G.R. No.

L-15774

November 29, 1920

PILAR
C.
DE
LIM, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Sanz
and
Cohn and Fisher for appellee.

Luzuriaga

for

appellant.

MALCOLM, J.:
This is an appeal by plaintiff from an order of the Court of First Instance of
Zamboanga sustaining a demurrer to plaintiff's complaint upon the ground that it
fails to state a cause of action.
As the demurrer had the effect of admitting the material facts set forth in the
complaint, the facts are those alleged by the plaintiff. On July 6, 1917, Luis Lim y
Garcia of Zamboanga made application to the Sun Life Assurance Company of
Canada for a policy of insurance on his life in the sum of P5,000. In his application
Lim designated his wife, Pilar C. de Lim, the plaintiff herein, as the beneficiary. The
first premium of P433 was paid by Lim, and upon such payment the company issued
what was called a "provisional policy." Luis Lim y Garcia died on August 23, 1917,
after the issuance of the provisional policy but before approval of the application by
the home office of the insurance company. The instant action is brought by the
beneficiary, Pilar C. de Lim, to recover from the Sun Life Assurance Company of
Canada the sum of P5,000, the amount named in the provisional policy.
The "provisional policy" upon which this action rests reads as follows:
Received (subject to the following stipulations and agreements) the sum of
four hundred and thirty-three pesos, being the amount of the first year's
premium for a Life Assurance Policy on the life of Mr. Luis D. Lim y Garcia of
Zamboanga for P5,000, for which an application dated the 6th day of July,
1917, has been made to the Sun Life Assurance Company of Canada.
The above-mentioned life is to be assured in accordance with the terms and
conditions contained or inserted by the Company in the policy which may be
granted by it in this particular case for four months only from the date of the
application, provided that the Company shall confirm this agreement by
issuing a policy on said application when the same shall be submitted to the
Head Office in Montreal. Should the Company not issue such a policy, then
this agreement shall be null and void ab initio, and the Company shall be held
not to have been on the risk at all, but in such case the amount herein
acknowledged shall be returned.
[SEAL.]
(Sgd.) A. F. Peters, Agent.

(Sgd.)

T.

B.

MACAULAY,

President.

Our duty in this case is to ascertain the correct meaning of the document above
quoted. A perusal of the same many times by the writer and by other members of the
court leaves a decided impression of vagueness in the mind. Apparently it is to be a
provisional policy "for four months only from the date of this application." We use the
term "apparently" advisedly, because immediately following the words fixing the four
months period comes the word "provided" which has the meaning of "if." Otherwise
stated, the policy for four months is expressly made subjected to the affirmative
condition that "the company shall confirm this agreement by issuing a policy on said
application when the same shall be submitted to the head office in Montreal." To
reenforce the same there follows the negative condition
Should the company not issue such a policy, then this agreement shall be null and
void ab initio, and the company shall be held not to have been on the risk." Certainly,
language could hardly be used which would more clearly stipulate that the
agreement should not go into effect until the home office of the company should
confirm it by issuing a policy. As we read and understand the so-called provisional
policy it amounts to nothing but an acknowledgment on behalf of the company, that
it has received from the person named therein the sum of money agreed upon as the
first year's premium upon a policy to be issued upon the application, if the
application is accepted by the company.
It is of course a primary rule that a contract of insurance, like other contracts, must
be assented to by both parties either in person or by their agents. So long as an
application for insurance has not been either accepted or rejected, it is merely an
offer or proposal to make a contract. The contract, to be binding from the date of the
application, must have been a completed contract, one that leaves nothing to be
done, nothing to be completed, nothing to be passed upon, or determined, before it
shall take effect. There can be no contract of insurance unless the minds of the
parties have met in agreement. Our view is, that a contract of insurance was not here
consummated by the parties.lawph!l.net
Appellant relies on Joyce on Insurance. Beginning at page 253, of Volume I, Joyce
states the general rule concerning the agent's receipt pending approval or issuance
of policy. The first rule which Joyce lays down is this: If the act of acceptance of the
risk by the agent and the giving by him of a receipt, is within the scope of the agent's
authority, and nothing remains but to issue a policy, then the receipt will bind the
company. This rule does not apply, for while here nothing remained but to issue the
policy, this was made an express condition to the contract. The second rule laid down
by Joyce is this: Where an agreement is made between the applicant and the agent
whether by signing an application containing such condition, or otherwise, that no
liability shall attach until the principal approves the risk and a receipt is given buy the
agent, such acceptance is merely conditional, and it subordinated to the act of the
company in approving or rejecting; so in life insurance a "binding slip" or "binding
receipt" does not insure of itself. This is the rule which we believe applies to the
instant case. The third rule announced by Joyce is this: Where the acceptance by the
agent is within the scope of his authority a receipt containing a contract for insurance
for a specific time which is not absolute but conditional, upon acceptance or rejection
by the principal, covers the specified period unless the risk is declined within that
period. The case cited by Joyce to substantiate the last principle is that a
Goodfellow vs. Times & Beacon Assurance Com. (17 U. C. Q. B., 411), not available.

The two cases most nearly in point come from the federal courts and the Supreme
Court of Arkansas.
In the case of Steinle vs. New York Life Insurance Co. ([1897], 81 Fed., 489} the facts
were that the amount of the first premium had been paid to an insurance agent and a
receipt given therefor. The receipt, however, expressly declared that if the application
was accepted by the company, the insurance shall take effect from the date of the
application but that if the application was not accepted, the money shall be returned.
The trite decision of the circuit court of appeal was, "On the conceded facts of this
case, there was no contract to life insurance perfected and the judgment of the
circuit court must be affirmed."
In the case of Cooksey vs. Mutual Life Insurance Co. ([1904], 73 Ark., 117) the person
applying for the life insurance paid and amount equal to the first premium, but the
application and the receipt for the money paid, stipulated that the insurance was to
become effective only when the application was approved and the policy issued. The
court held that the transaction did not amount to an agreement for preliminary or
temporary insurance. It was said:
It is not an unfamiliar custom among life insurance companies in the operation of the
business, upon receipt of an application for insurance, to enter into a contract with
the applicant in the shape of a so-called "binding receipt" for temporary insurance
pending the consideration of the application, to last until the policy be issued or the
application rejected, and such contracts are upheld and enforced when the applicant
dies before the issuance of a policy or final rejection of the application. It is held, too,
that such contracts may rest in parol. Counsel for appellant insists that such a
preliminary contract for temporary insurance was entered into in this instance, but
we do not think so. On the contrary, the clause in the application and the receipt
given by the solicitor, which are to be read together, stipulate expressly that the
insurance shall become effective only when the "application shall be approved and
the policy duly signed by the secretary at the head office of the company and
issued." It constituted no agreement at all for preliminary or temporary insurance;
Mohrstadt vs. Mutual Life Ins. Co., 115 Fed., 81, 52 C. C. A., 675; Steinle vs. New York
Life Ins. Co., 81 Fed., 489, 26 C. C. A., 491." (See further Weinfeld vs. Mutual Reserve
Fund Life Ass'n. [1892], 53 Fed, 208' Mohrstadt vs. Mutual Life Insurance Co. [1902],
115 Fed., 81; Insurance co. vs. Young's Administrator [1875], 90 U. S., 85;
Chamberlain vs. Prudential Insurance Company of America [1901], 109 Wis., 4;
Shawnee Mut. Fire Ins. Co. vs. McClure [1913], 39 Okla., 509; Dorman vs. Connecticut
Fire Ins. Co. [1914], 51 contra, Starr vs. Mutual Life Ins. Co. [1905], 41 Wash., 228.)
We are of the opinion that the trial court committed no error in sustaining the
demurrer and dismissing the case. It is to be noted, however, that counsel for
appellee admits the liability of the company for the return of the first premium to the
estate of the deceased. It is not to be doubted but that the Sun Life Assurance
Company of Canada will immediately, on the promulgation of this decision, pay to the
estate of the late Luis Lim y Garcia the of P433.
The order appealed from, in the nature of a final judgment is affirmed, without special
finding as to costs in this instance. So ordered.

G.R. No. L-38613 February 25, 1982

PACIFIC
TIMBER
vs.
THE HONORABLE COURT OF
COMPANY, INC., respondents.

EXPORT
APPEALS

CORPORATION, petitioner,
and

WORKMEN'S

INSURANCE

DE CASTRO, ** J.:
This petition seeks the review of the decision of the Court of Appeals reversing the
decision of the Court of First Instance of Manila in favor of petitioner and against
private respondent which ordered the latter to pay the sum of Pll,042.04 with interest
at the rate of 12% interest from receipt of notice of loss on April 15, 1963 up to the
complete payment, the sum of P3,000.00 as attorney's fees and the costs 1 thereby
dismissing petitioner s complaint with costs. 2
The findings of the of fact of the Court of Appeals, which are generally binding upon
this Court, Except as shall be indicated in the discussion of the opinion of this Court
the substantial correctness of still particular finding having been disputed, thereby
raising a question of law reviewable by this Court 3 are as follows:
March 19, l963, the plaintiff secured temporary insurance from the
defendant for its exportation of 1,250,000 board feet of Philippine
Lauan and Apitong logs to be shipped from the Diapitan. Bay, Quezon
Province to Okinawa and Tokyo, Japan. The defendant issued on said
date Cover Note No. 1010, insuring the said cargo of the plaintiff
"Subject to the Terms and Conditions of the WORKMEN'S INSURANCE
COMPANY, INC. printed Marine Policy form as filed with and approved
by the Office of the Insurance Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in
favor of the plaintiff on April 2, 1963. The two marine policies bore the
numbers 53 HO 1032 and 53 HO 1033 (Exhibits B and C, respectively).
Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces of logs equivalent
to 499,950 board feet. Policy No. 53 H0 1033 was for 853 pieces of logs
equivalent to 695,548 board feet (Exhibit C). The total cargo insured
under the two marine policies accordingly consisted of 1,395 logs, or
the equivalent of 1,195.498 bd. ft.
After the issuance of Cover Note No. 1010 (Exhibit A), but before the
issuance of the two marine policies Nos. 53 HO 1032 and 53 HO 1033,
some of the logs intended to be exported were lost during loading
operations in the Diapitan Bay. The logs were to be loaded on the 'SS
Woodlock' which docked about 500 meters from the shoreline of the
Diapitan Bay. The logs were taken from the log pond of the plaintiff and
from which they were towed in rafts to the vessel. At about 10:00
o'clock a. m. on March 29, 1963, while the logs were alongside the
vessel, bad weather developed resulting in 75 pieces of logs which
were rafted together co break loose from each other. 45 pieces of logs

were salvaged, but 30 pieces were verified to have been lost or

washed away as a result of the accident.
In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of
'appropriately 32 pieces of log's during loading of the 'SS Woodlock'. The said letter
(Exhibit F) reads as follows:
April 4, 1963
Workmen's Insurance Company, Inc. Manila, Philippines
Gentlemen:
This has reference to Insurance Cover Note No. 1010 for shipment of
1,250,000 bd. ft. Philippine Lauan and Apitong Logs. We would like to
inform you that we have received advance preliminary report from our
Office in Diapitan, Quezon that we have lost approximately 32 pieces
of logs during loading of the SS Woodlock.
We will send you an accurate report all the details including values as
soon as same will be reported to us.
Thank you for your attention, we wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT CORPORATION
(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.
Although dated April 4, 1963, the letter was received in the office of
the defendant only on April 15, 1963, as shown by the stamp
impression appearing on the left bottom corner of said letter. The
plaintiff subsequently submitted a 'Claim Statement demanding
payment of the loss under Policies Nos. 53 HO 1032 and 53 HO 1033,
in the total amount of P19,286.79 (Exhibit G).
On July 17, 1963, the defendant requested the First Philippine
Adjustment Corporation to inspect the loss and assess the damage.
The adjustment company submitted its 'Report on August 23, 1963
(Exhibit H). In said report, the adjuster found that 'the loss of 30 pieces
of logs is not covered by Policies Nos. 53 HO 1032 and 1033 inasmuch
as said policies covered the actual number of logs loaded on board the
'SS Woodlock' However, the loss of 30 pieces of logs is within the
1,250,000 bd. ft. covered by Cover Note 1010 insured for $70,000.00.
On September 14, 1963, the adjustment company submitted a
computation of the defendant's probable liability on the loss sustained
by the shipment, in the total amount of Pl1,042.04 (Exhibit 4).

On January 13, 1964, the defendant wrote the plaintiff denying the
latter's claim, on the ground they defendant's investigation revealed
that the entire shipment of logs covered by the two marines policies
No. 53 110 1032 and 713 HO 1033 were received in good order at their
point of destination. It was further stated that the said loss may be
considered as covered under Cover Note No. 1010 because the said
Note had become 'null and void by virtue of the issuance of Marine
Policy Nos. 53 HO 1032 and 1033'(Exhibit J-1). The denial of the claim
by the defendant was brought by the plaintiff to the attention of the
Insurance Commissioner by means of a letter dated March 21, 1964
(Exhibit K). In a reply letter dated March 30, 1964, Insurance
Commissioner Francisco Y. Mandanas observed that 'it is only fair and
equitable to indemnify the insured under Cover Note No. 1010', and
advised early settlement of the said marine loss and salvage claim
(Exhibit L).
On June 26, 1964, the defendant informed the Insurance Commissioner
that, on advice of their attorneys, the claim of the plaintiff is being
denied on the ground that the cover note is null and void for lack of
valuable consideration (Exhibit M). 4
Petitioner assigned as errors of the Court of Appeals, the following:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE
WAS NULL AND VOID FOR LACK OF VALUABLE CONSIDERATION
BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT
PREMIUMS FOR THE COMPREHENSIVE INSURANCE COVERAGE THAT
INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT
INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO
SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON
ALL ITS COVER NOTES.
II
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE
RESPONDENT WAS RELEASED FROM LIABILITY UNDER THE COVER
NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS
BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT PRIVATE
RESPONDENT DID NOT PROMPTLY AND SPECIFICALLY OBJECT TO THE
CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF LOSS AND,
CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER
SECTION 84 OF THE INSURANCE ACT. 5
1. Petitioner contends that the Cover Note was issued with a consideration when, by
express stipulation, the cover note is made subject to the terms and conditions of the
marine policies, and the payment of premiums is one of the terms of the policies.
From this undisputed fact, We uphold petitioner's submission that the Cover Note was
not without consideration for which the respondent court held the Cover Note as null
and void, and denied recovery therefrom. The fact that no separate premium was

