due and observe honesty and good faith.
Article 20 provides:
Every person who, contrary to law, willfully or negligently causes damage to another, shall
indemnify the latter for the same.
Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy. To
assume that were it not for DBP's concealment of the limits of its authority, Dans would
have secured an MRI from another insurance company, and therefore would have been
Page 20 of 33
fully insured by the time he died, is highly speculative. Considering his advanced age, there
is no absolute certainty that Dans could obtain an insurance coverage from another
company. It must also be noted that Dans died almost immediately, i.e., on the nineteenth
day after applying for the MRI, and on the twenty-third day from the date of release of his
loan.

One is entitled to an adequate compensation only for such pecuniary loss suffered by him
as he has duly proved (Civil Code of the Philippines, Art. 2199). Damages, to be
recoverable, must not only be capable of proof, but must be actually proved with a
reasonable degree of certainty (Refractories Corporation v. Intermediate Appellate Court,
176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447 [1916]).
Speculative damages are too remote to be included in an accurate estimate of damages
(Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).

While Dans is not entitled to compensatory damages, he is entitled to moral damages. No

proof of pecuniary loss is required in the assessment of said kind of damages (Civil Code
of Philippines, Art. 2216). The same may be recovered in acts referred to in Article 2219
of the Civil Code.

The assessment of moral damages is left to the discretion of the court according to the
circumstances of each case (Civil Code of the Philippines, Art. 2216). Considering that DBP
had offered to pay P30,000.00 to respondent Estate in ex gratia settlement of its claim and
that DBP's non-disclosure of the limits of its authority amounted to a deception to its
client, an award of moral damages in the amount of P50,000.00 would be reasonable.

The award of attorney's fees is also just and equitable under the circumstances (Civil Code
of the Philippines, Article 2208 [11]).

WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV

No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE respondent
Estate of Juan B. Dans the amount of P1,476.00 with legal interest from the date of the
filing of the complaint until fully paid; and (2) to PAY said Estate the amount of Fifty
Thousand Pesos (P50,000.00) as moral damages and the amount of Ten Thousand Pesos
(P10,000.00) as attorney's fees. With costs against petitioner.

SO ORDERED.