paid on the Cover Note before the loss insured against occurred, does not militate
against the validity of petitioner's contention, for no such premium could have been
paid, since by the nature of the Cover Note, it did not contain, as all Cover Notes do
not contain particulars of the shipment that would serve as basis for the computation
of the premiums. As a logical consequence, no separate premiums are intended or
required to be paid on a Cover Note. This is a fact admitted by an official of
respondent company, Juan Jose Camacho, in charge of issuing cover notes of the
respondent company (p. 33, tsn, September 24, 1965).
At any rate, it is not disputed that petitioner paid in full all the premiums as called for
by the statement issued by private respondent after the issuance of the two regular
marine insurance policies, thereby leaving no account unpaid by petitioner due on
the insurance coverage, which must be deemed to include the Cover Note. If the
Note is to be treated as a separate policy instead of integrating it to the regular
policies subsequently issued, the purpose and function of the Cover Note would be
set at naught or rendered meaningless, for it is in a real sense a contract, not a mere
application for insurance which is a mere offer. 6
It may be true that the marine insurance policies issued were for logs no longer
including those which had been lost during loading operations. This had to be so
because the risk insured against is not for loss during operations anymore, but for
loss during transit, the logs having already been safely placed aboard. This would
make no difference, however, insofar as the liability on the cover note is concerned,
for the number or volume of logs lost can be determined independently as in fact it
had been so ascertained at the instance of private respondent itself when it sent its
own adjuster to investigate and assess the loss, after the issuance of the marine
insurance policies.
The adjuster went as far as submitting his report to respondent, as well as its
computation of respondent's liability on the insurance coverage. This coverage could
not have been no other than what was stipulated in the Cover Note, for no loss or
damage had to be assessed on the coverage arising from the marine insurance
policies. For obvious reasons, it was not necessary to ask petitioner to pay premium
on the Cover Note, for the loss insured against having already occurred, the more
practical procedure is simply to deduct the premium from the amount due the
petitioner on the Cover Note. The non-payment of premium on the Cover Note is,
therefore, no cause for the petitioner to lose what is due it as if there had been
payment of premium, for non-payment by it was not chargeable against its fault. Had
all the logs been lost during the loading operations, but after the issuance of the
Cover Note, liability on the note would have already arisen even before payment of
premium. This is how the cover note as a "binder" should legally operate otherwise, it
would serve no practical purpose in the realm of commerce, and is supported by the
doctrine that where a policy is delivered without requiring payment of the premium,
the presumption is that a credit was intended and policy is valid. 7
2. The defense of delay as raised by private respondent in resisting the claim cannot
be sustained. The law requires this ground of delay to be promptly and specifically
asserted when a claim on the insurance agreement is made. The undisputed facts
show that instead of invoking the ground of delay in objecting to petitioner's claim of
recovery on the cover note, it took steps clearly indicative that this particular ground
for objection to the claim was never in its mind. The nature of this specific ground for

resisting a claim places the insurer on duty to inquire when the loss took place, so
that it could determine whether delay would be a valid ground upon which to object
to a claim against it.
As already stated earlier, private respondent's reaction upon receipt of the notice of
loss, which was on April 15, 1963, was to set in motion from July 1963 what would be
necessary to determine the cause and extent of the loss, with a view to the payment
thereof on the insurance agreement. Thus it sent its adjuster to investigate and
assess the loss in July, 1963. The adjuster submitted his report on August 23, 1963
and its computation of respondent's liability on September 14, 1963. From April 1963
to July, 1963, enough time was available for private respondent to determine if
petitioner was guilty of delay in communicating the loss to respondent company. In
the proceedings that took place later in the Office of the Insurance Commissioner,
private respondent should then have raised this ground of delay to avoid liability. It
did not do so. It must be because it did not find any delay, as this Court fails to find a
real and substantial sign thereof. But even on the assumption that there was delay,
this Court is satisfied and convinced that as expressly provided by law, waiver can
successfully be raised against private respondent. Thus Section 84 of the Insurance
Act provides:
Section 84.Delay in the presentation to an insurer of notice or proof
of loss is waived if caused by any act of his or if he omits to take
objection promptly and specifically upon that ground.
From what has been said, We find duly substantiated petitioner's assignments of
error.
ACCORDINGLY, the appealed decision is set aside and the decision of the Court of
First Instance is reinstated in toto with the affirmance of this Court. No special
pronouncement as to costs.
SO ORDERED.

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
Nabong and Sese for respondent.

and

Delfin

L.

Gonzales

for

petitioner.

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 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.
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 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.

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
L.
L.
Reyes
for
Geronimo F. Abellera for third party defendants-appellees.

for

plaintiff-appellant.
defendant-appellee.

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: 1wph1.t
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: .
1wph1.t
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 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.

G.R. No. 92383 July 17, 1992

SUN
INSURANCE
OFFICE,
LTD., petitioner,
vs.
THE HON. COURT OF APPEALS and NERISSA LIM, respondents.

CRUZ, J.:
The petitioner issued Personal Accident Policy No. 05687 to Felix Lim, Jr. with a face
value of P200,000.00. Two months later, he was dead with a bullet wound in his head.
As beneficiary, his wife Nerissa Lim sought payment on the policy but her claim was
rejected. The petitioner agreed that there was no suicide. It argued, however that
there was no accident either.
Pilar Nalagon, Lim's secretary, was the only eyewitness to his death. It happened on
October 6, 1982, at about 10 o'clock in the evening, after his mother's birthday party.
According to Nalagon, Lim was in a happy mood (but not drunk) and was playing with
his handgun, from which he had previously removed the magazine. As she watched
television, he stood in front of her and pointed the gun at her. She pushed it aside
and said it might he loaded. He assured her it was not and then pointed it to his
temple. The next moment there was an explosion and Lim slumped to the floor. He
was dead before he fell. 1
The widow sued the petitioner in the Regional Trial Court of Zamboanga City and was
sustained. 2 The petitioner was sentenced to pay her P200,000.00, representing the
face value of the policy, with interest at the legal rate; P10,000.00 as moral
damages; P5,000.00 as exemplary damages; P5,000.00 as actual and compensatory
damages; and P5,000.00 as attorney's fees, plus the costs of the suit. This decision
was affirmed on appeal, and the motion for reconsideration was denied. 3 The
petitioner then came to this Court to fault the Court of Appeals for approving the
payment of the claim and the award of damages.
The term "accident" has been defined as follows:
The words "accident" and "accidental" have never acquired any technical
signification in law, and when used in an insurance contract are to be construed and
considered according to the ordinary understanding and common usage and speech
of people generally. In-substance, the courts are practically agreed that the words
"accident" and "accidental" mean that which happens by chance or fortuitously,
without intention or design, and which is unexpected, unusual, and unforeseen. The
definition that has usually been adopted by the courts is that an accident is an event
that takes place without one's foresight or expectation an event that proceeds
from an unknown cause, or is an unusual effect of a known case, and therefore not
expected. 4
An accident is an event which happens without any human agency or, if happening
through human agency, an event which, under the circumstances, is unusual to and
not expected by the person to whom it happens. It has also been defined as an injury

which happens by reason of some violence or casualty to the injured without his
design, consent, or voluntary co-operation. 5
In light of these definitions, the Court is convinced that the incident that resulted in
Lim's death was indeed an accident. The petitioner, invoking the case of De la Cruz v.
Capital Insurance, 6 says that "there is no accident when a deliberate act is
performed unless some additional, unexpected, independent and unforeseen
happening occurs which produces or brings about their injury or death." There was
such a happening. This was the firing of the gun, which was the additional
unexpected and independent and unforeseen occurrence that led to the insured
person's death.
The petitioner also cites one of the four exceptions provided for in the insurance
contract and contends that the private petitioner's claim is barred by such provision.
It is there stated:
Exceptions
The company shall not be liable in respect of
1. Bodily injury
xxx xxx xxx
b. consequent upon
i) The insured person attempting to commit suicide or willfully exposing
himself to needless peril except in an attempt to save human life.
To repeat, the parties agree that Lim did not commit suicide. Nevertheless, the
petitioner contends that the insured willfully exposed himself to needless peril and
thus removed himself from the coverage of the insurance policy.
It should be noted at the outset that suicide and willful exposure to needless peril
are in pari materia because they both signify a disregard for one's life. The only
difference is in degree, as suicide imports a positive act of ending such life whereas
the second act indicates a reckless risking of it that is almost suicidal in intent. To
illustrate, a person who walks a tightrope one thousand meters above the ground and
without any safety device may not actually be intending to commit suicide, but his
act is nonetheless suicidal. He would thus be considered as "willfully exposing himself
to needless peril" within the meaning of the exception in question.
The petitioner maintains that by the mere act of pointing the gun to hip temple, Lim
had willfully exposed himself to needless peril and so came under the exception. The
theory is that a gun is per se dangerous and should therefore be handled cautiously
in every case.
That posture is arguable. But what is not is that, as the secretary testified, Lim had
removed the magazine from the gun and believed it was no longer dangerous. He
expressly assured her that the gun was not loaded. It is submitted that Lim did not
willfully expose himself to needless peril when he pointed the gun to his temple

because the fact is that he thought it was not unsafe to do so. The act was precisely
intended to assure Nalagon that the gun was indeed harmless.
The contrary view is expressed by the petitioner thus:
Accident insurance policies were never intended to reward the insured
for his tendency to show off or for his miscalculations. They were
intended to provide for contingencies. Hence, when I miscalculate and
jump from the Quezon Bridge into the Pasig River in the belief that I
can overcome the current, I have wilfully exposed myself to peril and
must accept the consequences of my act. If I drown I cannot go to the
insurance company to ask them to compensate me for my failure to
swim as well as I thought I could. The insured in the case at bar
deliberately put the gun to his head and pulled the trigger. He wilfully
exposed himself to peril.
The Court certainly agrees that a drowned man cannot go to the insurance company
to ask for compensation. That might frighten the insurance people to death. We also
agree that under the circumstances narrated, his beneficiary would not be able to
collect on the insurance policy for it is clear that when he braved the currents below,
he deliberately exposed himself to a known peril.
The private respondent maintains that Lim did not. That is where she says the
analogy fails. The petitioner's hypothetical swimmer knew when he dived off the
Quezon Bridge that the currents below were dangerous. By contrast, Lim did not
know that the gun he put to his head was loaded.
Lim was unquestionably negligent and that negligence cost him his own life. But it
should not prevent his widow from recovering from the insurance policy he obtained
precisely against accident. There is nothing in the policy that relieves the insurer of
the responsibility to pay the indemnity agreed upon if the insured is shown to have
contributed to his own accident. Indeed, most accidents are caused by negligence.
There are only four exceptions expressly made in the contract to relieve the insurer
from liability, and none of these exceptions is applicable in the case at bar. **
It bears noting that insurance contracts are as a rule supposed to be interpreted
liberally in favor of the assured. There is no reason to deviate from this rule,
especially in view of the circumstances of this case as above analyzed.
On the second assigned error, however, the Court must rule in favor of the petitioner.
The basic issue raised in this case is, as the petitioner correctly observed, one of first
impression. It is evident that the petitioner was acting in good faith then it resisted
the private respondent's claim on the ground that the death of the insured was
covered by the exception. The issue was indeed debatable and was clearly not raised
only for the purpose of evading a legitimate obligation. We hold therefore that the
award of moral and exemplary damages and of attorney's fees is unjust and so must
be disapproved.
In order that a person may be made liable to the payment of moral
damages, the law requires that his act be wrongful. The adverse result
of an action does not per se make the act wrongful and subject the act

or to the payment of moral damages. The law could not have meant to
impose a penalty on the right to litigate; such right is so precious that
moral damages may not be charged on those who may exercise it
erroneously. For these the law taxes costs. 7
The fact that the results of the trial were adverse to Barreto did not
alone make his act in bringing the action wrongful because in most
cases one party will lose; we would be imposing an unjust condition or
limitation on the right to litigate. We hold that the award of moral
damages in the case at bar is not justified by the facts had
circumstances as well as the law.
If a party wins, he cannot, as a rule, recover attorney's fees and
litigation expenses, since it is not the fact of winning alone that entitles
him to recover such damages of the exceptional circumstances
enumerated in Art. 2208. Otherwise, every time a defendant wins,
automatically the plaintiff must pay attorney's fees thereby putting a
premium on the right to litigate which should not be so. For those
expenses, the law deems the award of costs as sufficient. 8
WHEREFORE, the challenged decision of the Court of Appeals is AFFIRMED in so far as
it holds the petitioner liable to the private respondent in the sum of P200,000.00
representing the face value of the insurance contract, with interest at the legal rate
from the date of the filing of the complaint until the full amount is paid, but MODIFIED
with the deletion of all awards for damages, including attorney's fees, except the
costs of the suit.
SO ORDERED.

UNITED MERCHANTS
CORPORATION,

G.R. No. 198588

Petitioner,

- versus -

Present:
CARPIO, J., Chairperson,
BRION,
PEREZ,
SERENO, and
REYES, JJ.

Promulgated:
COUNTRY
BANKERS
INSURANCE
CORPORATION,
July 11, 2012
Respondent.
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION
CARPIO, J.:
The Case
This Petition for Review on Certiorari [1] seeks to reverse the Court of Appeals
Decision[2] dated 16 June 2011 and its Resolution[3] dated 8 September 2011 in CAG.R. CV No. 85777. The Court of Appeals reversed the Decision [4] of the Regional Trial
Court (RTC) of Manila, Branch 3, and ruled that the claim on the Insurance Policy is
void.
The Facts
The facts, as culled from the records, are as follows:
Petitioner United Merchants Corporation (UMC) is engaged in the business of
buying, selling, and manufacturing Christmas lights. UMC leased a warehouse at 19-B
Dagot Street, San Jose Subdivision, Barrio Manresa, Quezon City, where UMC
assembled and stored its products.
On 6 September 1995, UMCs General Manager Alfredo Tan insured UMCs
stocks in trade of Christmas lights against fire with defendant Country Bankers
Insurance Corporation (CBIC) for P15,000,000.00. The Fire Insurance Policy No. FHO/95-576 (Insurance Policy) and Fire Invoice No. 12959A, valid until 6 September
1996, states:
AMOUNT OF INSURANCE:

FIFTEEN
MILLION PESOS
PHILIPPINE
CURRENCY

xxx
PROPERTY INSURED: On stocks in trade only, consisting of Christmas
Lights, the properties of the Assured or held by them in trust, on
commissions, or on joint account with others and/or for which they are
responsible in the event of loss and/or damage during the currency of
this policy, whilst contained in the building of one lofty storey in height,
constructed of concrete and/or hollow blocks with portion of galvanized
iron sheets, under galvanized iron rood, occupied as Christmas lights
storage.[5]
On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire
Invoice No. 16583A to form part of the Insurance Policy. Endorsement F/96-154
provides that UMCs stocks in trade were insured against additional perils, to wit:
typhoon, flood, ext. cover, and full earthquake. The sum insured was also increased
to P50,000,000.00 effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC
issued Endorsement F/96-157 where the name of the assured was changed from
Alfredo Tan to UMC.
On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated
CRM Adjustment Corporation (CRM) to investigate and evaluate UMCs loss by reason
of the fire. CBICs reinsurer, Central Surety, likewise requested the National Bureau of
Investigation (NBI) to conduct a parallel investigation. On 6 July 1996, UMC, through
CRM, submitted to CBIC its Sworn Statement of Formal Claim, with proofs of its loss.
On 20 November 1996, UMC demanded for at least fifty percent (50%)
payment of its claim from CBIC. On 25 February 1997, UMC received CBICs letter,
dated 10 January 1997, rejecting UMCs claim due to breach of Condition No. 15 of
the Insurance Policy. Condition No. 15 states:
If the claim be in any respect fraudulent, or if any false declaration be
made or used in support thereof, or if any fraudulent means or devices
are used by the Insured or anyone acting in his behalf to obtain any
benefit under this Policy; or if the loss or damage be occasioned by the
willful act, or with the connivance of the Insured, all the benefits under
this Policy shall be forfeited.[6]

On 19 February 1998, UMC filed a Complaint[7] against CBIC with the RTC of
Manila. UMC anchored its insurance claim on the Insurance Policy, the Sworn
Statement of Formal Claim earlier submitted, and the Certification dated 24 July 1996
made by Deputy Fire Chief/Senior Superintendent Bonifacio J. Garcia of the Bureau of
Fire Protection. The Certification dated 24 July 1996 provides that:
This is to certify that according to available records of this office, on or
about 6:10 P.M. of July 3, 1996, a fire broke out at United Merchants
Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City
incurring an estimated damage of Fifty-Five Million Pesos

(P55,000,000.00) to the building and contents, while the reported

insurance coverage amounted to Fifty Million Pesos (P50,000,000.00)
with Country Bankers Insurance Corporation.
The Bureau further certifies that no evidence was gathered to
prove that the establishment was willfully, feloniously and intentionally
set on fire.
That the investigation of the fire incident is already closed
being ACCIDENTAL in nature.[8]
In its Answer with Compulsory Counterclaim [9] dated 4 March 1998, CBIC
admitted the issuance of the Insurance Policy to UMC but raised the following
defenses: (1) that the Complaint states no cause of action; (2) that UMCs claim has
already prescribed; and (3) that UMCs fire claim is tainted with fraud. CBIC alleged
that UMCs claim was fraudulent because UMCs Statement of Inventory showed that
it had no stocks in trade as of 31 December 1995, and that UMCs suspicious
purchases for the year 1996 did not even amount to P25,000,000.00. UMCs GIS and
Financial Reports further revealed that it had insufficient capital, which meant UMC
could not afford the allegedP50,000,000.00 worth of stocks in trade.
In its Reply[10] dated 20 March 1998, UMC denied violation of Condition No. 15
of the Insurance Policy. UMC claimed that it did not make any false declaration
because the invoices were genuine and the Statement of Inventory was for internal
revenue purposes only, not for its insurance claim.
During trial, UMC presented five witnesses. The first witness was Josie Ebora
(Ebora), UMCs disbursing officer. Ebora testified that UMCs stocks in trade, at the
time of the fire, consisted of: (1) raw materials for its Christmas lights; (2) Christmas
lights already assembled; and (3) Christmas lights purchased from local suppliers.
These stocks in trade were delivered from August 1995 to May 1996. She stated that
Straight Cargo Commercial Forwarders delivered the imported materials to the
warehouse, evidenced by delivery receipts. However, for the year 1996, UMC had no
importations and only bought from its local suppliers. Ebora identified the suppliers
as Fiber Technology Corporation from which UMC bought stocks worth P1,800,000.00
on 20 May 1996; Fuze Industries Manufacturer Philippines from which UMC bought
stocks worth P19,500,000.00 from 20 January 1996 to 23 February 1996; and Tomco
Commercial Press from which UMC bought several Christmas boxes. Ebora testified
that all these deliveries were not yet paid. Ebora also presented UMCs Balance
Sheet, Income Statement and Statement of Cash Flow. Per her testimony, UMCs
purchases

amounted

to P608,986.00

in

1994;P827,670.00

in

1995;

and P20,000,000.00 in 1996. Ebora also claimed that UMC had sales only from its
fruits business but no sales from its Christmas lights for the year 1995.

The next witness, Annie Pabustan (Pabustan), testified that her company
provided about 25 workers to assemble and pack Christmas lights for UMC from 28
March 1996 to 3 July 1996. The third witness, Metropolitan Bank and Trust Company
(MBTC) Officer Cesar Martinez, stated that UMC opened letters of credit with MBTC for
the year 1995 only. The fourth witness presented was Ernesto Luna (Luna), the
delivery checker of Straight Commercial Cargo Forwarders. Luna affirmed the delivery
of UMCs goods to its warehouse on 13 August 1995, 6 September 1995,

September 1995, 24 October 1995, 27 October 1995, 9 November 1995, and 19

December 1995. Lastly, CRMs adjuster Dominador Victorio testified that he
inspected UMCs warehouse and prepared preliminary reports in this connection.
On the other hand, CBIC presented the claims manager Edgar Caguindagan
(Caguindagan), a Securities and Exchange Commission (SEC) representative, Atty.
Ernesto Cabrera (Cabrera), and NBI Investigator Arnold Lazaro (Lazaro). Caguindagan
testified that he inspected the burned warehouse on 5 July 1996, took pictures of it
and referred the claim to an independent adjuster. The SEC representatives
testimony was dispensed with, since the parties stipulated on the existence of certain
documents, to wit: (1) UMCs GIS for 1994-1997; (2) UMCs Financial Report as
of

31 December 1996; (3) SEC Certificate that UMC did not file GIS or Financial

Reports for certain years; and (4) UMCs Statement of Inventory as of 31 December
1995 filed with the BIR.
Cabrera and Lazaro testified that they were hired by Central Surety to
investigate UMCs claim. On 19 November 1996, they concluded that arson was
committed based from their interview with barangay officials and the pictures
showing that blackened surfaces were present at different parts of the warehouse. On
cross-examination, Lazaro admitted that they did not conduct a forensic investigation
of the warehouse, nor did they file a case for arson.
For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of
the documents of UCPB General Insurance, the insurer of Perfect Investment
Company, Inc., the warehouse owner. When asked to bring documents related to the
insurance of Perfect Investment Company, Inc., Batallones brought the papers of
Perpetual Investment, Inc.
The Ruling of the Regional Trial Court
On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of
UMC, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of
plaintiff and ordering defendant to pay plaintiff:

a) the sum of P43,930,230.00 as indemnity with interest

thereon at 6% per annum from November 2003 until fully paid;
b) the sum of P100,000.00 for exemplary damages;
c) the sum of P100,000.00 for attorneys fees; and
d) the costs of suit.
merit.

Defendants counterclaim is denied for lack of

SO ORDERED.[11]

The RTC found no dispute as to UMCs fire insurance contract with CBIC. Thus,
the RTC ruled for UMCs entitlement to the insurance proceeds, as follows:
Fraud is never presumed but must be proved by clear and
convincing evidence. (see Alonso v. Cebu Country Club, 417 SCRA 115
[2003]) Defendant failed to establish by clear and convincing evidence
that the documents submitted to the SEC and BIR were true. It is
common business practice for corporations to have 2 sets of
reports/statements for tax purposes. The stipulated documents of
plaintiff (Exhs. 2 8) may not have been accurate.
The conflicting findings of defendants adjuster, CRM
Adjustment [with stress] and that made by Atty. Cabrera & Mr. Lazaro
for Central Surety shall be resolved in favor of the former. Definitely the
formers finding is more credible as it was made soon after the fire
while that of the latter was done 4 months later. Certainly it would be a
different situation as the site was no longer the same after the clearing
up operation which is normal after a fire incident. The Christmas lights
and parts could have been swept away. Hence the finding of the latter
appears to be speculative to benefit the reinsurer and which defendant
wants to adopt to avoid liability.
The CRM Adjustment report found no arson and confirmed
substantial stocks in the burned warehouse (Exhs. QQQ) [underscoring
supplied]. This is bolstered by the BFP certification that there was no
proof of arson and the fire was accidental (Exhs. PPP). The certification
by a government agency like BFP is presumed to be a regular
performance of official duty. Absent convincing evidence to the
contrary, the presumption of regularity in the performance of official
functions has to be upheld. (People vs. Lapira, 255 SCRA 85) The
report of UCPB General Insurances adjuster also found no arson so
that the burned warehouse owner PIC was indemnified.[12]

Hence, CBIC filed an appeal with the Court of Appeals (CA).

The Ruling of the Court of Appeals
On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The
dispositive portion of the Decision reads:

WHEREFORE, in view of the foregoing premises, the instant

appeal is GRANTED and the Decision of the Regional Trial Court, of the
National Judicial Capital Region, Branch 3 of the City of Manila dated
June 16, 2005 in Civil Case No. 98-87370 is REVERSED and SET ASIDE.
The plaintiff-appellees claim upon its insurance policy is deemed
avoided.
SO ORDERED.[13]
The CA ruled that UMCs claim under the Insurance Policy is void. The CA found
that the fire was intentional in origin, considering the array of evidence submitted by
CBIC, particularly the pictures taken and the reports of Cabrera and Lazaro, as
opposed to UMCs failure to explain the details of the alleged fire accident. In
addition, it found that UMCs claim was overvalued through fraudulent transactions.
The CA ruled:
We have meticulously gone over the entirety of the evidence
submitted by the parties and have come up with a conclusion that the
claim of the plaintiff-appellee was indeed overvalued by transactions
which were fraudulently concocted so that the full coverage of the
insurance policy will have to be fully awarded to the plaintiff-appellee.
First, We turn to the backdrop of the plaintiff-appellees case,
thus, [o]n September 6, 1995 its stocks-in-trade were insured for
Fifteen Million Pesos and on May 7, 1996 the same was increased to 50
Million Pesos. Two months thereafter, a fire gutted the plaintiffappellees warehouse.
Second, We consider the reported purchases of the plaintiffappellee as shown in its financial report dated December 31, 1996 vis-vis the testimony of Ms. Ebora thus:
1994- P608,986.00
1995- P827,670.00
1996- P20,000,000.00 (more or less) which were purchased
for a period of one month.
Third, We shall also direct our attention to the alleged true and
complete purchases of the plaintiff-appellee as well as the value of all
stock-in-trade it had at the time that the fire occurred. Thus:
Exhibit
Source
Amount
Dates Covered
(pesos)
Exhs. P-DD, Fuze Industries
inclusive
Manufacturer
Phils.

19,550,400.00

Exhs. EE-HH, Tomco

1,712,000.00
Commercial Press
inclusive
Exhs. II-QQ, Precious Belen
inclusive
Trading

2,720,400.00

January 20, 1996

January 31, 1996
February 12, 1996
February 20, 1996
February 23, 1996
December 19, 1995
January 24, 1996
February 21, 1996
November 24, 1995
January 13, 1996
January 19, 1996
January 26, 1996
February 3, 1996

Exhs. RRWisdom
EEE, inclusive Manpower
Services

361,966.00

Exhs. GGGCosts of Letters of 15,159,144.71

NNN, inclusive Credit for
imported raw
materials

Exhs. GGG-11 SCCFI statements384,794.38

- GGG-24,
of account
HHH-12,
HHH-22,
III11, III-14,
JJJ-13,
KKK11, LLL-5

TOTAL

February 13, 1996

February 20, 1996
February 27, 1996
April 3, 1996
April 12, 1996
April 19, 1996
April 26, 1996
May 3, 1996
May 10, 1996
May 17, 1996
May 24, 1996
June 7, 1996
June 14, 1996
June 21, 1996
June 28, 1996
July 5, 1996
May 29, 1995
June 15, 1995
July 5, 1995
September 4, 1995
October 2, 1995
October 27, 1995
January 8, 1996
March 19, 1996
June 15, 1995
June 28, 1995
August 1, 1995
September 4, 1995
September 8, 1995
September
11,
1995
October 30, 199[5]
November 10, 1995
December 21, 1995

44,315,024.31

Fourth, We turn to the allegation of fraud by the defendantappellant by thoroughly looking through the pieces of evidence that it
adduced during the trial. The latter alleged that fraud is present in the
case at bar as shown by the discrepancy of the alleged purchases from
that of the reported purchases made by plaintiff-appellee. It had also
averred that fraud is present when upon verification of the address of
Fuze Industries, its office is nowhere to be found. Also, the defendantappellant expressed grave doubts as to the purchases of the plaintiffappellee sometime in 1996 when such purchases escalated to a high
19.5 Million Pesos without any contract to back it up.[14]
On 7 July 2011, UMC filed a Motion for Reconsideration, [15] which the CA
denied in its Resolution dated 8 September 2011. Hence, this petition.

The Issues

UMC seeks a reversal and raises the following issues for resolution:

I.
WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT
WITH LAW, APPLICABLE JURISPRUDENCE AND EVIDENCE AS TO THE
EXISTENCE OF ARSON AND FRAUD IN THE ABSENCE OF MATERIALLY
CONVINCING EVIDENCE.
II.
WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT
WITH LAW, APPLICABLE JURISPRUDENCE AND EVIDENCE WHEN IT
FOUND THAT PETITIONER BREACHED ITS WARRANTY. [16]

The Ruling of the Court

At the outset, CBIC assails this petition as defective since what UMC ultimately
wants this Court to review are questions of fact. However, UMC argues that where the
findings of the CA are in conflict with those of the trial court, a review of the facts
may be made. On this procedural issue, we find UMCs claim meritorious.
A petition for review under Rule 45 of the Rules of Court specifically provides
that only questions of law may be raised. The findings of fact of the CA are final and
conclusive and this Court will not review them on appeal, [17] subject to exceptions as
when the findings of the appellate court conflict with the findings of the trial court.
[18]

Clearly, the present case falls under the exception. Since UMC properly raised the

conflicting findings of the lower courts, it is proper for this Court to resolve such
contradiction.
Having settled the procedural issue, we proceed to the primordial issue which
boils down to whether UMC is entitled to claim from CBIC the full coverage of its fire
insurance policy.

UMC contends that because it had already established a prima facie case
against CBIC which failed to prove its defense, UMC is entitled to claim the full
coverage under the Insurance Policy. On the other hand, CBIC contends that because
arson and fraud attended the claim, UMC is not entitled to recover under Condition
No. 15 of the Insurance Policy.

Burden of proof is the duty of any party to present evidence to establish his
claim or defense by the amount of evidence required by law, [19] which is
preponderance of evidence in civil cases. [20] The party, whether plaintiff or
defendant, who asserts the affirmative of the issue has the burden of proof to obtain
a favorable judgment.[21] Particularly, in insurance cases, once an insured makes out
a prima facie case in its favor, the burden of evidence shifts to the insurer to
controvert the insureds prima facie case.[22] In the present case, UMC established
a prima facie case against CBIC. CBIC does not dispute that UMCs stocks in trade
were insured against fire under the Insurance Policy and that the warehouse, where
UMCs stocks in trade were stored, was gutted by fire on 3 July 1996, within the
duration of the fire insurance. However, since CBIC alleged an excepted risk, then the
burden of evidence shifted to CBIC to prove such exception.
An insurer who seeks to defeat a claim because of an exception or limitation
in the policy has the burden of establishing that the loss comes within the purview of
the exception or limitation.[23] If loss is proved apparently within a contract
of insurance, the burden is upon the insurer to establish that the loss arose from a
cause of loss which is excepted or for which it is not liable, or from a cause which
limits its liability.[24] In the present case, CBIC failed to discharge its primordial burden
of establishing that the damage or loss was caused by arson, a limitation in the
policy.
In prosecutions for arson, proof of the crime charged is complete where the
evidence establishes: (1) the corpus delicti, that is, a fire caused by a criminal act;
and (2) the identity of the defendants as the one responsible for the crime. [25] Corpus
delicti means the substance of the crime, the fact that a crime has actually been
committed.[26] This is satisfied by proof of the bare occurrence of the fire and of its
having been intentionally caused.[27]
In the present case, CBICs evidence did not prove that the fire was
intentionally caused by the insured. First, the findings of CBICs witnesses, Cabrera
and Lazaro, were based on an investigation conducted more than four months after
the fire. The testimonies of Cabrera and Lazaro, as to the boxes doused with kerosene
as told to them bybarangay officials, are hearsay because the barangay officials were
not presented in court. Cabrera and Lazaro even admitted that they did not conduct a
forensic investigation of the warehouse nor did they file a case for arson.
[28]

Second, the Sworn Statement of Formal Claim submitted by UMC, through CRM,

states that the cause of the fire was faulty electrical wiring/accidental in
nature. CBIC is bound by this evidence because in its Answer, it admitted that it
designated CRM to evaluate UMCs loss. Third, the Certification by the Bureau of Fire

Protection states that the fire was accidental in origin. This Certification enjoys the
presumption of regularity, which CBIC failed to rebut.
Contrary to UMCs allegation, CBICs failure to prove arson does not mean
that it also failed to prove fraud. Qua Chee Gan v. Law Union [29] does not apply in the
present case. In Qua Chee Gan,[30] the Court dismissed the allegation of fraud based
on the dismissal of the arson case against the insured, because the evidence was
identical in both cases, thus:
While the acquittal of the insured in the arson case is not res judicata
on the present civil action, the insurers evidence, to judge from the
decision in the criminal case, is practically identical in both cases and
must lead to the same result, since the proof to establish the defense
of connivance at the fire in order to defraud the insurer cannot be
materially less convincing than that required in order to convict the
insured of the crime of arson (Bachrach vs. British American
Assurance Co., 17 Phil. 536). [31]
In the present case, arson and fraud are two separate grounds based on two
different sets of evidence, either of which can void the insurance claim of UMC. The
absence of one does not necessarily result in the absence of the
other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under the
policy shall be forfeited, if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, to wit:
15. If the claim be in any respect fraudulent, or if any false declaration
be made or used in support thereof, or if any fraudulent means or
devices are used by the Insured or anyone acting in his behalf to
obtain any benefit under this Policy; or if the loss or damage be
occasioned by the willful act, or with the connivance of the Insured, all
the benefits under this Policy shall be forfeited.
In Uy Hu & Co. v. The Prudential Assurance Co., Ltd.,[32] the Court held that
where a fire insurance policy provides that if the claim be in any respect fraudulent,
or if any false declaration be made or used in support thereof, or if any fraudulent
means or devices are used by the Insured or anyone acting on his behalf to obtain
any benefit under this Policy, and the evidence is conclusive that the proof of claim
which the insured submitted was false and fraudulent both as to the kind, quality and
amount of the goods and their value destroyed by the fire, such a proof of claim is a
bar against the insured from recovering on the policy even for the amount of his
actual loss.