Cruz, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

Page 21 of 33
 G.R. No. 83122 October 19, 1990
ARTURO P. VALENZUELA and HOSPITALITA N. VALENZUELA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS, BIENVENIDO M. ARAGON, ROBERT E.
PARNELL, CARLOS K. CATOLICO and THE PHILIPPINE AMERICAN GENERAL
INSURANCE COMPANY, INC., respondents.
Albino B. Achas for petitioners.
Angara, Abello, Concepcion, Regala & Cruz for private respondents.
GUTIERREZ, JR., J.:
This is a petition for review of the January 29, 1988 decision of the Court of Appeals and
the April 27, 1988 resolution denying the petitioners' motion for reconsideration, which
decision and resolution reversed the decision dated June 23,1986 of the Court of First
Instance of Manila, Branch 34 in Civil Case No. 121126 upholding the petitioners' causes
of action and granting all the reliefs prayed for in their complaint against private
respondents.
The antecedent facts of the case are as follows:
Petitioner Arturo P. Valenzuela (Valenzuela for short) is a General Agent of private
respondent Philippine American General Insurance Company, Inc. (Philamgen for short)
since 1965. As such, he was authorized to solicit and sell in behalf of Philamgen all kinds
of non-life insurance, and in consideration of services rendered was entitled to receive the
full agent's commission of 32.5% from Philamgen under the scheduled commission rates
(Exhibits "A" and "1"). From 1973 to 1975, Valenzuela solicited marine insurance from
one of his clients, the Delta Motors, Inc. (Division of Electronics Airconditioning and
Refrigeration) in the amount of P4.4 Million from which he was entitled to a commission
of 32% (Exhibit "B"). However, Valenzuela did not receive his full commission which
amounted to P1.6 Million from the P4.4 Million insurance coverage of the Delta Motors.
During the period 1976 to 1978, premium payments amounting to P1,946,886.00 were
paid directly to Philamgen and Valenzuela's commission to which he is entitled amounted
to P632,737.00.
In 1977, Philamgen started to become interested in and expressed its intent to share in
the commission due Valenzuela (Exhibits "III" and "III-1") on a fifty-fifty basis (Exhibit
"C"). Valenzuela refused (Exhibit "D").
On February 8, 1978 Philamgen and its President, Bienvenido M. Aragon insisted on the
sharing of the commission with Valenzuela (Exhibit E). This was followed by another
sharing proposal dated June 1, 1978. On June 16,1978, Valenzuela firmly reiterated his
objection to the proposals of respondents stating that: "It is with great reluctance that I
have to decline upon request to signify my conformity to your alternative proposal
regarding the payment of the commission due me. However, I have no choice for to do
otherwise would be violative of the Agency Agreement executed between our goodselves."
(Exhibit B-1)
Because of the refusal of Valenzuela, Philamgen and its officers, namely: Bienvenido
Aragon, Carlos Catolico and Robert E. Parnell took drastic action against Valenzuela. They:
(a) reversed the commission due him by not crediting in his account the commission
earned from the Delta Motors, Inc. insurance (Exhibit "J" and "2"); (b) placed agency
transactions on a cash and carry basis; (c) threatened the cancellation of policies issued
by his agency (Exhibits "H" to "H-2"); and (d) started to leak out news that Valenzuela has
a substantial account with Philamgen. All of these acts resulted in the decline of his
business as insurance agent (Exhibits "N", "O", "K" and "K-8"). Then on December 27, 1978,
Philamgen terminated the General Agency Agreement of Valenzuela (Exhibit "J", pp. 1-3,
Decision Trial Court dated June 23, 1986, Civil Case No. 121126, Annex I, Petition).
The petitioners sought relief by filing the complaint against the private respondents in the
court a quo (Complaint of January 24, 1979, Annex "F" Petition). After due proceedings,
the trial court found:
xxx xxx xxx
Defendants tried to justify the termination of plaintiff Arturo P. Valenzuela as one of
defendant PHILAMGEN's General Agent by making it appear that plaintiff Arturo P.
Valenzuela has a substantial account with defendant PHILAMGEN particularly Delta
Motors, Inc.'s Account, thereby prejudicing defendant PHILAMGEN's interest (Exhibits
6,"11","11- "12- A"and"13-A").
Defendants also invoked the provisions of the Civil Code of the Philippines (Article 1868)
and the provisions of the General Agency Agreement as their basis for terminating plaintiff
Arturo P. Valenzuela as one of their General Agents.
That defendants' position could have been justified had the termination of plaintiff Arturo
P. Valenzuela was (sic) based solely on the provisions of the Civil Code and the conditions
of the General Agency Agreement. But the records will show that the principal cause of the
termination of the plaintiff as General Agent of defendant PHILAMGEN was his refusal to
share his Delta commission.
That it should be noted that there were several attempts made by defendant Bienvenido
M. Aragon to share with the Delta commission of plaintiff Arturo P. Valenzuela. He had
persistently pursued the sharing scheme to the point of terminating plaintiff Arturo P.
Valenzuela, and to make matters worse, defendants made it appear that plaintiff Arturo P.
Valenzuela had substantial accounts with defendant PHILAMGEN.
Not only that, defendants have also started (a) to treat separately the Delta Commission of
plaintiff Arturo P. Valenzuela, (b) to reverse the Delta commission due plaintiff Arturo P.
Valenzuela by not crediting or applying said commission earned to the account of plaintiff
Arturo P. Valenzuela, (c) placed plaintiff Arturo P. Valenzuela's agency transactions on a
Page 22 of 33
"cash and carry basis", (d) sending threats to cancel existing policies issued by plaintiff
Arturo P. Valenzuela's agency, (e) to divert plaintiff Arturo P. Valenzuela's insurance
business to other agencies, and (f) to spread wild and malicious rumors that plaintiff
Arturo P. Valenzuela has substantial account with defendant PHILAMGEN to force plaintiff
Arturo P. Valenzuela into agreeing with the sharing of his Delta commission." (pp. 9-10,
Decision, Annex 1, Petition).
xxx xxx xxx
These acts of harrassment done by defendants on plaintiff Arturo P. Valenzuela to force
him to agree to the sharing of his Delta commission, which culminated in the termination
of plaintiff Arturo P. Valenzuela as one of defendant PHILAMGEN's General Agent, do not
justify said termination of the General Agency Agreement entered into by defendant
PHILAMGEN and plaintiff Arturo P. Valenzuela.
That since defendants are not justified in the termination of plaintiff Arturo P. Valenzuela
as one of their General Agents, defendants shall be liable for the resulting damage and loss
of business of plaintiff Arturo P. Valenzuela. (Arts. 2199/2200, Civil Code of the
Philippines). (Ibid, p. 11)
The court accordingly rendered judgment, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
defendants ordering the latter to reinstate plaintiff Arturo P. Valenzuela as its General
Agent, and to pay plaintiffs, jointly and severally, the following:
1. The amount of five hundred twenty-one thousand nine hundred sixty four and 16/100
pesos (P521,964.16) representing plaintiff Arturo P. Valenzuela's Delta Commission with
interest at the legal rate from the time of the filing of the complaint, which amount shall
be adjusted in accordance with Article 1250 of the Civil Code of the Philippines;
2. The amount of seventy-five thousand pesos (P75,000.00) per month as compensatory
damages from 1980 until such time that defendant Philamgen shall reinstate plaintiff
Arturo P. Valenzuela as one of its general agents;
3. The amount of three hundred fifty thousand pesos (P350,000.00) for each plaintiff as
moral damages;
4. The amount of seventy-five thousand pesos (P75,000.00) as and for attorney's fees;
5. Costs of the suit. (Ibid., P. 12)
From the aforesaid decision of the trial court, Bienvenido Aragon, Robert E. Parnell, Carlos
K. Catolico and PHILAMGEN respondents herein, and defendants-appellants below,
interposed an appeal on the following:
ASSIGNMENT OF ERRORS
I or not Philamgen and/or its officers can be held liable for damages due to the termination
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA HAD
NO OUTSTANDING ACCOUNT WITH DEFENDANT PHILAMGEN AT THE TIME OF THE
TERMINATION OF THE AGENCY.
II
THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF ARTURO P. VALENZUELA IS
ENTITLED TO THE FULL COMMISSION OF 32.5% ON THE DELTA ACCOUNT.
III
THE LOWER COURT ERRED IN HOLDING THAT THE TERMINATION OF PLAINTIFF
ARTURO P. VALENZUELA WAS NOT JUSTIFIED AND THAT CONSEQUENTLY
DEFENDANTS ARE LIABLE FOR ACTUAL AND MORAL DAMAGES, ATTORNEYS FEES AND
COSTS.
IV
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES AGAINST DEFENDANT
PHILAMGEN WAS PROPER, THE LOWER COURT ERRED IN AWARDING DAMAGES EVEN
AGAINST THE INDIVIDUAL DEFENDANTS WHO ARE MERE CORPORATE AGENTS ACTING
WITHIN THE SCOPE OF THEIR AUTHORITY.
V
ASSUMING ARGUENDO THAT THE AWARD OF DAMAGES IN FAVOR OF PLAINTIFF
ARTURO P. VALENZUELA WAS PROPER, THE LOWER COURT ERRED IN AWARDING
DAMAGES IN FAVOR OF HOSPITALITA VALENZUELA, WHO, NOT BEING THE REAL
PARTY IN INTEREST IS NOT TO OBTAIN RELIEF.
On January 29, 1988, respondent Court of Appeals promulgated its decision in the
appealed case. The dispositive portion of the decision reads:
WHEREFORE, the decision appealed from is hereby modified accordingly and judgment is
hereby rendered ordering:
1. Plaintiff-appellee Valenzuela to pay defendant-appellant Philamgen the sum of one
million nine hundred thirty two thousand five hundred thirty-two pesos and seventeen
centavos (P1,902,532.17), with legal interest thereon from the date of finality of this
judgment until fully paid.
2. Both plaintiff-appellees to pay jointly and severally defendants-appellants the sum of
fifty thousand pesos (P50,000.00) as and by way of attorney's fees.
No pronouncement is made as to costs. (p. 44, Rollo)