In the present case, as proof of its loss of stocks in trade amounting

to P50,000,000.00, UMC submitted its Sworn Statement of Formal Claim together
with the following documents: (1) letters of credit and invoices for raw materials,
Christmas lights and cartons purchased; (2) charges for assembling the Christmas
lights; and (3) delivery receipts of the raw materials. However, the charges for
assembling the Christmas lights and delivery receipts could not support its insurance
claim. The Insurance Policy provides that CBIC agreed to insure UMCs stocks in
trade. UMC defined stock in trade as tangible personal property kept for sale or
traffic.[33] Applying UMCs definition, only the letters of credit and invoices for raw
materials, Christmas lights and cartons may be considered.
The invoices, however, cannot be taken as genuine. The invoices reveal that
the stocks in trade purchased for 1996 amounts to P20,000,000.00 which were
purchased in one month. Thus, UMC needs to prove purchases amounting
to P30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in the
Statement of Inventory it submitted to the BIR, which is considered an entry in official
records,[34] UMC stated that it had no stocks in trade as of 31 December 1995. In its
defense, UMC alleged that it did not include as stocks in trade the raw materials to be
assembled as Christmas lights, which it had on 31 December 1995. However, as
proof of its loss, UMC submitted invoices for raw materials, knowing that the
insurance covers only stocks in trade.
Equally important, the invoices (Exhibits P-DD) from Fuze Industries
Manufacturer Phils. were suspicious. The purchases, based on the invoices and
without any supporting contract, amounted to P19,550,400.00 worth of Christmas
lights from 20 January 1996 to 23 February 1996. The uncontroverted testimony of
Cabrera revealed that there was no Fuze Industries Manufacturer Phils. located at 55
Mahinhin St., Teachers Village, Quezon City, the business address appearing in the
invoices and the records of the Department of Trade & Industry. Cabrera testified
that:
A: Then we went personally to the address as I stated a while ago
appearing in the record furnished by the United Merchants Corporation
to the adjuster, and the adjuster in turn now, gave us our basis in
conducting investigation, so we went to this place which according to
the records, the address of this company but there was no office of this
company.
Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City
and discover the address indicated by the United Merchants as the
place of business of Fuze Industries Manufacturer, Phils. was a
residential place, what then did you do after determining that it was a
residential place?
A: We went to the owner of the alleged company as appearing in the
Department of Trade & Industry record, and as appearing a certain

Chinese name Mr. Huang, and the address as appearing there is

somewhere in Binondo. We went personally there together with the NBI
Agent and I am with them when the subpoena was served to them, but
a male person approached us and according to him, there was no Fuze
Industries Manufacturer, Phils., company in that building sir. [35]
In Yu Ban Chuan v. Fieldmens Insurance, Co., Inc.,[36] the Court ruled that the
submission of false invoices to the adjusters establishes a clear case of fraud and
misrepresentation which voids the insurers liability as per condition of the policy.
Their falsity is the best evidence of the fraudulent character of plaintiffs claim.
[37]

InVerendia v. Court of Appeals,[38] where the insured presented a fraudulent lease

contract to support his claim for insurance benefits, the Court held that by its false
declaration, the insured forfeited all benefits under the policy provision similar to
Condition No. 15 of the Insurance Policy in this case.
Furthermore, UMCs Income Statement indicated that the purchases or costs of
sales

are P827,670.00

of P1,936,860.00.

[39]

for

1995

and P1,109,190.00

for

1996

or

total

To corroborate this fact, Ebora testified that:

Q: Based on your 1995 purchases, how much were the purchases

made in 1995?
A: The purchases made by United Merchants Corporation for
the last year 1995 is P827,670.[00] sir
Q: And how about in 1994?
A: In 1994, its P608,986.00 sir.
Q: These purchases were made for the entire year of 1995 and
1994 respectively, am I correct?
A: Yes sir, for the year 1994 and 1995.[40] (Emphasis supplied)
In its 1996 Financial Report, which UMC admitted as existing, authentic and duly
executed during the 4 December 2002 hearing, it had P1,050,862.71 as total assets
andP167,058.47 as total liabilities.[41]
Thus, either amount in UMCs Income Statement or Financial Reports is twentyfive times the claim UMC seeks to enforce. The RTC itself recognized that UMC
padded its claim when it only allowed P43,930,230.00 as insurance claim. UMC
supported its claim of P50,000,000.00 with the Certification from the Bureau of Fire
Protection stating that x x x a fire broke out at United Merchants Corporation located
at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an estimated damage of
Fifty- Five Million Pesos (P55,000,000.00) to the building and contents x x x.
However, this Certification only proved that the estimated damage of P55,000,000.00
is shared by both the building and the stocks in trade.

It has long been settled that a false and material statement made with an
intent to deceive or defraud voids an insurance policy. [42] In Yu Cua v. South British
Insurance Co.,[43] the claim was fourteen times bigger than the real loss; in Go Lu v.
Yorkshire Insurance Co,[44] eight times; and in Tuason v. North China Insurance Co.,
[45]

six times. In the present case, the claim is twenty five times the actual claim

proved.
The most liberal human judgment cannot attribute such difference to mere
innocent error in estimating or counting but to a deliberate intent to demand from
insurance companies payment for indemnity of goods not existing at the time of the
fire.[46] This constitutes the so-called fraudulent claim which, by express agreement
between the insurers and the insured, is a ground for the exemption of insurers from
civil liability.[47]
In

its

Reply,

UMC

admitted

the

discrepancies

when

it

stated

that discrepancies in its statements were not covered by the warranty such that
any discrepancy in the declaration in other instruments or documents as to matters
that may have some relation to the insurance coverage voids the policy. [48]
On UMCs allegation that it did not breach any warranty, it may be argued that
the discrepancies do not, by themselves, amount to a breach of warranty. However,
the Insurance Code provides that a policy may declare that a violation of specified
provisions thereof shall avoid it. [49] Thus, in fire insurance policies, which contain
provisions such as Condition No. 15 of the Insurance Policy, a fraudulent discrepancy
between the actual loss and that claimed in the proof of loss voids the insurance
policy. Mere filing of such a claim will exonerate the insurer. [50]
Considering that all the circumstances point to the inevitable conclusion that
UMC padded its claim and was guilty of fraud, UMC violated Condition No. 15 of the
Insurance Policy. Thus, UMC forfeited whatever benefits it may be entitled under the
Insurance Policy, including its insurance claim.
While it is a cardinal principle of insurance law that a contract of insurance is to
be construed liberally in favor of the insured and strictly against the insurer company,
[51]

contracts of insurance, like other contracts, are to be construed according to the

sense and meaning of the terms which the parties themselves have used. [52] If such
terms are clear and unambiguous, they must be taken and understood in their plain,
ordinary and popular sense. Courts are not permitted to make contracts for the
parties; the function and duty of the courts is simply to enforce and carry out the
contracts actually made.[53]

WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision

and the 8 September 2011 Resolution of the Court of Appeals in CA-G.R. CV No.
85777.

SO ORDERED.

G.R. No. L-27932 October 30, 1972

UNION MANUFACTURING CO., INC. and the REPUBLIC BANK, plaintiffs,
REPUBLIC
BANK, plaintiff-appellant,
vs.
PHILIPPINE GUARANTY CO., INC., defendant-appellee.
Armando L. Abad, Sr. for plaintiff-appellant.
Gamelo, Francisco and Aquino for defendant-appellee.

FERNANDO, J.:p
In a suit arising from a fire insurance policy, the insurer, Philippine Guaranty Co., Inc.,
defendant in the lower court and now appellee, was able to avoid liability upon proof
that there was a violation of a warranty. There was no denial thereof from the
insured, Union Manufacturing Co., Inc. With such a legally crippling blow, the effort of
the Republic Bank, the main plaintiff and now the sole appellant, to recover on such
policy as mortgagee, by virtue of the cover note in the insurance policy providing
that it is entitled to the payment of loss or damages as its interest may appear, was
in vain. The defect being legally incurable, its appeal is likewise futile. We affirm.
As noted in the decision, the following facts are not disputed: "(1) That on January 12,
1962, the Union Manufacturing Co., Inc. obtained certain loans, overdrafts and other
credit accommodations from the Republic Bank in the total sum of P415,000.00 with
interest at 9% per annum from said date and to secure the payment thereof, said
Union Manufacturing Co., Inc. executed a real and chattel mortgages on certain
properties, which are more particularly described and listed at the back of the
mortgage contract ...; (2) That as additional condition of the mortgage contract, the
Union Manufacturing Co., Inc. undertook to secure insurance coverage over the
mortgaged properties for the same amount of P415,000.00 distributed as follows: (a)
Buildings, P30,000.00; (b) Machineries, P300,000.00; and (c) Merchandise Inventory,
P85,000.00, giving a total of P415,000.00; (3) That as Union Manufacturing Co., Inc.
failed to secure insurance coverage on the mortgaged properties since January 12,
1962, despite the fact that Cua Tok, its general manager, was reminded of said
requirement, the Republic Bank procured from the defendant, Philippine Guaranty
Co., Inc. an insurance coverage on loss against fire for P500,000.00 over the
properties of the Union Manufacturing Co., Inc., as described in defendant's 'Cover
Note' dated September 25, 1962, with the annotation that loss or damage, if any,
under said Cover Note is payable to Republic Bank as its interest may appear, subject
however to the printed conditions of said defendant's Fire Insurance Policy Form; (4)
That on September 27, 1962, Fire Insurance Policy No. 43170 ... was issued for the
sum of P500,000.00 in favor of the assured, Union Manufacturing Co., Inc., for which
the corresponding premium in the sum of P8,328.12, which was reduced to
P6,688.12, was paid by the Republic Bank to the defendant, Philippine Guaranty Co.,
Inc. ...; (5) That upon the expiration of said fire policy on September 25, 1963, the
same was renewed by the Republic Bank upon payment of the corresponding
premium in the same amount of P6,663.52 on September 26, 1963; (6) That in the
corresponding voucher ..., it appears that although said renewal premium was paid

by the Republic Bank, such payment was for the account of Union Manufacturing Co.,
Inc. and that the cash voucher for the payment of the first premium was paid also by
the Republic Bank but for the account Union Manufacturing Co., Inc.; (7) That
sometime on September 6, 1964, a fire occurred in the premises of the Union
Manufacturing Co., Inc.; (8) That on October 6, 1964, the Union Manufacturing Co.,
Inc. filed its fire claim with the defendant Philippine Guaranty Co., Inc., thru its
adjuster, H. H. Bayne Adjustment Co., which was denied by said defendant in its
letter dated November 27, 1964 ..., on the following grounds: 'a. Policy Condition No.
3 and/or the 'Other Insurance Clause' of the policy violated because you did not give
notice to us the other insurance which you had taken from New India for P80,000.00,
Sincere Insurance for P25,000.00 and Manila Insurance for P200,000.00 with the
result that these insurances, of which we became aware of only after the fire, were
not endorsed on our policy; and (b) Policy Condition No. 11 was not complied with
because you have failed to give to our representatives the required documents and
other proofs with respect to your claim and matters touching on our liability, if any,
and the amount of such liability'; (9) That as of September, 1962, when the
defendant Philippine Guaranty Co., issued Fire Insurance Policy No. 43170 ... in the
sum of P500,000.00 to cover the properties of the Union Manufacturing Co., Inc., the
same properties were already covered by Fire Policy No. 1533 of the Sincere
Insurance Company for P25,000.00 for the period from October 7, 1961 to October 7,
1962 ...; and by insurance policies Nos. F-2314 ... and F-2590 ... of the Oceanic
Insurance Agency for the total sum of P300,000.00 and for periods respectively, from
January 27, 1962 to January 27, 1963, and from June 1, 1962 to June 1, 1963; and
(10) That when said defendant's Fire Insurance Policy No. 43170 was already in full
force and effect, the Union Manufacturing Co., Inc. without the consent of the
defendant, Philippine Guaranty Co., Inc., obtained other insurance policies totalling
P305,000.00 over the same properties prior to the fire, to wit: (1) Fire Policy No. 250
of New India Assurance Co., Ltd., for P80,000.00 for the period from May 27, 1964 to
May 27, 1965 ...; (2) Fire Policy No. 3702 of the Sincere Insurance Company for
P25,000.00 for the period from October 7, 1963 to October 7, 1964 ...; and (3) Fire
Policy No. 6161 of Manila Insurance Co. for P200,000.00 for the period from May 15,
1964 to May 15, 1965 ... ." 1 There is in the cover note 2 and in the fire insurance
policy 3 the following warranty: "[Co- Insurance Declared]: Nil." 4
Why the appellant Republic Bank could not recover, as payee, in case of loss as its
"interest may appear subject to the terms and conditions, clauses and warranties" of
the policy was expressed in the appealed decision thus: "However, inasmuch as the
Union Manufacturing Co., Inc. has violated the condition of the policy to the effect
that it did not reveal the existence of other insurance policies over the same
properties, as required by the warranty appearing on the face of the policy issued by
the defendant and that on the other hand said Union Manufacturing Co., Inc.
represented that there were no other insurance policies at the time of the issuance of
said defendant's policy, and it appearing furthermore that while the policy of the
defendant was in full force and effect the Union Manufacturing Co., Inc. secured other
fire insurance policies without the written consent of the defendant endorsed on the
policy, the conclusion is inevitable that both the Republic Bank and Union
Manufacturing Co., Inc. cannot recover from the same policy of the defendant
because the same is null and void." 5 The tone of confidence apparent in the above
excerpts from the lower court decision is understandable. The conclusion reached by
the lower court finds support in authoritative precedents. It is far from easy,
therefore, for appellant Republic Bank to impute to such a decision a failure to abide

by the law. Hence, as noted at the outset, the appeal cannot prosper. An affirmance is
indicated.
It is to Santa Ana v. Commercial Union Assurance Co., 6 a 1930 decision, that one
turns to for the first explicit formulation as to the controlling principle. As was made
clear in the opinion of this Court, penned by Justice Villa-Real: "Without deciding
whether notice of other insurance upon the same property must be given in writing,
or whether a verbal notice is sufficient to render an insurance valid which requires
such notice, whether oral or written, we hold that in the absolute absence of such
notice when it is one of the conditions specified in the fire insurance policy, the policy
is null and void." 7 The next year, in Ang Giok Chip v. Springfield Fire & Marine Ins.
Co., 8 the conformity of the insured to the terms of the policy, implied from the failure
to express any disagreement with what is provided for, was stressed in these words
of the ponente, Justice Malcolm: "It is admitted that the policy before us was
accepted by the plaintiff. The receipt of this policy by the insured without objection
binds both the acceptor and the insured to the terms thereof. The insured may not
thereafter be heard to say that he did not read the policy or know its terms, since it is
his duty to read his policy and it will be assumed that he did so." 9 As far back as
1915, in Young v. Midland Textile Insurance Company, 10 it was categorically set forth
that as a condition precedent to the right of recovery, there must be compliance on
the part of the insured with the terms of the policy. As stated in the opinion of the
Court through Justice Johnson: "If the insured has violated or failed to perform the
conditions of the contract, and such a violation or want of performance has not been
waived by the insurer, then the insured cannot recover. Courts are not permitted to
make contracts for the parties. The function and duty of the courts consist simply in
enforcing and carrying out the contracts actually made. While it is true, as a general
rule, that contracts of insurance are construed most favorably to the insured, yet
contracts of insurance, like other contracts, are to be construed according to the
sense and meaning of the terms which the parties themselves have used. If such
terms are clear and unambiguous they must be taken and understood in their plain,
ordinary and popular sense." 11 More specifically, there was a reiteration of this Santa
Ana ruling in a decision by the then Justice, later Chief Justice, Bengzon, in General
Insurance & Surety Corp. v. Ng Hua. 12 Thus: "The annotation then, must be deemed
to be a warranty that the property was not insured by any other policy. Violation
thereof entitles the insurer to rescind. (Sec. 69, Insurance Act) Such
misrepresentation is fatal in the light of our views in Santa Ana v. Commercial Union
Assurance Company, Ltd. ... . The materiality of non-disclosure of other insurance
policies is not open to doubt." 13 As a matter of fact, in a 1966 decision, Misamis
Lumber Corp. v. Capital Ins. & Surety Co., Inc., 14 Justice J.B.L. Reyes, for this Court,
made manifest anew its adherence to such a principle in the face of an assertion that
thereby a highly unfavorable provision for the insured would be accorded recognition.
This is the language used: "The insurance contract may be rather onerous ('one
sided', as the lower court put it), but that in itself does not justify the abrogation of its
express terms, terms which the insured accepted or adhered to and which is the law
between the contracting parties." 15
There is no escaping the conclusion then that the lower court could not have
disposed of this case in a way other than it did. Had it acted otherwise, it clearly
would have disregarded pronouncements of this Court, the compelling force of which
cannot be denied. There is, to repeat, no justification for a reversal.

WHEREFORE, the decision of the lower court of March 31, 1967 is affirmed. No costs.

G.R. No. 200784

August 7, 2013

MALAYAN
INSURANCE
COMPANY,
vs.
PAP CO., LTD. (PHIL. BRANCH), RESPONDENT.

INC., PETITIONER,

DECISION
MENDOZA, J.:
Challenged in this petition for review on certiorari under Rule 45 of the Rules of Court
is the October 27, 2011 Decision 1 of the Court of Appeals (CA), which affirmed with
modification the September 17, 2009 Decision 2 of the Regional Trial Court, Branch 15,
Manila (RTC), and its February 24, 2012 Resolution 3 denying the motion for
reconsideration filed by petitioner Malayan Insurance Company., Inc. (Malayan).
The Facts
The undisputed factual antecedents were succinctly summarized by the CA as
follows:
On May 13, 1996, Malayan Insurance Company (Malayan) issued Fire Insurance Policy
No. F-00227-000073 to PAP Co., Ltd. (PAP Co.) for the latters machineries and
equipment located at Sanyo Precision Phils. Bldg., Phase III, Lot 4, Block 15, PEZA,
Rosario, Cavite (Sanyo Building). The insurance, which was for Fifteen Million Pesos (?
15,000,000.00) and effective for a period of one (1) year, was procured by PAP Co. for
Rizal Commercial Banking Corporation (RCBC), the mortgagee of the insured
machineries and equipment.
After the passage of almost a year but prior to the expiration of the insurance
coverage, PAP Co. renewed the policy on an "as is" basis. Pursuant thereto, a renewal
policy, Fire Insurance Policy No. F-00227-000079, was issued by Malayan to PAP Co.
for the period May 13, 1997 to May 13, 1998.
On October 12, 1997 and during the subsistence of the renewal policy, the insured
machineries and equipment were totally lost by fire. Hence, PAP Co. filed a fire
insurance claim with Malayan in the amount insured.
In a letter, dated December 15, 1997, Malayan denied the claim upon the ground
that, at the time of the loss, the insured machineries and equipment were transferred
by PAP Co. to a location different from that indicated in the policy. Specifically, that
the insured machineries were transferred in September 1996 from the Sanyo Building
to the Pace Pacific Bldg., Lot 14, Block 14, Phase III, PEZA, Rosario, Cavite (Pace
Pacific). Contesting the denial, PAP Co. argued that Malayan cannot avoid liability as
it was informed of the transfer by RCBC, the party duty-bound to relay such
information. However, Malayan reiterated its denial of PAP Co.s claim. Distraught,
PAP Co. filed the complaint below against Malayan.4
Ruling of the RTC

On September 17, 2009, the RTC handed down its decision, ordering Malayan to pay
PAP Company Ltd (PAP) an indemnity for the loss under the fire insurance policy as
well as for attorneys fees. The dispositive portion of the RTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff. Defendant is hereby ordered:
a)
To pay plaintiff the sum of FIFTEEN MILLION PESOS (P15,000,000.00) as and for
indemnity for the loss under the fire insurance policy, plus interest thereon at the
rate of 12% per annum from the time of loss on October 12, 1997 until fully paid;
b)
To pay plaintiff the sum of FIVE HUNDRED THOUSAND PESOS (PhP500,000.00) as and
by way of attorneys fees; [and,]
c)
To pay the costs of suit.
SO ORDERED.5
The RTC explained that Malayan is liable to indemnify PAP for the loss under the
subject fire insurance policy because, although there was a change in the condition of
the thing insured as a result of the transfer of the subject machineries to another
location, said insurance company failed to show proof that such transfer resulted in
the increase of the risk insured against. In the absence of proof that the alteration of
the thing insured increased the risk, the contract of fire insurance is not affected per
Article 169 of the Insurance Code.
The RTC further stated that PAPs notice to Rizal Commercial Banking Corporation
(RCBC) sufficiently complied with the notice requirement under the policy considering
that it was RCBC which procured the insurance. PAP acted in good faith in notifying
RCBC about the transfer and the latter even conducted an inspection of the
machinery in its new location.
Not contented, Malayan appealed the RTC decision to the CA basically arguing that
the trial court erred in ordering it to indemnify PAP for the loss of the subject
machineries since the latter, without notice and/or consent, transferred the same to a
location different from that indicated in the fire insurance policy.
Ruling of the CA
On October 27, 2011, the CA rendered the assailed decision which affirmed the RTC
decision but deleted the attorneys fees. The decretal portion of the CA decision
reads:
WHEREFORE, the assailed dispositions are MODIFIED. As modified, Malayan Insurance
Company must indemnify PAP Co. Ltd the amount of Fifteen Million Pesos

(PhP15,000,000.00) for the loss under the fire insurance policy, plus interest thereon
at the rate of 12% per annum from the time of loss on October 12, 1997 until fully
paid. However, the Five Hundred Thousand Pesos (PhP500,000.00) awarded to PAP
Co., Ltd. as attorneys fees is DELETED. With costs.
SO ORDERED.6
The CA wrote that Malayan failed to show proof that there was a prohibition on the
transfer of the insured properties during the efficacy of the insurance policy. Malayan
also failed to show that its contractual consent was needed before carrying out a
transfer of the insured properties. Despite its bare claim that the original and the
renewed insurance policies contained provisions on transfer limitations of the insured
properties, Malayan never cited the specific provisions.
The CA further stated that even if there was such a provision on transfer restrictions
of the insured properties, still Malayan could not escape liability because the transfer
was made during the subsistence of the original policy, not the renewal policy. PAP
transferred the insured properties from the Sanyo Factory to the Pace Pacific Building
(Pace Factory) sometime in September 1996. Therefore, Malayan was aware or
should have been aware of such transfer when it issued the renewal policy on May
14, 1997. The CA opined that since an insurance policy was a contract of adhesion,
any ambiguity must be resolved against the party that prepared the contract, which,
in this case, was Malayan.
Finally, the CA added that Malayan failed to show that the transfer of the insured
properties increased the risk of the loss. It, thus, could not use such transfer as an
excuse for not paying the indemnity to PAP. Although the insurance proceeds were
payable to RCBC, PAP could still sue Malayan to enforce its rights on the policy
because it remained a party to the insurance contract.
Not in conformity with the CA decision, Malayan filed this petition for review anchored
on the following
GROUNDS
I
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE
WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
AFFIRMED THE DECISION OF THE TRIAL COURT AND THUS RULING IN THE
QUESTIONED DECISION AND RESOLUTION THAT PETITIONER MALAYAN IS LIABLE
UNDER THE INSURANCE CONTRACT BECAUSE:
CONTRARY TO THE CONCLUSION OF THE COURT OF APPEALS, PETITIONER MALAYAN
WAS ABLE TO PROVE AND IT IS NOT DENIED, THAT ON THE FACE OF THE RENEWAL
POLICY ISSUED TO RESPONDENT PAP CO., THERE IS AN AFFIRMATIVE WARRANTY OR A
REPRESENTATION MADE BY THE INSURED THAT THE "LOCATION OF THE RISK" WAS AT
THE SANYO BUILDING. IT IS LIKEWISE UNDISPUTED THAT WHEN THE RENEWAL
POLICY WAS ISSUED TO RESPONDENT PAP CO., THE INSURED PROPERTIES WERE NOT
AT THE SANYO BUILDING BUT WERE AT A DIFFERENT LOCATION, THAT IS, AT THE
PACE FACTORY AND IT WAS IN THIS DIFFERENT LOCATION WHEN THE LOSS INSURED

AGAINST OCCURRED. THESE SET OF UNDISPUTED FACTS, BY ITSELF ALREADY

ENTITLES PETITIONER MALAYAN TO CONSIDER THE RENEWAL POLICY AS AVOIDED OR
RESCINDED BY LAW, BECAUSE OF CONCEALMENT, MISREPRESENTATION AND BREACH
OF AN AFFIRMATIVE WARRANTY UNDER SECTIONS 27, 45 AND 74 IN RELATION TO
SECTION 31 OF THE INSURANCE CODE, RESPECTIVELY.
RESPONDENT PAP CO. WAS NEVER ABLE TO SHOW THAT IT DID NOT COMMIT
CONCEALMENT, MISREPRESENTATION OR BREACH OF AN AFFIRMATIVE WARRANTY
WHEN IT FAILED TO PROVE THAT IT INFORMED PETITIONER MALAYAN THAT THE
INSURED PROPERTIES HAD BEEN TRANSFERRED TO A LOCATION DIFFERENT FROM
WHAT WAS INDICATED IN THE INSURANCE POLICY.
IN ANY EVENT, RESPONDENT PAP CO. NEVER DISPUTED THAT THERE ARE
CONDITIONS AND LIMITATIONS TO THE RENEWAL POLICY WHICH ARE THE REASONS
WHY ITS CLAIM WAS DENIED IN THE FIRST PLACE. IN FACT, THE BEST PROOF THAT
RESPONDENT PAP CO. RECOGNIZES THESE CONDITIONS AND LIMITATIONS IS THE
FACT THAT ITS ENTIRE EVIDENCE FOCUSED ON ITS FACTUAL ASSERTION THAT IT
SUPPOSEDLY NOTIFIED PETITIONER MALAYAN OF THE TRANSFER AS REQUIRED BY
THE INSURANCE POLICY.
MOREOVER, PETITIONER MALAYAN PRESENTED EVIDENCE THAT THERE WAS AN
INCREASE IN RISK BECAUSE OF THE UNILATERAL TRANSFER OF THE INSURED
PROPERTIES. IN FACT, THIS PIECE OF EVIDENCE WAS UNREBUTTED BY RESPONDENT
PAP CO.
II
THE COURT OF APPEALS DEPARTED FROM, AND DID NOT APPLY, THE LAW AND
ESTABLISHED DECISIONS OF THE HONORABLE COURT WHEN IT IMPOSED INTEREST
AT THE RATE OF TWELVE PERCENT (12%) INTEREST FROM THE TIME OF THE LOSS
UNTIL FULLY PAID.
JURISPRUDENCE DICTATES THAT LIABILITY UNDER AN INSURANCE POLICY IS NOT A
LOAN OR FORBEARANCE OF MONEY FROM WHICH A BREACH ENTITLES A PLAINTIFF
TO AN AWARD OF INTEREST AT THE RATE OF TWELVE PERCENT (12%) PER ANNUM.
MORE IMPORTANTLY, SECTIONS 234 AND 244 OF THE INSURANCE CODE SHOULD NOT
HAVE BEEN APPLIED BY THE COURT OF APPEALS BECAUSE THERE WAS NEVER ANY
FINDING THAT PETITIONER MALAYAN UNJUSTIFIABLY REFUSED OR WITHHELD THE
PROCEEDS OF THE INSURANCE POLICY BECAUSE IN THE FIRST PLACE, THERE WAS A
LEGITIMATE DISPUTE OR DIFFERENCE IN OPINION ON WHETHER RESPONDENT PAP
CO. COMMITTED CONCEALMENT, MISREPRESENTATION AND BREACH OF AN
AFFIRMATIVE WARRANTY WHICH ENTITLES PETITIONER MALAYAN TO RESCIND THE
INSURANCE POLICY AND/OR TO CONSIDER THE CLAIM AS VOIDED.
III
THE COURT OF APPEALS HAS DECIDED THE CASE IN A MANNER NOT IN ACCORDANCE
WITH THE LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT
AGREED WITH THE TRIAL COURT AND HELD IN THE QUESTIONED DECISION THAT THE

PROCEEDS OF THE INSURANCE CONTRACT IS PAYABLE TO RESPONDENT PAP CO.