There is in this instance irreconcilable divergence in the findings and conclusions of the
Court of Appeals, vis-a-visthose of the trial court particularly on the pivotal issue whether
Page 23 of 33
of the General Agency Agreement it entered into with the petitioners. In its questioned
decision the Court of Appeals observed that:
In any event the principal's power to revoke an agency at will is so pervasive, that the
Supreme Court has consistently held that termination may be effected even if the principal
acts in bad faith, subject only to the principal's liability for damages (Danon v. Antonio A.
Brimo & Co., 42 Phil. 133; Reyes v. Mosqueda, 53 O.G. 2158 and Infante V. Cunanan, 93
Phil. 691, cited in Paras, Vol. V, Civil Code of the Philippines Annotated [1986] 696).
The lower court, however, thought the termination of Valenzuela as General Agent
improper because the record will show the principal cause of the termination of the
plaintiff as General Agent of defendant Philamgen was his refusal to share his Delta
commission. (Decision, p. 9; p. 13, Rollo, 41)
Because of the conflicting conclusions, this Court deemed it necessary in the interest of
substantial justice to scrutinize the evidence and records of the cases. While it is an
established principle that the factual findings of the Court of Appeals are final and may not
be reviewed on appeal to this Court, there are however certain exceptions to the rule
which this Court has recognized and accepted, among which, are when the judgment is
based on a misapprehension of facts and when the findings of the appellate court, are
contrary to those of the trial court (Manlapaz v. Court of Appeals, 147 SCRA 236 [1987]);
Guita v. Court of Appeals, 139 SCRA 576 [1986]). Where the findings of the Court of
Appeals and the trial court are contrary to each other, this Court may scrutinize the
evidence on record (Cruz v. Court of Appeals, 129 SCRA 222 [1984]; Mendoza v. Court of
Appeals, 156 SCRA 597 [1987]; Maclan v. Santos, 156 SCRA 542 [1987]). When the
conclusion of the Court of Appeals is grounded entirely on speculation, surmises or
conjectures, or when the inference made is manifestly mistaken, absurd or impossible, or
when there is grave abuse of discretion, or when the judgment is based on a
misapprehension of facts, and when the findings of facts are conflict the exception also
applies (Malaysian Airline System Bernad v. Court of Appeals, 156 SCRA 321 [1987]).
After a painstaking review of the entire records of the case and the findings of facts of both
the court a quo and respondent appellate court, we are constrained to affirm the trial
court's findings and rule for the petitioners.
We agree with the court a quo that the principal cause of the termination of Valenzuela as
General Agent of Philamgen arose from his refusal to share his Delta commission. The
records sustain the conclusions of the trial court on the apparent bad faith of the private
respondents in terminating the General Agency Agreement of petitioners. It is axiomatic
that the findings of fact of a trial judge are entitled to great weight (People v. Atanacio, 128
SCRA 22 [1984]) and should not be disturbed on appeal unless for strong and cogent
reasons, because the trial court is in a better position to examine the evidence as well as
to observe the demeanor of the witnesses while testifying (Chase v. Buencamino, Sr., 136
SCRA 365 [1985]; People v. Pimentel, 147 SCRA 25 [1987]; and Baliwag Trans., Inc. v.
Court of Appeals, 147 SCRA 82 [1987]). In the case at bar, the records show that the
findings and conclusions of the trial court are supported by substantial evidence and there
appears to be no cogent reason to disturb them (Mendoza v. Court of Appeals. 156 SCRA
597 [1987]).
As early as September 30,1977, Philamgen told the petitioners of its desire to share the
Delta Commission with them. It stated that should Delta back out from the agreement, the
petitioners would be charged interests through a reduced commission after full payment
by Delta.
On January 23, 1978 Philamgen proposed reducing the petitioners' commissions by 50%
thus giving them an agent's commission of 16.25%. On February 8, 1978, Philamgen
insisted on the reduction scheme followed on June 1, 1978 by still another insistence on
reducing commissions and proposing two alternative schemes for reduction. There were
other pressures. Demands to settle accounts, to confer and thresh out differences
regarding the petitioners' income and the threat to terminate the agency followed. The
petitioners were told that the Delta commissions would not be credited to their account
(Exhibit "J"). They were informed that the Valenzuela agency would be placed on a cash
and carry basis thus removing the 60-day credit for premiums due. (TSN., March 26, 1979,
pp. 54-57). Existing policies were threatened to be cancelled (Exhibits "H" and "14"; TSN.,
March 26, 1979, pp. 29-30). The Valenzuela business was threatened with diversion to
other agencies. (Exhibit "NNN"). Rumors were also spread about alleged accounts of the
Valenzuela agency (TSN., January 25, 1980, p. 41). The petitioners consistently opposed
the pressures to hand over the agency or half of their commissions and for a treatment of
the Delta account distinct from other accounts. The pressures and demands, however,
continued until the agency agreement itself was finally terminated.
It is also evident from the records that the agency involving petitioner and private
respondent is one "coupled with an interest," and, therefore, should not be freely
revocable at the unilateral will of the latter.
In the insurance business in the Philippines, the most difficult and frustrating period is the
solicitation and persuasion of the prospective clients to buy insurance policies. Normally,
agents would encounter much embarrassment, difficulties, and oftentimes frustrations in
the solicitation and procurement of the insurance policies. To sell policies, an agent exerts
great effort, patience, perseverance, ingenuity, tact, imagination, time and money. In the
case of Valenzuela, he was able to build up an Agency from scratch in 1965 to a highly
productive enterprise with gross billings of about Two Million Five Hundred Thousand
Pesos (P2,500,000.00) premiums per annum. The records sustain the finding that the
private respondent started to covet a share of the insurance business that Valenzuela had
built up, developed and nurtured to profitability through over thirteen (13) years of
patient work and perseverance. When Valenzuela refused to share his commission in the
Delta account, the boom suddenly fell on him.
The private respondents by the simple expedient of terminating the General Agency
Agreement appropriated the entire insurance business of Valenzuela. With the
termination of the General Agency Agreement, Valenzuela would no longer be entitled to
commission on the renewal of insurance policies of clients sourced from his agency.
Page 24 of 33
Worse, despite the termination of the agency, Philamgen continued to hold Valenzuela
jointly and severally liable with the insured for unpaid premiums. Under these
circumstances, it is clear that Valenzuela had an interest in the continuation of the agency
when it was unceremoniously terminated not only because of the commissions he should
continue to receive from the insurance business he has solicited and procured but also for
the fact that by the very acts of the respondents, he was made liable to Philamgen in the
event the insured fail to pay the premiums due. They are estopped by their own positive
averments and claims for damages. Therefore, the respondents cannot state that the
agency relationship between Valenzuela and Philamgen is not coupled with interest.
"There may be cases in which an agent has been induced to assume a responsibility or
incur a liability, in reliance upon the continuance of the authority under such
circumstances that, if the authority be withdrawn, the agent will be exposed to personal
loss or liability" (See MEC 569 p. 406).
Furthermore, there is an exception to the principle that an agency is revocable at will and
that is when the agency has been given not only for the interest of the principal but for the
interest of third persons or for the mutual interest of the principal and the agent. In these
cases, it is evident that the agency ceases to be freely revocable by the sole will of the
principal (See Padilla, Civil Code Annotated, 56 ed., Vol. IV p. 350). The following citations
are apropos:
The principal may not defeat the agent's right to indemnification by a termination of the
contract of agency (Erskine v. Chevrolet Motors Co. 185 NC 479, 117 SE 706, 32 ALR 196).
Where the principal terminates or repudiates the agent's employment in violation of the
contract of employment and without cause ... the agent is entitled to receive either the
amount of net losses caused and gains prevented by the breach, or the reasonable value of
the services rendered. Thus, the agent is entitled to prospective profits which he would
have made except for such wrongful termination provided that such profits are not
conjectural, or speculative but are capable of determination upon some fairly reliable
basis. And a principal's revocation of the agency agreement made to avoid payment of
compensation for a result which he has actually accomplished (Hildendorf v. Hague, 293
NW 2d 272; Newhall v. Journal Printing Co., 105 Minn 44,117 NW 228; Gaylen Machinery
Corp. v. Pitman-Moore Co. [C.A. 2 NY] 273 F 2d 340)
If a principal violates a contractual or quasi-contractual duty which he owes his agent, the
agent may as a rule bring an appropriate action for the breach of that duty. The agent may
in a proper case maintain an action at law for compensation or damages ... A wrongfully
discharged agent has a right of action for damages and in such action the measure and
element of damages are controlled generally by the rules governing any other action for
the employer's breach of an employment contract. (Riggs v. Lindsay, 11 US 500, 3L Ed 419;
Tiffin Glass Co. v. Stoehr, 54 Ohio 157, 43 NE 2798)
At any rate, the question of whether or not the agency agreement is coupled with interest
is helpful to the petitioners' cause but is not the primary and compelling reason. For the
pivotal factor rendering Philamgen and the other private respondents liable in damages is
that the termination by them of the General Agency Agreement was tainted with bad faith.
Hence, if a principal acts in bad faith and with abuse of right in terminating the agency,
then he is liable in damages. This is in accordance with the precepts in Human Relations
enshrined in our Civil Code that "every person must in the exercise of his rights and in the
performance of his duties act with justice, give every one his due, and observe honesty and
good faith: (Art. 19, Civil Code), and every person who, contrary to law, wilfully or
negligently causes damages to another, shall indemnify the latter for the same (Art. 20, id).
"Any person who wilfully causes loss or injury to another in a manner contrary to morals,
good customs and public policy shall compensate the latter for the damages" (Art. 21, id.).
As to the issue of whether or not the petitioners are liable to Philamgen for the unpaid and
uncollected premiums which the respondent court ordered Valenzuela to pay Philamgen
the amount of One Million Nine Hundred Thirty-Two Thousand Five Hundred Thirty-Two
and 17/100 Pesos (P1,932,532,17) with legal interest thereon until fully paid (Decision-
January 20, 1988, p. 16; Petition, Annex "A"), we rule that the respondent court erred in
holding Valenzuela liable. We find no factual and legal basis for the award. Under Section
77 of the Insurance Code, the remedy for the non-payment of premiums is to put an end
to and render the insurance policy not binding —
Sec. 77 ... [N]otwithstanding any agreement to the contrary, no policy or contract of
insurance is valid and binding unless and until the premiums thereof have been paid
except in the case of a life or industrial life policy whenever the grace period provision
applies (P.D. 612, as amended otherwise known as the Insurance Code of 1974)
In Philippine Phoenix Surety and Insurance, Inc. v. Woodworks, Inc. (92 SCRA 419 [1979])
we held that the non-payment of premium does not merely suspend but puts an end to an
insurance contract since the time of the payment is peculiarly of the essence of the
contract. And in Arce v. The Capital Insurance and Surety Co. Inc. (117 SCRA 63, [1982]), we
reiterated the rule that unless premium is paid, an insurance contract does not take effect.
Thus:
It is to be noted that Delgado (Capital Insurance & Surety Co., Inc. v. Delgado, 9 SCRA 177
[1963] was decided in the light of the Insurance Act before Sec. 72 was amended by the
underscored portion. Supra. Prior to the Amendment, an insurance contract was effective
even if the premium had not been paid so that an insurer was obligated to pay indemnity
in case of loss and correlatively he had also the right to sue for payment of the
premium. But the amendment to Sec. 72 has radically changed the legal regime in that unless
the premium is paid there is no insurance. " (Arce v. Capitol Insurance and Surety Co., Inc.,
117 SCRA 66; Emphasis supplied)
In Philippine Phoenix Surety case, we held:
Moreover, an insurer cannot treat a contract as valid for the purpose of collecting premiums
and invalid for the purpose of indemnity. (Citing Insurance Law and Practice by John Alan
Appleman, Vol. 15, p. 331; Emphasis supplied)
Page 25 of 33
The foregoing findings are buttressed by Section 776 of the insurance Code (Presidential
Decree No. 612, promulgated on December 18, 1974), which now provides that no
contract of Insurance by an insurance company is valid and binding unless and until the
premium thereof has been paid, notwithstanding any agreement to the contrary (Ibid., 92
SCRA 425)
Perforce, since admittedly the premiums have not been paid, the policies issued have
lapsed. The insurance coverage did not go into effect or did not continue and the obligation
of Philamgen as insurer ceased. Hence, for Philamgen which had no more liability under
the lapsed and inexistent policies to demand, much less sue Valenzuela for the unpaid
premiums would be the height of injustice and unfair dealing. In this instance, with the
lapsing of the policies through the nonpayment of premiums by the insured there were no
more insurance contracts to speak of. As this Court held in the Philippine Phoenix
Surety case, supra "the non-payment of premiums does not merely suspend but puts an
end to an insurance contract since the time of the payment is peculiarly of the essence of
the contract."
The respondent appellate court also seriously erred in according undue reliance to the
report of Banaria and Banaria and Company, auditors, that as of December 31, 1978,
Valenzuela owed Philamgen P1,528,698.40. This audit report of Banaria was
commissioned by Philamgen after Valenzuela was almost through with the presentation
of his evidence. In essence, the Banaria report started with an unconfirmed and unaudited
beginning balance of account of P1,758,185.43 as of August 20, 1976. But even with that
unaudited and unconfirmed beginning balance of P1,758,185.43, Banaria still came up
with the amount of P3,865.49 as Valenzuela's balance as of December 1978 with
Philamgen (Exh. "38-A-3"). In fact, as of December 31, 1976, and December 31, 1977,
Valenzuela had no unpaid account with Philamgen (Ref: Annexes "D", "D-1", "E",
Petitioner's Memorandum). But even disregarding these annexes which are records of
Philamgen and addressed to Valenzuela in due course of business, the facts show that as
of July 1977, the beginning balance of Valenzuela's account with Philamgen amounted to
P744,159.80. This was confirmed by Philamgen itself not only once but four (4) times on
different occasions, as shown by the records.
On April 3,1978, Philamgen sent Valenzuela a statement of account with a beginning
balance of P744,159-80 as of July 1977.
On May 23, 1978, another statement of account with exactly the same beginning balance
was sent to Valenzuela.
On November 17, 1978, Philamgen sent still another statement of account with
P744,159.80 as the beginning balance.
And on December 20, 1978, a statement of account with exactly the same figure was sent
to Valenzuela.
It was only after the filing of the complaint that a radically different statement of accounts
surfaced in court. Certainly, Philamgen's own statements made by its own accountants
over a long period of time and covering examinations made on four different occasions
must prevail over unconfirmed and unaudited statements made to support a position
made in the course of defending against a lawsuit.
It is not correct to say that Valenzuela should have presented its own records to refute the
unconfirmed and unaudited finding of the Banaria auditor. The records of Philamgen itself
are the best refutation against figures made as an afterthought in the course of litigation.
Moreover, Valenzuela asked for a meeting where the figures would be reconciled.
Philamgen refused to meet with him and, instead, terminated the agency agreement.
After off-setting the amount of P744,159.80, beginning balance as of July 1977, by way of
credits representing the commission due from Delta and other accounts, Valenzuela had
overpaid Philamgen the amount of P530,040.37 as of November 30, 1978. Philamgen
cannot later be heard to complain that it committed a mistake in its computation. The
alleged error may be given credence if committed only once. But as earlier stated, the
reconciliation of accounts was arrived at four (4) times on different occasions where
Philamgen was duly represented by its account executives. On the basis of these
admissions and representations, Philamgen cannot later on assume a different posture
and claim that it was mistaken in its representation with respect to the correct beginning
balance as of July 1977 amounting to P744,159.80. The Banaria audit report
commissioned by Philamgen is unreliable since its results are admittedly based on an
unconfirmed and unaudited beginning balance of P1,758,185.43 as of August 20,1976.
As so aptly stated by the trial court in its decision:
Defendants also conducted an audit of accounts of plaintiff Arturo P. Valenzuela after the
controversy has started. In fact, after hearing plaintiffs have already rested their case.
The results of said audit were presented in Court to show plaintiff Arturo P. Valenzuela's
accountability to defendant PHILAMGEN. However, the auditor, when presented as
witness in this case testified that the beginning balance of their audit report was based on
an unaudited amount of P1,758,185.43 (Exhibit 46-A) as of August 20, 1976, which was
unverified and merely supplied by the officers of defendant PHILAMGEN.
Even defendants very own Exhibit 38- A-3, showed that plaintiff Arturo P. Valenzuela's
balance as of 1978 amounted to only P3,865.59, not P826,128.46 as stated in defendant
Bienvenido M. Aragon's letter dated December 20,1978 (Exhibit 14) or P1,528,698.40 as
reflected in defendant's Exhibit 46 (Audit Report of Banaria dated December 24, 1980).
These glaring discrepancy (sic) in the accountability of plaintiff Arturo P. Valenzuela to
defendant PHILAMGEN only lends credence to the claim of plaintiff Arturo P. Valenzuela
that he has no outstanding account with defendant PHILAMGEN when the latter, thru
defendant Bienvenido M. Aragon, terminated the General Agency Agreement entered into
by plaintiff (Exhibit A) effective January 31, 1979 (see Exhibits "2" and "2-A"). Plaintiff
Arturo P. Valenzuela has shown that as of October 31, 1978, he has overpaid defendant
PHILAMGEN in the amount of P53,040.37 (Exhibit "EEE", which computation was based
on defendant PHILAMGEN's balance of P744,159.80 furnished on several occasions to
Page 26 of 33
plaintiff Arturo P. Valenzuela by defendant PHILAMGEN (Exhibits H-1, VV, VV-1, WW,
WW-1 , YY , YY-2 , ZZ and , ZZ-2).