DESPITE THE EXISTENCE OF A MORTGAGEE CLAUSE IN THE INSURANCE POLICY.
IV
THE COURT OF APPEALS ERRED AND DEPARTED FROM ESTABLISHED LAW AND
JURISPRUDENCE WHEN IT HELD IN THE QUESTIONED DECISION AND RESOLUTION
THAT THE INTERPRETATION MOST FAVORABLE TO THE INSURED SHALL BE ADOPTED. 7
Malayan basically argues that it cannot be held liable under the insurance contract
because PAP committed concealment, misrepresentation and breach of an affirmative
warranty under the renewal policy when it transferred the location of the insured
properties without informing it. Such transfer affected the correct estimation of the
risk which should have enabled Malayan to decide whether it was willing to assume
such risk and, if so, at what rate of premium. The transfer also affected Malayans
ability to control the risk by guarding against the increase of the risk brought about
by the change in conditions, specifically the change in the location of the risk.
Malayan claims that PAP concealed a material fact in violation of Section 27 of the
Insurance Code8 when it did not inform Malayan of the actual and new location of the
insured properties. In fact, before the issuance of the renewal policy on May 14,
1997, PAP even informed it that there would be no changes in the renewal policy.
Malayan also argues that PAP is guilty of breach of warranty under the renewal policy
in violation of Section 74 of the Insurance Code 9 when, contrary to its affirmation in
the renewal policy that the insured properties were located at the Sanyo Factory,
these were already transferred to the Pace Factory. Malayan adds that PAP is guilty of
misrepresentation upon a material fact in violation of Section 45 of the Insurance
Code10 when it informed Malayan that there would be no changes in the original
policy, and that the original policy would be renewed on an "as is" basis.
Malayan further argues that PAP failed to discharge the burden of proving that the
transfer of the insured properties under the insurance policy was with its knowledge
and consent. Granting that PAP informed RCBC of the transfer or change of location of
the insured properties, the same is irrelevant and does not bind Malayan considering
that RCBC is a corporation vested with separate and distinct juridical personality.
Malayan did not consent to be the principal of RCBC. RCBC did not also act as
Malayans representative.
With regard to the alleged increase of risk, Malayan insists that there is evidence of
an increase in risk as a result of the unilateral transfer of the insured properties.
According to Malayan, the Sanyo Factory was occupied as a factory of
automotive/computer parts by the assured and factory of zinc & aluminum die cast
and plastic gear for copy machine by Sanyo Precision Phils., Inc. with a rate of
0.449% under 6.1.2 A, while Pace Factory was occupied as factory that repacked
silicone sealant to plastic cylinders with a rate of 0.657% under 6.1.2 A.
PAPs position
On the other hand, PAP counters that there is no evidence of any misrepresentation,
concealment or deception on its part and that its claim is not fraudulent. It insists
that it can still sue to protect its rights and interest on the policy notwithstanding the

fact that the proceeds of the same was payable to RCBC, and that it can collect
interest at the rate of 12% per annum on the proceeds of the policy because its claim
for indemnity was unduly delayed without legal justification.
The Courts Ruling
The Court agrees with the position of Malayan that it cannot be held liable for the loss
of the insured properties under the fire insurance policy.
As can be gleaned from the pleadings, it is not disputed that on May 13, 1996, PAP
obtained a ?15,000,000.00 fire insurance policy from Malayan covering its
machineries and equipment effective for one (1) year or until May 13, 1997; that the
policy expressly stated that the insured properties were located at "Sanyo Precision
Phils. Building, Phase III, Lots 4 & 6, Block 15, EPZA, Rosario, Cavite"; that before its
expiration, the policy was renewed 11 on an "as is" basis for another year or until May
13, 1998; that the subject properties were later transferred to the Pace Factory also in
PEZA; and that on October 12, 1997, during the effectivity of the renewal policy, a
fire broke out at the Pace Factory which totally burned the insured properties.
The policy forbade the removal of the insured properties unless sanctioned by
Malayan
Condition No. 9(c) of the renewal policy provides:
9. Under any of the following circumstances the insurance ceases to attach as
regards the property affected unless the insured, before the occurrence of any loss or
damage, obtains the sanction of the company signified by endorsement upon the
policy, by or on behalf of the Company:
xxx

xxx

xxx

(c) If property insured be removed to any building or place other than in that which is
herein stated to be insured.12
Evidently, by the clear and express condition in the renewal policy, the removal of
the insured property to any building or place required the consent of Malayan. Any
transfer effected by the insured, without the insurers consent, would free the latter
from any liability.
The respondent failed to notify, and to obtain the consent of, Malayan regarding the
removal
The records are bereft of any convincing and concrete evidence that Malayan was
notified of the transfer of the insured properties from the Sanyo factory to the Pace
factory. The Court has combed the records and found nothing that would show that
Malayan was duly notified of the transfer of the insured properties.
What PAP did to prove that Malayan was notified was to show that it relayed the fact
of transfer to RCBC, the entity which made the referral and the named beneficiary in
the policy. Malayan and RCBC might have been sister companies, but such fact did
not make one an agent of the other. The fact that RCBC referred PAP to Malayan did

not clothe it with authority to represent and bind the said insurance company. After
the referral, PAP dealt directly with Malayan.
The respondent overlooked the fact that during the November 9, 2006 hearing, 13 its
counsel stipulated in open court that it was Malayans authorized insurance agent,
Rodolfo Talusan, who procured the original policy from Malayan, not RCBC. This was
the reason why Talusans testimony was dispensed with.
Moreover, in the previous hearing held on November 17, 2005, 14 PAPs hostile
witness, Alexander Barrera, Administrative Assistant of Malayan, testified that he was
the one who procured Malayans renewal policy, not RCBC, and that RCBC merely
referred fire insurance clients to Malayan. He stressed, however, that no written
referral agreement exists between RCBC and Malayan. He also denied that PAP
notified Malayan about the transfer before the renewal policy was issued. He added
that PAP, through Maricar Jardiniano (Jardiniano), informed him that the fire insurance
would be renewed on an "as is basis."15
Granting that any notice to RCBC was binding on Malayan, PAPs claim that it notified
RCBC and Malayan was not indubitably established. At best, PAP could only come up
with the hearsay testimony of its principal witness, Branch Manager Katsumi Yoneda
(Mr. Yoneda), who testified as follows:
Q
What did you do as Branch Manager of Pap Co. Ltd.?
A
What I did I instructed my Secretary, because these equipment was bank loan and
because of the insurance I told my secretary to notify.
Q
To notify whom?
A
I told my Secretary to inform the bank.
Q
You are referring to RCBC?
A
Yes, sir.
xxxx
Q
After the RCBC was informed in the manner you stated, what did you do regarding
the new location of these properties at Pace Pacific Bldg. insofar as Malayan
Insurance Company is concerned?
A
After that transfer, we informed the RCBC about the transfer of the equipment and
also Malayan Insurance but we were not able to contact Malayan Insurance so I
instructed again my secretary to inform Malayan about the transfer.
Q
Who was the secretary you instructed to contact Malayan Insurance, the defendant in
this case?
A
Dory Ramos.
Q
How many secretaries do you have at that time in your office?
A
Only one, sir.
Q
Do you know a certain Maricar Jardiniano?

A
Yes, sir.
Q
Why do you know her?
A
Because she is my secretary.
Q
So how many secretaries did you have at that time?
A
Two, sir.
Q
What happened with the instruction that you gave to your secretary Dory Ramos
about the matter of informing the defendant Malayan Insurance Co of the new
location of the insured properties?
A
She informed me that the notification was already given to Malayan Insurance.
Q
Aside from what she told you how did you know that the information was properly
relayed by the said secretary, Dory Ramos, to Malayan Insurance?
A
I asked her, Dory Ramos, did you inform Malayan Insurance and she said yes, sir.
Q
Now after you were told by your secretary, Dory Ramos, that she was able to inform
Malayan Insurance Company about the transfer of the properties insured to the new
location, do you know what happened insofar this information was given to the
defendant Malayan Insurance?
A
I heard that someone from Malayan Insurance came over to our company.
Q
Did you come to know who was that person who came to your place at Pace Pacific?
A
I do not know, sir.
Q
How did you know that this person from Malayan Insurance came to your place?
A
It is according to the report given to me.
Q
Who gave that report to you?
A
Dory Ramos.
Q
Was that report in writing or verbally done?
A
Verbal.16 [Emphases supplied]
The testimony of Mr. Yoneda consisted of hearsay matters. He obviously had no
personal knowledge of the notice to either Malayan or RCBC. PAP should have
presented his secretaries, Dory Ramos and Maricar Jardiniano, at the witness stand.
His testimony alone was unreliable.
Moreover, the Court takes note of the fact that Mr. Yoneda admitted that the insured
properties were transferred to a different location only after the renewal of the fire
insurance policy.
COURT
Q
When did you transfer the machineries and equipments before the renewal or after
the renewal of the insurance?
A
After the renewal.

COURT
Q
You understand my question?
A
Yes, Your Honor.17 [Emphasis supplied]
This enfeebles PAPs position that the subject properties were already transferred to
the Pace factory before the policy was renewed.
The transfer from the Sanyo Factory to the PACE Factory increased the risk.
The courts below held that even if Malayan was not notified thereof, the transfer of
the insured properties to the Pace Factory was insignificant as it did not increase the
risk.
Malayan argues that the change of location of the subject properties from the Sanyo
Factory to the Pace Factory increased the hazard to which the insured properties were
exposed. Malayan wrote:
With regards to the exposure of the risk under the old location, this was occupied as
factory of automotive/computer parts by the assured, and factory of zinc & aluminum
die cast, plastic gear for copy machine by Sanyo Precision Phils., Inc. with a rate of
0.449% under 6.1.2 A. But under Pace Pacific Mfg. Corporation this was occupied as
factory that repacks silicone sealant to plastic cylinders with a rate of 0.657% under
6.1.2 A. Hence, there was an increase in the hazard as indicated by the increase in
rate.18
The Court agrees with Malayan that the transfer to the Pace Factory exposed the
properties to a hazardous environment and negatively affected the fire rating stated
in the renewal policy. The increase in tariff rate from 0.449% to 0.657% put the
subject properties at a greater risk of loss. Such increase in risk would necessarily
entail an increase in the premium payment on the fire policy.
Unfortunately, PAP chose to remain completely silent on this very crucial point.
Despite the importance of the issue, PAP failed to refute Malayans argument on the
increased risk.
Malayan is entitled to rescind the insurance contract
Considering that the original policy was renewed on an "as is basis," it follows that
the renewal policy carried with it the same stipulations and limitations. The terms and
conditions in the renewal policy provided, among others, that the location of the risk
insured against is at the Sanyo factory in PEZA. The subject insured properties,
however, were totally burned at the Pace Factory. Although it was also located in
PEZA, Pace Factory was not the location stipulated in the renewal policy. There being
an unconsented removal, the transfer was at PAPs own risk. Consequently, it must
suffer the consequences of the fire. Thus, the Court agrees with the report of
Cunningham Toplis Philippines, Inc., an international loss adjuster which investigated
the fire incident at the Pace Factory, which opined that "[g]iven that the location of
risk covered under the policy is not the location affected, the policy will, therefore,
not respond to this loss/claim."19

It can also be said that with the transfer of the location of the subject properties,
without notice and without Malayans consent, after the renewal of the policy, PAP
clearly committed concealment, misrepresentation and a breach of a material
warranty. Section 26 of the Insurance Code provides:
Section 26. A neglect to communicate that which a party knows and ought to
communicate, is called a concealment.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to
rescind a contract of insurance."
Moreover, under Section 168 of the Insurance Code, the insurer is entitled to rescind
the insurance contract in case of an alteration in the use or condition of the thing
insured. Section 168 of the Insurance Code provides, as follows:
Section 68. An alteration in the use or condition of a thing insured from that to which
it is limited by the policy made without the consent of the insurer, by means within
the control of the insured, and increasing the risks, entitles an insurer to rescind a
contract of fire insurance.
Accordingly, an insurer can exercise its right to rescind an insurance contract when
the following conditions are present, to wit:
1) the policy limits the use or condition of the thing insured;
2) there is an alteration in said use or condition;
3) the alteration is without the consent of the insurer;
4) the alteration is made by means within the insureds control; and
5) the alteration increases the risk of loss.20
In the case at bench, all these circumstances are present. It was clearly established
that the renewal policy stipulated that the insured properties were located at the
Sanyo factory; that PAP removed the properties without the consent of Malayan; and
that the alteration of the location increased the risk of loss.
WHEREFORE, the October 27, 2011 Decision of the Court of Appeals is hereby
REVERSED and SET ASIDE. Petitioner Malayan Insurance Company, Inc. is hereby
declared NOT liable for the loss of the insured machineries and equipment suffered
by PAP Co., Ltd.
SO ORDERED.

G.R. No. L-22684

August 31, 1967

PHILIPPINE
PHOENIX SURETY
& INSURANCE,
vs.
WOODWORKS, INC., defendant-appellant.
Zosimo
Rivas
Manuel O. Chan for plaintiff-appellee.

for

INC., plaintiff-appellee,

defendant-appellant.

DIZON, J.:
Appeal upon a question of law taken by Woodworks, Inc. from the judgment of the
Court of First Instance of Manila in Civil Case No. 50710 "ordering the defendant,
Woodworks, Inc. to pay to the plaintiff, Philippine Phoenix Surety & Insurance, Inc.,
the sum of P3,522.09 with interest thereon at the legal rate of 6% per annum from
the date of the filing of the complaint until fully paid, and costs of the suit."
Appellee Philippine Phoenix Surety & Insurance Co., Inc. commenced this action in
the Municipal Court of Manila to recover from appellant Woodworks, Inc. the sum of
P3,522.09, representing the unpaid balance of the premiums on a fire insurance
policy issued by appellee in favor of appellant for a term of one year from April 1,
1960 to April 1, 1961. From an adverse decision of said court, Woodworks, Inc.
appealed to the Court of First Instance of Manila (Civil Case No. 50710) where the
parties submitted the following stipulation of facts, on the basis of which the
appealed decision was rendered:
That plaintiff and defendant are both corporations duly organized and existing
under and by virtue of the laws of the Philippines;
That on April 1, 1960, plaintiff issued to defendant Fire Policy No. 9652 for the
amount of P300,000.00, under the terms and conditions therein set forth in
said policy a copy of which is hereto attached and made a part hereof as
Annex "A";
That the premiums of said policy as stated in Annex "A" amounted to
P6,051.95; the margin fee pursuant to the adopted plan as an implementation
of Republic Act 2609 amounted to P363.72, copy of said adopted plan is
hereto attached as Annex "B" and made a part hereof, the documentary
stamps attached to the policy was P96.42;
That the defendant paid P3,000.00 on September 22, 1960 under official
receipt No. 30245 of plaintiff;
That plaintiff made several demands on defendant to pay the amount of
P3,522.09.1wph1.t
In the present appeal, appellant claims that the court a quo committed the following
errors:
I. The lower court erred in stating that in fire insurance policies the risk
attached upon the issuance and delivery of the policy to the insured.

II. The lower court erred in deciding that in a perfected contract of insurance
non-payment of premium does not cancel the policy.
III. The lower court erred in deciding that the premium in the policy was still
collectible when the complaint was filed.
IV. The lower court erred in deciding that a partial payment of the premium
made the policy effective during the whole period of the policy.
It is clear from the foregoing that on April 1, 1960 Fire Insurance Policy No. 9652 was
issued by appellee and delivered to appellant, and that on September 22 of the same
year, the latter paid to the former the sum of P3,000.00 on account of the total
premium of P6,051.95 due thereon. There is, consequently, no doubt at all that, as
between the insurer and the insured, there was not only a perfected contract of
insurance but a partially performed one as far as the payment of the agreed premium
was concerned. Thereafter the obligation of the insurer to pay the insured the
amount for which the policy was issued in case the conditions therefor had been
complied with, arose and became binding upon it, while the obligation of the insured
to pay the remainder of the total amount of the premium due became demandable.
We can not agree with appellant's theory that non-payment by it of the premium due,
produced the cancellation of the contract of insurance. Such theory would place
exclusively in the hands of one of the contracting parties the right to decide whether
the contract should stand or not. Rather the correct view would seem to be this: as
the contract had become perfected, the parties could demand from each other the
performance of whatever obligations they had assumed. In the case of the insurer, it
is obvious that it had the right to demand from the insured the completion of the
payment of the premium due or sue for the rescission of the contract. As it chose to
demand specific performance of the insured's obligation to pay the balance of the
premium, the latter's duty to pay is indeed indubitable.
Having thus resolved that the fourth and last assignment of error submitted in
appellant's brief is without merit, the first three assignments of error must likewise be
overruled as lacking in merit.
Wherefore, the appealed decision being in accordance with law and the evidence, the
same is hereby affirmed, with costs.