Prescinding from the foregoing, and considering that the private respondents terminated
Valenzuela with evident mala fide it necessarily follows that the former are liable in
damages. Respondent Philamgen has been appropriating for itself all these years the gross
billings and income that it unceremoniously took away from the petitioners. The
preponderance of the authorities sustain the preposition that a principal can be held liable
for damages in cases of unjust termination of agency. In Danon v. Brimo, 42 Phil. 133
[1921]), this Court ruled that where no time for the continuance of the contract is fixed by
its terms, either party is at liberty to terminate it at will, subject only to the ordinary
requirements of good faith. The right of the principal to terminate his authority is absolute
and unrestricted, except only that he may not do so in bad faith.

The trial court in its decision awarded to Valenzuela the amount of Seventy Five Thousand
Pesos (P75,000,00) per month as compensatory damages from June 1980 until its decision
becomes final and executory. This award is justified in the light of the evidence extant on
record (Exhibits "N", "N-10", "0", "0-1", "P" and "P-1") showing that the average gross
premium collection monthly of Valenzuela over a period of four (4) months from
December 1978 to February 1979, amounted to over P300,000.00 from which he is
entitled to a commission of P100,000.00 more or less per month. Moreover, his annual
sales production amounted to P2,500,000.00 from where he was given 32.5%
commissions. Under Article 2200 of the new Civil Code, "indemnification for damages shall
comprehend not only the value of the loss suffered, but also that of the profits which the
obligee failed to obtain."

The circumstances of the case, however, require that the contractual relationship between
the parties shall be terminated upon the satisfaction of the judgment. No more claims
arising from or as a result of the agency shall be entertained by the courts after that date.

ACCORDINGLY, the petition is GRANTED. The impugned decision of January 29, 1988 and
resolution of April 27, 1988 of respondent court are hereby SET ASIDE. The decision of the
trial court dated January 23, 1986 in Civil Case No. 121126 is REINSTATED with the
MODIFICATIONS that the amount of FIVE HUNDRED TWENTY ONE THOUSAND NINE
HUNDRED SIXTY-FOUR AND 16/100 PESOS (P521,964.16) representing the petitioners
Delta commission shall earn only legal interests without any adjustments under Article
1250 of the Civil Code and that the contractual relationship between Arturo P. Valenzuela
and Philippine American General Insurance Company shall be deemed terminated upon
the satisfaction of the judgment as modified.

SO ORDERED.

Page 27 of 33
 G.R. No. L-44588 May 9, 1989
LAURA VELASCO and GRETA ACOSTA, petitioners,
vs.
HON. SERGIO A. F. APOSTOL and MAHARLIKA INSURANCE CO., INC., respondents.
Ramon A. Gonzales for petitioner.
Inocentes, Crisostomo, Tomas, Garcia & Associates for respondents.
REGALADO, J.:
Petitioners Laura Velasco and Greta Acosta were the plaintiffs in Civil Case No. Q-19118
the former Court of First Instance of Rizal, Branch XVI, of which public respondent Hon.
Sergio A. F. Apostol was the presiding judge. The case was an offshoot of an incident
adequately alleged in their complaint, dated July 22, 1974, as follows:
That on November 27, 1973, at about 2:30 p.m. plaintiffs were riding in their Mercury car,
with Plate No. 44-43 (H-Manila-73), owned by plaintiff Laura Velasco, and driven by their
driver Restitute Guarra, along Quezon Boulevard near the corner of Speaker Perez Street,
Quezon City, toward the direction of Manila, when, before reaching said corner, an N/S
taxicab driven by defendant Dominador Santos and with Plate No. 75-25L (TX QC-73),
registered in the name of defendants Alice Artuz, c/o Norberto Santos, crossed the center
island towards their direction, and finally collided with their car at the left front part, and
thereafter, the said taxicab tried to return to its original lane, but was unable to climb the
island, and instead, backtracked, hitting again plaintiffs' car in the left near portion,
causing the latter's back portion to turn toward the center hitting a jeepney on its right,
which was travelling along their side going toward Manila also; 1
and amply substantiated in detail at the trial. 2
Originally sued as defendants were Dominador Santos, Alice Artuz, and Norberto Santos,
with plaintiffs claiming actual, moral and exemplary damages plus attorney's fees. After
an answer was filed by said defendants, private respondent Maharlika Insurance Co., Inc.
was impleaded as a defendant in an amended complaint filed by the petitioner on April 4,
1975, with an allegation that the N/S taxicab involved was insured against third party
liability for P20,000.00 with private respondent at the time of the accident. 3
In its answer to the amended complaint, respondent Maharlika Insurance Co., Inc. claimed
that there was no cause of action against it because at the time of the accident, the alleged
insurance policy was not in, force due to non-payment of the premium thereon. It further
averred that even if the taxicab had been insured, the complaint would still be premature
since the policy provides that the insurer would be liable only when the insured becomes
legally liable. 4
The trial court rendered judgment in favor of the plaintiff finding that the evidence on the
negligence of defendant Dominador Santos was uncontroverted and the proximate cause
of the accident was his negligence. 5 Defendants Dominador Santos, Alice Artuz, and
Norberto Santos were adjudged jointly and severally liable to petitioners for the sums of
Pl 7,061.95 for the repair of their car, P17,000.00 for their medical expenses P10,000.00
as moral damages and P10,000.00 as attorney's fees. 6 However, Maharlika Insurance Co.
was exonerated on the ground that the policy was not in force for failure of the therein
defendants to pay the initial premium and for their concealment of a material fact.
From the decision of the court a quo, petitioners elevated the case to this Court by a
petition for review on certiorari, with the averment that only questions of law are
involved.
Petitioners fault the respondent-judge for considering private respondent's defense of late
payment of premium when, according to them, "the same was waived at the pre-
trial" 7 hence private respondent's evidence of late payment should be disregarded
supposedly because, as We understand petitioners' argument, private respondent had
thereby admitted that such fact was not in issue. They theorize that what was stipulated
in the pre-trial order "does not include the issue on whether defendant Maharlika
Insurance Co., Inc. is liable under the insurance policy, even as the premium was paid after
the accident in question." 8
The records show that at the pre-trial conference the issues stipulated by the parties for
trial were the following:
Whether it was the driver of the plaintiffs' car or the driver of the defendants' car who was
negligent.
Whether defendant Maharlika Insurance Co. Inc. is liable under the insurance policy on
account of the negligence of defendant Dominador Santos. 9
Petitioners' position is bereft of merit. We have carefully examined the pre-trial order but
We fail to discern any intimation or semblance of a waiver or an admission on the part of
Maharlika Insurance Co., Inc. Although there is no express statement as to the fact of late
payment, this is necessarily deemed included in or ineluctably inferred from the issue of
whether the company is liable under the insurance policy it had allegedly issued for the
vehicle involved and on which petitioners seek to recover. A pre-trial order is not meant
to be a detailed catalogue of each and every issue that is to be or may be taken up during
the trial. Issues that are impliedly included therein or may be inferable therefrom by
necessary implication are as much integral parts of the pre-trial order as those that are
expressly stipulated.
In fact, it would be absurd and inexplicable for the respondent company to knowingly
disregard or deliberately abandon the issue of non-payment of the premium on the policy
considering that it is the very core of its defense. Correspondingly, We cannot but perceive
here an undesirable resort to technicalities to evade an issue determinative of a defense
duly averred.
Page 28 of 33
Furthermore, as private respondent correctly points out, evidence to prove such late
payment was introduced without any objection by the adverse party. 10 This lack of
objection amounts to an implied consent conferring jurisdiction on the court to try said
issue. 11
Noteworthy, too is petitioners' vacillation on this particular score. In their reply to
respondents' comment, petitioners categorically stated that respondents' point regarding
the lack of objection to the evidence is well taken, hence they do not insist on this ground
to review respondent court's decision. 12 However, in their amended reply, they reverted
to their original position that it was a mistake for the trial court to have considered the
defense of lack of payment of premium. At any rate, We consider that matter as duly
disposed of by the preceding discussion.
Digressing from the procedural aspects of this case, We now consider petitioners' curative
assertion that private respondent had agreed to grant the then prospective insured a
credit extension for the premium due. It should be noted at the outset that this controversy
arose under the aegis of the old insurance law, Act No. 2427, as amended. The accident
occurred on November 27, 1973 while the complaint by reason thereof was filed on July
20, 1974, both before effectivity on December 18, 1974 of Presidential Decree No. 612, the
subsequent insurance law which repealed its predecessor.
The former insurance law, which applies to the case under consideration, provided that:
An insurer is entitled to the payment of premium as soon as the thing insured is exposed
to the peril insured against, unless there is clear agreement to grant the insured credit
extension of the premium due. No policy issued by an insurance company is valid and
binding unless and until the premium thereof has been paid. 13
Consequently, the insurance policy in question would be valid and binding
notwithstanding the non-payment of the premium if there was a clear agreement to grant
to the insured credit extension. Such agreement may be express or implied.
Petitioners quote and rely on the following as authority for their cause:
A condition requiring pre-payment of the premium is waived by a parol agreement to that
effect, acceptance of the premium after delivery of the policy, the unconditional delivery
of the policy, the giving of credit for the premiums, ... or any other circumstances showing
that pre-payment was not intended to be insisted upon, as where there are any words or
acts from which a reasonable inference may be drawn that the insurer does not stand upon
its rights to demand pre-payment. (Couch on Insurance, 2d, Vol. 1, pp. 402-403. ) 14
As earlier stated, the accident for which respondent insurance company is sought to be
held liable occurred on November 27, 1973 while the initial premium was paid only on
December 11, 1973.
Petitioners maintain that in spite of this late payment, the policy is nevertheless binding
because there was an implied agreement to grant a credit extension so as to make the