UCPB GENERAL INSURANCE CO. INC., petitioner, vs. MASAGANA TELAMART,

INC., respondent.
RESOLUTION
DAVIDE, JR., C.J.:
In our decision of 15 June 1999 in this case, we reversed and set aside the
assailed decision[1] of the Court of Appeals, which affirmed with modification the
judgment of the trial court (a) allowing Respondent to consign the sum
of P225,753.95 as full payment of the premiums for the renewal of the five insurance
policies on Respondents properties; (b) declaring the replacement-renewal policies
effective and binding from 22 May 1992 until 22 May 1993; and (c) ordering
Petitioner to pay Respondent P18,645,000.00 as indemnity for the burned properties
covered by the renewal-replacement policies. The modification consisted in the (1)
deletion of the trial courts declaration that three of the policies were in force from
August 1991 to August 1992; and (2) reduction of the award of the attorneys fees
from 25% to 10% of the total amount due the Respondent.
The material operative facts upon which the appealed judgment was based are
summarized by the Court of Appeals in its assailed decision as follows:
Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5)
insurance policies (Exhibits "A" to "E", Record, pp. 158-175) on its properties [in
Pasay City and Manila].
All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May
1991 to 4:00 P.M. of 22 May 1992." On June 13, 1992, plaintiff's properties located at
2410-2432 and 2442-2450 Taft Avenue, Pasay City were razed by fire. On July 13,
1992, plaintiff tendered, and defendant accepted, five (5) Equitable Bank Manager's
Checks in the total amount of P225,753.45 as renewal premium payments for which
Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by
defendant. On July 14, 1992, Masagana made its formal demand for indemnification
for the burned insured properties. On the same day, defendant returned the five (5)
manager's checks stating in its letter (Exhibit "R"/"8", Record, p. 192) that it was
rejecting Masagana's claim on the following grounds:
"a) Said policies expired last May 22, 1992 and were not renewed for another
term;
b) Defendant had put plaintiff and its alleged broker on notice of nonrenewal earlier; and
c) The properties covered by the said policies were burned in a fire that took
place last June 13, 1992, or before tender of premium payment."

(Record, p.
5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioners stand that Respondents tender
of payment of the premiums on 13 July 1992 did not result in the renewal of the
policies, having been made beyond the effective date of renewal as provided under
Policy Condition No. 26, which states:
26. Renewal Clause. -- Unless the company at least forty five days in advance of the
end of the policy period mails or delivers to the assured at the address shown in the
policy notice of its intention not to renew the policy or to condition its renewal upon
reduction of limits or elimination of coverages, the assured shall be entitled to renew
the policy upon payment of the premium due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that
Respondent, which had procured insurance coverage from Petitioner for a number of
years, had been granted a 60 to 90-day credit term for the renewal of the
policies. Such a practice had existed up to the time the claims were filed. Thus:
Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued
on May 7, 1990 but premium was paid more than 90 days later on August 31, 1990
under O.R. No. 4771 (Exhs. "T" and "T-1"). Fire Insurance Policy No. 34660 for
Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was issued by UCPB on
May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than
60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other
policies: Fire Insurance Policy No. 34657 covering risks from May 22, 1990 to May 22,
1991 was issued on May 7, 1990 but premium therefor was paid only on July 19, 1990
under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire Insurance Policy No. 34661
covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990 but
premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X' and "X1"). Fire Insurance Policy No. 34688 for insurance coverage from May 22, 1990 to
May 22, 1991 was issued on May 7, 1990 but premium was paid only on July 19, 1990
under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance Policy No. 29126 to cover
insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989 but
premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799
(Exhs. "AA" and "AA-1"). Fire Insurance Policy No. HO/F-26408 covering risks from
January 12, 1989 to January 12, 1990 was issued to Intratrade Phils. (Masagana's
sister company) dated December 10, 1988 but premium therefor was paid only on
February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance
Policy No. 29128 was issued on May 22, 1989 but premium was paid only on July 25,
1989 under O.R. No. 40800 for insurance coverage from May 22, 1989 to May 22,
1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy No. 29127 was issued on May 22,
1989 but premium was paid only on July 17, 1989 under O.R. No. 40682 for insurance
risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire
Insurance Policy No. HO/F-29362 was issued on June 15, 1989 but premium was paid
only on February 13, 1990 under O.R. No. 39233 for insurance coverage from May 22,
1989 to May 22, 1990 (Exhs. "EE" and "EE-1"). Fire Insurance Policy No. 26303 was
issued on November 22, 1988 but premium therefor was collected only on March 15,
1989 under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to
December 15, 1989 (Exhs. "FF" and "FF-1").

Moreover, according to the Court of Appeals the following circumstances

constitute preponderant proof that no timely notice of non-renewal was made by
Petitioner:
(1) Defendant-appellant received the confirmation (Exhibit 11, Record, p. 350)
from Ultramar Reinsurance Brokers that plaintiffs reinsurance facility had been
confirmed up to 67.5% only on April 15, 1992 as indicated on Exhibit
11. Apparently, the notice of non-renewal (Exhibit 7, Record, p. 320) was
sent not earlier than said date, or within 45 days from the expiry dates of the
policies as provided under Policy Condition No. 26; (2) Defendant insurer
unconditionally accepted, and issued an official receipt for, the premium
payment on July 1[3], 1992 which indicates defendant's willingness to assume
the risk despite only a 67.5% reinsurance cover[age]; and (3) Defendant insurer
appointed Esteban Adjusters and Valuers to investigate plaintiffs claim as shown
by the letter dated July 17, 1992 (Exhibit 11, Record, p. 254).
In our decision of 15 June 1999, we defined the main issue to be whether the
fire insurance policies issued by petitioner to the respondent covering the period
from May 22, 1991 to May 22, 1992 had been extended or renewed by an implied
credit arrangement though actual payment of premium was tendered on a later date
and after the occurrence of the (fire) risk insured against. We resolved this issue in
the negative in view of Section 77 of the Insurance Code and our decisions
in Valenzuela v. Court of Appeals[2]; South Sea Surety and Insurance Co., Inc. v. Court
of Appeals[3]; and Tibay v. Court of Appeals.[4] Accordingly, we reversed and set aside
the decision of the Court of Appeals.
Respondent seasonably filed a motion for the reconsideration of the adverse
verdict. It alleges in the motion that we had made in the decision our own findings of
facts, which are not in accord with those of the trial court and the Court of
Appeals. The courts below correctly found that no notice of non-renewal was made
within 45 days before 22 May 1992, or before the expiration date of the fire insurance
policies. Thus, the policies in question were renewed by operation of law and were
effective and valid on 30 June 1992 when the fire occurred, since the premiums were
paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree
expressly or impliedly on the extension of credit or time to pay the premium nor
consider a policy binding before actual payment. It urges the Court to take judicial
notice of the fact that despite the express provision of Section 77 of the Insurance
Code, extension of credit terms in premium payment has been the prevalent practice
in the insurance industry. Most insurance companies, including Petitioner, extend
credit terms because Section 77 of the Insurance Code is not a prohibitive injunction
but is merely designed for the protection of the parties to an insurance contract. The
Code itself, in Section 78, authorizes the validity of a policy notwithstanding nonpayment of premiums.
Respondent also asserts that the principle of estoppel applies to Petitioner.
Despite its awareness of Section 77 Petitioner persuaded and induced Respondent to
believe that payment of premium on the 60- to 90-day credit term was perfectly
alright; in fact it accepted payments within 60 to 90 days after the due dates. By
extending credit and habitually accepting payments 60 to 90 days from the effective

dates of the policies, it has implicitly agreed to modify the tenor of the insurance
policy and in effect waived the provision therein that it would pay only for the loss or
damage in case the same occurred after payment of the premium.
Petitioner filed an opposition to the Respondents motion for reconsideration. It
argues that both the trial court and the Court of Appeals overlooked the fact that on
6 April 1992 Petitioner sent by ordinary mail to Respondent a notice of non-renewal
and sent by personal delivery a copy thereof to Respondents broker, Zuellig. Both
courts likewise ignored the fact that Respondent was fully aware of the notice of nonrenewal. A reading of Section 66 of the Insurance Code readily shows that in order
for an insured to be entitled to a renewal of a non-life policy, payment of the
premium due on the effective date of renewal should first be made. Respondents
argument that Section 77 is not a prohibitive provision finds no authoritative support.
Upon a meticulous review of the records and reevaluation of the issues raised in
the motion for reconsideration and the pleadings filed thereafter by the parties, we
resolved to grant the motion for reconsideration. The following facts, as found by the
trial court and the Court of Appeals, are indeed duly established:
1. For years, Petitioner had been issuing fire policies to the Respondent, and
these policies were annually renewed.
2. Petitioner had been granting Respondent a 60- to 90-day credit term
within which to pay the premiums on the renewed policies.
3. There was no valid notice of non-renewal of the policies in question, as
there is no proof at all that the notice sent by ordinary mail was received
by Respondent, and the copy thereof allegedly sent to Zuellig was ever
transmitted to Respondent.
4. The premiums for the policies in question in the aggregate amount
of P225,753.95 were paid by Respondent within the 60- to 90-day credit
term and were duly accepted and received by Petitioners cashier.
The instant case has to rise or fall on the core issue of whether Section 77 of the
Insurance Code of 1978 (P.D. No. 1460) must be strictly applied to Petitioners
advantage despite its practice of granting a 60- to 90-day credit term for the
payment of premiums.
Section 77 of the Insurance Code of 1978 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.
This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code)
promulgated on 18 December 1974. In turn, this Section has its source in Section 72
of Act No. 2427 otherwise known as the Insurance Act as amended by R.A. No. 3540,
approved on 21 June 1963, which read:

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

that the policy is valid even if premiums are not paid, but does not expressly prohibit
an agreement granting credit extension, and such an agreement is not contrary to
morals, good customs, public order or public policy (De Leon, The Insurance Code, p.
175). So is an understanding to allow insured to pay premiums in installments not so
prescribed. At the very least, both parties should be deemed in estoppel to question
the arrangement they have voluntarily accepted.
By the approval of the aforequoted findings and conclusion of the Court of
Appeals, Tuscany has provided a fourth exception to Section 77, namely, that the
insurer may grant credit extension for the payment of the premium. This simply
means that if the insurer has granted the insured a credit term for the payment of the
premium and loss occurs before the expiration of the term, recovery on the policy
should be allowed even though the premium is paid after the loss but within the
credit term.
Moreover, there is nothing in Section 77 which prohibits the parties in an
insurance contract to provide a credit term within which to pay the premiums. That
agreement is not against the law, morals, good customs, public order or public
policy. The agreement binds the parties. Article 1306 of the Civil Code provides:
ART. 1306. The contracting parties may establish such stipulations clauses, terms
and conditions as they may deem convenient, provided they are not contrary to law,
morals, good customs, public order, or public policy.
Finally in the instant case, it would be unjust and inequitable if recovery on the
policy would not be permitted against Petitioner, which had consistently granted a
60- to 90-day credit term for the payment of premiums despite its full awareness of
Section 77. Estoppel bars it from taking refuge under said Section, since Respondent
relied in good faith on such practice. Estoppel then is the fifth exception to Section
77.
WHEREFORE,
the
Decision
in
this
case
of
15
June
1999
is RECONSIDERED and SET ASIDE, and a new one is hereby entered DENYING the
instant petition for failure of Petitioner to sufficiently show that a reversible error was
committed by the Court of Appeals in its challenged decision, which is
hereby AFFIRMED in toto.
No pronouncement as to cost.
SO ORDERED.

SPS. ANTONIO A. TIBAY and VIOLETA R. TIBAY and OFELIA M. RORALDO,

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

On 24 March 1995 the Court of Appeals reversed the court a quo by declaring
FORTUNE not to be liable to plaintiff-appellees therein but ordering defendantappellant to return to the former the premium of P2,983.50 plus 12% interest from 10
March 1987 until full payment.[3]
Hence this petition for review with petitioners contending mainly that contrary to
the conclusion of the appellate court, FORTUNE remains liable under the subject fire
insurance policy inspite of the failure of petitioners to pay their premium in full.
We find no merit in the petition; hence, we affirm the Court of Appeals.
Insurance is a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent
event.[4] The consideration is the premium, which must be paid at the time and in the
way and manner specified in the policy, and if not so paid, the policy will lapse and
be forfeited by its own terms.[5]
The pertinent provisions in the Policy on premium read
THIS POLICY OF INSURANCE WITNESSETH, THAT only after payment to the Company
in accordance with Policy Condition No. 2 of the total premiums by the insured as
stipulated above for the period aforementioned for insuring against Loss or Damage
by Fire or Lightning as herein appears, the Property herein described x x x
2.
This policy including any renewal thereof and/or any endorsement thereon is
not in force until the premium has been fully paid to and duly receipted by the
Company in the manner provided herein.
Any supplementary agreement seeking to amend this condition prepared by agent,
broker or Company official, shall be deemed invalid and of no effect.
xxx

xxx

xxx

Except only in those specific cases where corresponding rules and regulations which
are or may hereafter be in force provide for the payment of the stipulated premiums
in periodic installments at fixed percentage, it is hereby declared, agreed and
warranted that this policy shall be deemed effective, valid and binding upon the
Company only when the premiums therefor have actually been paid in full and duly
acknowledged in a receipt signed by any authorized official or representative/agent
of the Company in such manner as provided herein, (Italics supplied). [6]
Clearly the Policy provides for payment of premium in full. Accordingly, where
the premium has only been partially paid and the balance paid only after the peril
insured against has occurred, the insurance contract did not take effect and the
insured cannot collect at all on the policy. This is fully supported by Sec. 77 of the
Insurance Code which provides
SEC. 77. An insurer is entitled to payment of the premium as soon as the thing
insured is exposed to the peril insured against. Notwithstanding any agreement to
the contrary, no policy or contract of insurance issued by an insurance company is
valid and binding unless and until the premium thereof has been paid, except in the

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

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

the assured in this particular instance should not be considered the payment required
by the law and the stipulation of the parties. Rather, it must be taken in the concept
of a deposit to be held in trust by the insurer until such time that the full amount has
been tendered and duly receipted for. In other words, as expressly agreed upon in
the contract, full payment must be made before the risk occurs for the policy to be
considered effective and in force.
Thus, no vinculum juris whereby the insurer bound itself to indemnify the assured
according to law ever resulted from the fractional payment of premium. The
insurance contract itself expressly provided that the policy would be effective only
when the premium was paid in full. It would have been altogether different were it
not so stipulated. Ergo, petitioners had absolute freedom of choice whether or not to
be insured by FORTUNE under the terms of its policy and they freely opted to adhere
thereto.
Indeed, and far more importantly, the cardinal polestar in the construction of an
insurance contract is the intention of the parties as expressed in the policy. [10] Courts
have no other function but to enforce the same. The rule that contracts of insurance
will be construed in favor of the insured and most strongly against the insurer should
not be permitted to have the effect of making a plain agreement ambiguous and then
construe it in favor of the insured. [11] Verily, it is elemental law that the payment of
premium is requisite to keep the policy of insurance in force. If the premium is not
paid in the manner prescribed in the policy as intended by the parties the policy is
ineffective. Partial payment even when accepted as a partial payment will not keep
the policy alive even for such fractional part of the year as the part payment bears to
the whole payment.[12]
Applying further the rules of statutory construction, the position maintained by
petitioners becomes even more untenable. The case of South Sea Surety and
Insurance Company, Inc. v. Court of Appeals, [13] speaks only of two (2) statutory
exceptions to the requirement of payment of the entire premium as a prerequisite to
the validity of the insurance contract. These exceptions are: (a) in case the
insurance coverage relates to life or industrial life (health) insurance when a grace
period applies, and (b) when the insurer makes a written acknowledgment of the
receipt of premium, this acknowledgment being declared by law to, be then
conclusive evidence of the premium payment.[14]
A maxim of recognized practicality is the rule that the expressed exception or
exemption excludes others. Exceptio firm at regulim in casibus non exceptis. The
express mention of exceptions operates to exclude other exceptions; conversely,
those which are not within the enumerated exceptions are deemed included in the
general rule. Thus, under Sec. 77, as well as Sec. 78, until the premium is paid, and
the law has not expressly excepted partial payments, there is no valid and binding
contract. Hence, in the absence of clear waiver of prepayment in full by the insurer,
the insured cannot collect on the proceeds of the policy.
In the desire to safeguard the interest of the assured, itmust not be ignored that
the contract of insurance is primarily a risk-distributing device, a mechanism by
which all members of a group exposed to a particular risk contribute premiums to an
insurer. From these contributory funds are paid whatever losses occur due to
exposure to the peril insured against. Each party therefore takes a risk: the insurer,