policy effective. To them, the subsequent acceptance of the premium and delivery of the
policy estops the respondent company from asserting that the policy is ineffective. 15
We see no cogent proof of any such implied agreement. The purported nexus between the
delivery of the policy and the grant of credit extension is too tenuous to support the
conclusion for which petitioners contend. The delivery of the policy made on March 28,
1974 and only because the premium was had been paid, in fact, more than three months
before such delivery. 16 As found by the court below, said payment was accepted by the
insurer without any knowledge that the risk insured against had already occurred since
such fact was concealed by the insured and was not revealed to the insurer. 17 Thus, the
delivery of the policy was far from being unconditional. Had there really been a credit
extension, the insured would not have had any apprehension or hesitation to inform the
respondent insurance company at the time of or before the payment of the premium that
an accident for which the insurer may be held liable had already happened. In fact, there
is authority to hold that under such circumstances notice alone is necessary and the
insured need not pay the premium because whatever premium may have been due may
already be deducted upon the satisfaction of the loss under the policy. 18
Aside from the supposed unconditional delivery of the policy, which has been
demonstrated to be baseless, petitioners failed to point out "any other circumstances
showing that prepayment of premium was not intended to be insisted upon." They have
thus failed to discharge the burden of proving their allegation of the existence of the
purported credit extension agreement. Indubitably their insurance claim must fail.
It may not be amiss to parenthetically mention in this regard that, in the present law,
Section 77 of the Insurance Code of 1978 19 has deleted the clause "unless there is clear
agreement to grant the insured credit extension of the premium due" which was then
involved in this controversy.
There is no need to elaborate on the finding of the lower court that there was concealment
by therein defendants of a material fact, although legal effects of pertinence to this case
could be drawn therefrom. The fact withheld could not in any event have influenced the
respondent company in entering into the supposed contract or in estimating the character
of the risk or in fixing the rate premium, for the simple reason that no such contract existed
between the defendants and the company at the time of the accident. Accordingly, there
was nothing to rescind at that point in time. What should be apparent from such actuations
of therein defendants, however, is the presence of bad faith on their part, a reprehensible
disregard of the principle that insurance contracts are uberrimae fidae and demand the
most abundant good faith. 20
WHEREFORE, finding no reversible error, the judgment appealed from is hereby
AFFIRMED.
SO ORDERED.
Page 29 of 33
 G.R. No. L-28501 September 30, 1982
PEDRO ARCE, plaintiff-appellee,
vs.
THE CAPITAL INSURANCE & SURETY CO., INC., defendant-appellant.
ABAD SANTOS, J.:
In Civil Case No. 66466 of the Court of First Instance of Manila, the Capital Insurance and
Surety Co., Inc., (COMPANY) was ordered to pay Pedro Arce (INSURED) the proceeds of a
fire insurance policy. Not satisfied with the decision, the company appealed to this Court
on questions of law.
The INSURED was the owner of a residential house in Tondo, Manila, which had been
insured with the COMPANY since 1961 under Fire Policy No. 24204. On November 27,
1965, the COMPANY sent to the INSURED Renewal Certificate No. 47302 to cover the
period December 5, 1965 to December 5, 1966. The COMPANY also requested payment of
the corresponding premium in the amount of P 38.10.
Anticipating that the premium could not be paid on time, the INSURED, thru his wife,
promised to pay it on January 4, 1966. The COMPANY accepted the promise but the
premium was not paid on January 4, 1966. On January 8, 1966, the house of the INSURED
was totally destroyed by fire.
On January 10, 1966, INSURED's wife presented a claim for indemnity to the COMPANY.
She was told that no indemnity was due because the premium on the policy was not paid.
Nonetheless the COMPANY tendered a check for P300.00 as financial aid which was
received by the INSURED's daughter, Evelina R. Arce. The voucher for the check which
Evelina signed stated that it was "in full settlement (ex gratia) of the fire loss under Claim
No. F-554 Policy No. F-24202." Thereafter the INSURED and his wife went to the office of
the COMPANY to have his signature on the check Identified preparatory to encashment. At
that time the COMPANY reiterated that the check was given "not as an obligation, but as a
concession" because the renewal premium had not been paid, The INSURED cashed the
check but then sued the COMPANY on the policy.
The court a quo held that since the COMPANY could have demanded payment of the
premium, mutuality of obligation requires that it should also be liable on its policy. The
court a quo also held that the INSURED was not bound by the signature of Evelina on the
check voucher because he did not authorize her to sign the waiver.
The appeal is impressed with merit.
The trial court cited Capital Insurance and Surety Co., Inc. vs. Delgado, L-18567, Sept. 30,
1963, 9 SCRA 177, to support its first proposition. In that case, this Court said:
On the other hand, the preponderance of the evidence shows that appellee issued fire
insurance policy No. C-1137 in favor of appellants covering a certain property belonging
to the latter located in Cebu City; that appellants failed to pay a balance of P583.95 on the
premium charges due, notwithstanding demands made upon them. As with the issuance
of the policy to appellants the same became effective and binding upon the contracting
parties, the latter can not avoid the obligation of paying the premiums agreed upon. In fact,
appellant Mario Delgado, in a letter marked in the record as Exhibit G, expressly admitted
his unpaid account for premiums and asked for an extension of time to pay the same. It is
clear from the foregoing that appellants are under obligation to pay the amount sued upon.
(At p. 180.)
Upon the other hand, Sec. 72 of the Insurance Act, as amended by R.A. No. 3540 reads:
SEC. 72. An insurer is entitled to payment of premium as soon as the thing insured is
exposed to the perils insured against, unless there is clear agreement to grant credit
extension for the premium due. No policy issued by an insurance company is valid and
binding unless and until the premium thereof has been paid " (Italics supplied.) (p. 11,
Appellant's Brief.)
Morever, the parties in this case had stipulated:
IT IS HEREBY DECLARED AND AGREED that not. withstanding anything to the contrary
contained in the within policy, this insurance will be deemed valid and binding upon the
Company only when the premium and documentary stamps therefor have actually been
paid in full and duly acknowledged in an official receipt signed by an authorized
official/representative of the Company, " (pp. 45-46, Record on Appeal.)
It is obvious from both the Insurance Act, as amended, and the stipulation of the parties
that time is of the essence in respect of the payment of the insurance premium so that if it
is not paid the contract does not take effect unless there is still another stipulation to the
contrary. In the instant case, the INSURED was given a grace period to pay the premium
but the period having expired with no payment made, he cannot insist that the COMPANY
is nonetheless obligated to him.
It is to be noted that Delgado was decided in the light of the Insurance Act before Sec. 72
was amended by the addition of the underscored portion, supra, Prior to the amendment,
an insurance contract was effective even if the premium had not been paid so that an
insurer was obligated to pay indemnity in case of loss and correlatively he had also the
right to sue for payment of the premium. But the amendment to Sec. 72 has radically
changed the legal regime in that unless the premium is paid there is no insurance.
With the foregoing, it is not necessary to dwell at length on the trial court's second
proposition that the INSURED had not authorized his daughter Evelina to make a waiver
because the INSURED had nothing to waive; his policy ceased to have effect when he failed
to pay the premium.
Page 30 of 33
We commiserate with the INSURED. We are wen aware that many insurance companies
have fallen into the condemnable practice of collecting premiums promptly but resort to
all kinds of excuses to deny or delay payment of just claims. Unhappily the instant case is
one where the insurer has the law on its side.

WHEREFORE, the decision of the court a quo is reversed; the appellee's complaint is
dismissed. No special pronouncement as to costs.

SO ORDERED.

Barredo (Chairman), Aquino, Concepcion, Jr., Guerrero, De Castro and Escolin, JJ., concur.

Page 31 of 33
 [G.R. No. L-25317. August 6, 1979.]
PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, Plaintiff-Appellee, v.
WOODWORKS, INC., Defendant-Appellant.
DECISION
MELENCIO-HERRERA, J.:
This case was certified to this Tribunal by the Court of Appeals in its Resolution of
October 4, 1965 on a pure question of law and "because the issues raised are practically
the same as those in CA-G.R. No. 32017-R" between the same parties, which case had
been forwarded to us on April 1, 1964. The latter case, "Philippine Phoenix Surety &
Insurance Inc. v. Woodworks, Inc.," docketed in this Court as L-22684, was decided on
August 31, 1967 and has been reported in 20 SCRA 1270.chanrobles.com:cralaw:red
Specifically, this action is for recovery of unpaid premium on a fire insurance policy
issued by plaintiff, Philippine Phoenix Surety & Insurance Company, in favor of
defendant Woodworks, Inc.
The following are the established facts:chanrob1es virtual 1aw library
On July 21, 1960, upon defendant’s application, plaintiff issued in its favor Fire Insurance
Policy No. 9749 for P500,000.00 whereby plaintiff insured defendant’s building,
machinery and equipment for a term of one year from July 21, 1960 to July 21, 1961
against loss by fire. The premium and other charges including the margin fee surcharge
of P590.76 and the documentary stamps in the amount of P156.60 affixed on the Policy,
amounted to P10,593.36.
It is undisputed that defendant did not pay the premium stipulated in the Policy when it
was issued nor at any time thereafter.
On April 19, 1961, or before the expiration of the one-year term, plaintiff notified
defendant, through its Indorsement No. F-6963/61, of the cancellation of the Policy
allegedly upon request of defendant. 1 The latter has denied having made such a request.
In said Indorsement, plaintiff credited defendant with the amount of P3,110.25 for the
unexpired period of 94 days, and claimed the balance of P7,483.11 representing "earned
premium from July 21, 1960 to 18th April 1961 or, say 271 days." On July 6, 1961,
plaintiff demanded in writing for the payment of said amount. 2 Defendant, through
counsel, disclaimed any liability in its reply-letter of August 15, 1961, contending, in
essence, that it need not pay premium "because the Insurer did not stand liable for any
indemnity during the period the premiums were not paid." 3
On January 30, 1962, plaintiff commenced action in the Court of First Instance of Manila,
Branch IV (Civil Case No. 49468), to recover the amount of P7,483.11 as "earned
premium." Defendant controverted basically on the theory that its failure "to pay the
premium after the issuance of the policy put an end to the insurance contract and
rendered the policy unenforceable." 4
On September 13, 1962, judgment was rendered in plaintiff’s favor "ordering defendant
to pay plaintiff the sum of P7,483.11, with interest thereon at the rate of 6% per annum
from January 30, 1962, until the principal shall have been fully paid, plus the sum of
P700.00 as attorney’s fees of the plaintiff, and the costs of the suit." From this adverse
Decision, defendant appealed to the Court of Appeals which, as heretofore stated,
certified the case to us on a question of law.
The errors assigned read:jgc:chanrobles.com.ph
"1. The lower court erred in sustaining that Fire Insurance Policy, Exhibit A, was a
binding contract even if the premium stated in the policy has not been paid.
"2. That the lower court erred in sustaining that the premium in Insurance Policy, Exhibit
B, became an obligation which was demandable even after the period in the Policy has
expired.
"3. The lower court erred in not deciding that a premium not paid is not a debt
enforceable by action of the insurer."cralaw virtua1aw library
We find the appeal meritorious.
Insurance is "a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event." 5
The consideration is the "premium." "The premium must be paid at the time and in the
way and manner specified in the policy and, if not so paid, the policy will lapse and be
forfeited by its own terms." 6
The provisions on premium in the subject Policy read:jgc:chanrobles.com.ph
"THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration of — MESSRS.
WOODWORKS, INC. — hereinafter called the Insured, paying to the PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC., hereinafter called the Company, the sum of —
PESOS NINE THOUSAND EIGHT HUNDRED FORTY SIX ONLY — the Premium for the first
period hereinafter mentioned, . . ."cralaw virtua1aw library
x x x
"THE COMPANY HEREBY AGREES with the Insured . . . that if the Property above
Page 32 of 33
described, or any part thereof, shall be destroyed or damaged by Fire or Lightning after
payment of Premium, at any time between 4:00 o’clock in the afternoon of the TWENTY
FIRST day of JULY One Thousand Nine Hundred and SIXTY and 4:00 o’clock in the
afternoon of the TWENTY FIRST day of JULY One Thousand Nine Hundred and SIXTY
ONE, . . ." (Emphasis supplied)
Paragraph "2" of the Policy further contained the following
condition:jgc:chanrobles.com.ph
"2. No payment in respect of any premium shall be deemed to be payment to the
Company unless a printed form of receipt for the same signed by an Official or duly-
appointed Agent of the Company shall have been given to the Insured."cralaw virtua1aw
library
Paragraph "10" of the Policy also provided:jgc:chanrobles.com.ph
"10. "This insurance may be terminated at any time at the request of the Insured, in
which case the Company will retain the customary short period rate for the time the
policy has been in force. This insurance may also at any time be terminated at the option
of the Company, on notice to that effect being given to the Insured, in which case the
Company shall be liable to repay on demand a ratable proportion of the premium for the
unexpired term from the date of the cancelment."cralaw virtua1aw library
Clearly, the Policy provides for pre-payment of premium. Accordingly; "when the policy
is tendered the insured must pay the premium unless credit is given or there is a waiver,
or some agreement obviating the necessity for prepayment." 7 To constitute an
extension of credit there must be a clear and express agreement therefor." 8
From the Policy provisions, we fail to find any clear agreement that a credit extension
was accorded defendant. And even if it were to be presumed that plaintiff had extended
credit from the circumstances of the unconditional delivery of the Policy without
prepayment of the premium, yet it is obvious that defendant had not accepted the
insurer’s offer to extend credit, which is essential for the validity of such
agreement.chanroblesvirtualawlibrary
"An acceptance of an offer to allow credit, if one was made, is as essential to make a valid
agreement for credit, to change a conditional delivery of an insurance policy to an
unconditional delivery, as it is to make any other contract. Such an acceptance could not
be merely a mental act or state of mind, but would require a promise to pay made known
in some manner to defendant. 9
In this respect, the instant case differs from that involving the same parties entitled
Philippine Phoenix Surety & Insurance Inc. v. Woodworks, Inc., 10 where recovery of the
balance of the unpaid premium was allowed inasmuch as in that case "there was not only
a perfected contract of insurance but a partially performed one as far as the payment of
the agreed premium was concerned." This is not the situation obtaining here where no
partial payment of premiums has been made whatsoever.
Since the premium had not been paid, the policy must be deemed to have lapsed.
"The non-payment of premiums does not merely suspend but puts an end to an
insurance contract, since the time of the payment is peculiarly of the essence of the
contract." 11
". . . the rule is that under policy provisions that upon the failure to make a payment of a
premium or assessment at the time provided for, the policy shall become void or
forfeited, or the obligation of the insurer shall cease, or words to like effect, because the
contract so prescribes and because such a stipulation is a material and essential part of
the contract. This is true, for instance, in the case of life, health and accident, fire and hail
insurance policies." 12
In fact, if the peril insured against had occurred, plaintiff, as insurer, would have had a
valid defense against recovery under the Policy it had issued. Explicit in the Policy itself
is plaintiff’s agreement to indemnify defendant for loss by fire only "after payment of
premium," supra. Compliance by the insured with the terms of the contract is a condition
precedent to the right of recovery.
"The burden is on an insured to keep a policy in force by the payment of premiums,
rather than on the insurer to exert every effort to prevent the insured from allowing a
policy to elapse through a failure to make premium payments. The continuance of the
insurer’s obligation is conditional upon the payment of premiums, so that no recovery
can be had upon a lapsed policy, the contractual relation between the parties having
ceased." 13
Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting
premiums and invalid for the purpose of indemnity." 14
The foregoing findings are buttressed by section 77 of the Insurance Code (Presidential
Decree No. 612, promulgated on December 18, 1974), which now provides that no
contract of insurance issued by an insurance company is valid and binding unless and
until the premium thereof has been paid, notwithstanding any agreement to the
contrary.chanrobles law library : red
WHEREFORE, the judgment appealed from is reversed, and plaintiff’s complaint hereby
dismissed.
Teehankee (Chairman), Fernandez, Guerrero and De Castro, JJ., concur.
Makasiar, J., is abroad.
Page 33 of 33