that of being compelled upon the happening of the contingency to pay the entire sum
agreed upon, and the insured, that of parting with the amount required as premium,
without receiving anything therefor in case the contingency does not happen. To
ensure payment for these losses, the law mandates all insurance companies to
maintain a legal reserve fund in favor of those claiming under their policies. [15] It
should be understood that the integrity of this fund cannot be secured and
maintained if by judicial fiat partial offerings of premiums were to be construed as a
legal nexus between the applicant and the insurer despite an express agreement to
the contrary. For what could prevent the insurance applicant from deliberately or
wilfully holding back full premium payment and wait for the risk insured against to
transpire and then conveniently pass on the balance of the premium to be deducted
from the proceeds of the insurance? Worse, what if the insured makes an initial
payment of only 10%, or even 1%, of the required premium, and when the risk occurs
simply points to the proceeds from where to source the balance? Can an insurance
company then exist and survive upon the payment of 1%, or even 10%, of the
premium stipulated in the policy on the basis that, after all, the insurer can deduct
from the proceeds of the insurance should the risk insured against occur?
Interpreting the contract of insurance stringently against the insurer but liberally
in favor of the insured despite clearly defined obligations of the parties to the policy
can be carried out to extremes that there is the danger that we may, so to speak,
kill the goose that lays the golden egg. We are well aware of insurance companies
falling into the despicable habit of collecting premiums promptly yet resorting to all
kinds of excuses to deny or delay payment of just insurance claims. But, in this case,
the law is manifestly on the side of the insurer. For as long as the current Insurance
Code remains unchanged and partial payment of premiums is not mentioned at all as
among the exceptions provided in Secs. 77 and 78, no policy of insurance can ever
pretend to be efficacious or effective until premium has been fully paid.
And so it must be. For it cannot be disputed that premium is the elixir vitae of
the insurance business because by law the insurer must maintain a legal reserve
fund to meet its contingent obligations to the public, hence, the imperative need for
its prompt payment and full satisfaction.[16] It must be emphasized here that all
actuarial calculations and various tabulations of probabilities of losses under the risks
insured against are based on the sound hypothesis of prompt payment of
premiums. Upon this bedrock insurance firms are enabled to offer the assurance of
security to the public at favorable rates. But once payment of premium is left to the
whim and caprice of the insured, as when the courts tolerate the payment of a mere
P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and
the balance to be paid even after the risk insured against has occurred, as petitioners
have done in this case, on the principle that the strength of the vinculumjuris is not
measured by any specific amount of premium payment, we will surely wreak havoc
on the business and set to naught what has taken actuarians centuries to devise to
arrive at a fair and equitable distribution of risks and benefits between the insurer
and the insured.
The terms of the insurance policy constitute the measure of the insurers liability.
In the absence of statutory prohibition to the contrary, insurance companies have the
same rights as individuals to limit their liability and to impose whatever conditions
they deem best upon their obligations not inconsistent with public policy. [17] The
validity of these limitations is by law passed upon by the Insurance Commissioner

who is empowered to approve all forms of policies, certificates or contracts of

insurance which insurers intend to issue or deliver. That the policy contract in the
case at bench was approved and allowed issuance simply reaffirms the validity of
such policy, particularly the provision in question.
WHEREFORE, the petition is DENIED and the assailed Decision of the Court of
Appeals dated 24 March 1995 is AFFIRMED.
SO ORDERED.

G.R. No. 95546 November 6, 1992

MAKATI
TUSCANY
CONDOMINIUM
CORPORATION, petitioner,
vs.
THE COURT OF APPEALS, AMERICAN HOME ASSURANCE CO., represented by
American International Underwriters (Phils.), Inc., respondent.

BELLOSILLO, J.:
This case involves a purely legal question: whether payment by installment of the
premiums due on an insurance policy invalidates the contract of insurance, in view of
Sec. 77 of P.D. 612, otherwise known as the Insurance Code, as amended, which
provides:
Sec. 77. An insurer is entitled to the payment of the premium as soon
as the thing is exposed to the peril insured against. Notwithstanding
any agreement to the contrary, no policy or contract of insurance
issued by an insurance company is valid and binding unless and until
the premium thereof has been paid, except in the case of a life or an
industrial life policy whenever the grace period provision applies.
Sometime in early 1982, private respondent American Home Assurance Co. (AHAC),
represented by American International Underwriters (Phils.), Inc., issued in favor of
petitioner Makati Tuscany Condominium Corporation (TUSCANY) Insurance Policy No.
AH-CPP-9210452 on the latter's building and premises, for a period beginning 1
March 1982 and ending 1 March 1983, with a total premium of P466,103.05. The
premium was paid on installments on 12 March 1982, 20 May 1982, 21 June 1982
and 16 November 1982, all of which were accepted by private respondent.
On 10 February 1983, private respondent issued to petitioner Insurance Policy No.
AH-CPP-9210596, which replaced and renewed the previous policy, for a term
covering 1 March 1983 to 1 March 1984. The premium in the amount of P466,103.05
was again paid on installments on 13 April 1983, 13 July 1983, 3 August 1983, 9
September 1983, and 21 November 1983. All payments were likewise accepted by
private respondent.
On 20 January 1984, the policy was again renewed and private respondent issued to
petitioner Insurance Policy No. AH-CPP-9210651 for the period 1 March 1984 to 1
March 1985. On this renewed policy, petitioner made two installment payments, both
accepted by private respondent, the first on 6 February 1984 for P52,000.00 and the
second, on 6 June 1984 for P100,000.00. Thereafter, petitioner refused to pay the
balance of the premium.
Consequently, private respondent filed an action to recover the unpaid balance of
P314,103.05 for Insurance Policy No. AH-CPP-9210651.
In its answer with counterclaim, petitioner admitted the issuance of Insurance Policy
No. AH-CPP-9210651. It explained that it discontinued the payment of premiums
because the policy did not contain a credit clause in its favor and the receipts for the

installment payments covering the policy for 1984-85, as well as the two (2) previous
policies, stated the following reservations:
2. Acceptance of this payment shall not waive any of the company
rights to deny liability on any claim under the policy arising before such
payments or after the expiration of the credit clause of the policy; and
3. Subject to no loss prior to premium payment. If there be any loss
such is not covered.
Petitioner further claimed that the policy was never binding and valid, and no risk
attached to the policy. It then pleaded a counterclaim for P152,000.00 for the
premiums already paid for 1984-85, and in its answer with amended counterclaim,
sought the refund of P924,206.10 representing the premium payments for 1982-85.
After some incidents, petitioner and private respondent moved for summary
judgment.
On 8 October 1987, the trial court dismissed the complaint and the counterclaim
upon the following findings:
While it is true that the receipts issued to the defendant contained the
aforementioned reservations, it is equally true that payment of the
premiums of the three aforementioned policies (being sought to be
refunded) were made during the lifetime or term of said policies,
hence, it could not be said, inspite of the reservations, that no risk
attached under the policies. Consequently, defendant's counterclaim
for refund is not justified.
As regards the unpaid premiums on Insurance Policy No. AH-CPP9210651, in view of the reservation in the receipts ordinarily issued by
the plaintiff on premium payments the only plausible conclusion is that
plaintiff has no right to demand their payment after the lapse of the
term of said policy on March 1, 1985. Therefore, the defendant was
justified in refusing to pay the same. 1
Both parties appealed from the judgment of the trial court. Thereafter, the Court of
Appeals rendered a decision 2modifying that of the trial court by ordering herein
petitioner to pay the balance of the premiums due on Policy No. AH-CPP-921-651, or
P314,103.05 plus legal interest until fully paid, and affirming the denial of the
counterclaim. The appellate court thus explained
The obligation to pay premiums when due is ordinarily as indivisible
obligation to pay the entire premium. Here, the parties herein agreed
to make the premiums payable in installments, and there is no
pretense that the parties never envisioned to make the insurance
contract binding between them. It was renewed for two succeeding
years, the second and third policies being a renewal/replacement for
the previous one. And the insured never informed the insurer that it
was terminating the policy because the terms were unacceptable.

While it may be true that under Section 77 of the Insurance Code, the
parties may not agree to make the insurance contract valid and
binding without payment of premiums, there is nothing in said section
which suggests that the parties may not agree to allow payment of the
premiums in installment, or to consider the contract as valid and
binding upon payment of the first premium. Otherwise, we would allow
the insurer to renege on its liability under the contract, had a loss
incurred (sic) before completion of payment of the entire premium,
despite its voluntary acceptance of partial payments, a result
eschewed by a basic considerations of fairness and equity.
To our mind, the insurance contract became valid and binding upon
payment of the first premium, and the plaintiff could not have denied
liability on the ground that payment was not made in full, for the
reason that it agreed to accept installment payment. . . . 3
Petitioner now asserts that its payment by installment of the premiums for the
insurance policies for 1982, 1983 and 1984 invalidated said policies because of the
provisions of Sec. 77 of the Insurance Code, as amended, and by the conditions
stipulated by the insurer in its receipts, disclaiming liability for loss for occurring
before payment of premiums.
It argues that where the premiums is not actually paid in full, the policy would only be
effective if there is an acknowledgment in the policy of the receipt of premium
pursuant to Sec. 78 of the Insurance Code. The absence of an express
acknowledgment in the policies of such receipt of the corresponding premium
payments, and petitioner's failure to pay said premiums on or before the effective
dates of said policies rendered them invalid. Petitioner thus concludes that there
cannot be a perfected contract of insurance upon mere partial payment of the
premiums because under Sec. 77 of the Insurance Code, no contract of insurance is
valid and binding unless the premium thereof has been paid, notwithstanding any
agreement to the contrary. As a consequence, petitioner seeks a refund of all
premium payments made on the alleged invalid insurance policies.
We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that petitioner and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in
1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer
accepted all the installment payments. Such acceptance of payments speaks loudly
of the insurer's intention to honor the policies it issued to petitioner. Certainly, basic
principles of equity and fairness would not allow the insurer to continue collecting
and accepting the premiums, although paid on installments, and later deny liability
on the lame excuse that the premiums were not prepared in full.
We therefore sustain the Court of Appeals. We quote with approval the well-reasoned
findings and conclusion of the appellate court contained in its Resolution denying the
motion to reconsider its Decision
While the import of Section 77 is that prepayment of premiums is
strictly required as a condition to the validity of the contract, We are

not prepared to rule that the request to make installment payments

duly approved by the insurer, would prevent the entire contract of
insurance from going into effect despite payment and acceptance of
the initial premium or first installment. Section 78 of the Insurance
Code in effect allows waiver by the insurer of the condition of
prepayment by making an acknowledgment in the insurance policy of
receipt of premium as conclusive evidence of payment so far as to
make the policy binding despite the fact that premium is actually
unpaid. Section 77 merely precludes the parties from stipulating that
the policy is valid even if premiums are not paid, but does not
expressly prohibit an agreement granting credit extension, and such an
agreement is not contrary to morals, good customs, public order or
public policy (De Leon, the Insurance Code, at p. 175). So is an
understanding to allow insured to pay premiums in installments not so
proscribed. At the very least, both parties should be deemed in
estoppel to question the arrangement they have voluntarily accepted. 4
The
reliance
by
petitioner on Arce
vs. Capital
Surety and
Insurance
Co. 5 is unavailing because the facts therein are substantially different from those in
the case at bar. In Arce, no payment was made by the insured at all despite the grace
period given. In the case before Us, petitioner paid the initial installment and
thereafter made staggered payments resulting in full payment of the 1982 and 1983
insurance policies. For the 1984 policy, petitioner paid two (2) installments although
it refused to pay the balance.
It appearing from the peculiar circumstances that the parties actually intended to
make three (3) insurance contracts valid, effective and binding, petitioner may not be
allowed to renege on its obligation to pay the balance of the premium after the
expiration of the whole term of the third policy (No. AH-CPP-9210651) in March 1985.
Moreover, as correctly observed by the appellate court, where the risk is entire and
the contract is indivisible, the insured is not entitled to a refund of the premiums paid
if the insurer was exposed to the risk insured for any period, however brief or
momentary.
WHEREFORE, finding no reversible error in the judgment appealed from, the same is
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 165585

November 20, 2013

GOVERNMENT
SERVICE
INSURANCE
SYSTEM, Petitioner,
vs.
PRUDENTIAL GUARANTEE AND ASSURANCE, INC., DEVELOPMENT BANK OF
THE PHILIPPINES and LAND BANK OF THE PHILIPPINES, Respondents.
x-----------------------x
G.R. No. 176982
GOVERNMENT
SERVICE
INSURANCE
SYSTEM, Petitioner,
vs.
PRUDENTIAL GUARANTEE AND ASSURANCE, INC., Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in these consolidated petitions for review on Certiorari 1 are separate
issuances of the Court of Appeals (CA) in relation to the complaint for sum of money
filed by Prudential Guarantee and Assurance, Inc. (PGAI) against the Government
Service Insurance System (GSIS) before the Regional Trial Court of Makati City,
Branch 149 (RTC), docketed as Civil Case No. 01-1634.
In particular, the petition in G.R. No. 165585 assails the Decision 2 dated May 26, 2004
and Resolution3 dated October 6, 2004 of the CA in CA-G.R. SP No. 69289 which
affirmed the Order4 dated February 14, 2002, as well as the Order, 5 Notices of
Garnishment,6 and Writ of Execution,7 all dated February 19, 2002, issued by the RTC
authorizing execution pending appeal.
On the other hand, the petition in G.R. No. 176982 assails the Decision 8 dated
October 30, 2006 and Resolution 9dated March 12, 2007 of the CA in CA-G.R. CV No.
73965 which dismissed the appeal filed by GSIS, affirming with modification the
Order10 dated January 11, 2002 of the RTC rendering judgment on the pleadings.
The Facts
Sometime in March 1999, the National Electrification Administration (NEA) entered
into a Memorandum of Agreement11 (MOA) with GSIS insuring all real and personal
properties mortgaged to it by electrical cooperatives under an Industrial All Risks
Policy
(IAR
policy).12 The
total
sum
insured
under
the
IAR
policy
wasP16,731,141,166.80, out of which, 95% or P15,894,584,108.40 was reinsured by
GSIS with PGAI for a period of one year or from March 5, 1999 to March 5, 2000. 13 As
reflected in Reinsurance Request Note No. 99-150 14(reinsurance cover) and the
Reinsurance Binder15 dated April 21, 1999 (reinsurance binder), GSIS agreed to pay
PGAI reinsurance premiums in the amount of P32,885,894.52 per quarter or a total
of P131,543,578.08.16 While GSIS remitted to PGAI the reinsurance premiums for the
first three quarters, it, however, failed to pay the fourth and last reinsurance
premium due on December 5, 1999 despite demands. This prompted PGAI to file, on

November 15, 2001, a Complaint17 for sum of money (complaint) against GSIS before
the RTC, docketed as Civil Case No. 01-1634.
In its complaint, PGAI alleged, among others, that: (a) after it had issued the IAR
policy, it further reinsured the risks covered under the said reinsurance with
reputable reinsurers worldwide such as Lloyds of London, Copenhagen Re, Cigna
Singapore, CCR, Generali, and Arig; 18 (b) the first three reinsurance premiums were
paid to PGAI by GSIS and, in the same vein, NEA paid the first three reinsurance
premiums due to GSIS;19 (c) GSIS failed to pay PGAI the fourth and last reinsurance
premium due on December 5, 1999;20 (d) the IAR policy remained in full force and
effect for the entire insurable period and, in fact, the losses/damages on various risks
reinsured by PGAI were paid and accordingly settled by it; 21 (e) PGAI is under
continuous pressure from its reinsurers in the international market to settle the
matter;22 and (f) GSIS acknowledged its obligation to pay the last reinsurance
premium as it, in turn, demanded from NEA the fourth and last reinsurance
premium.23
In its Answer,24 GSIS admitted, among others, that: (a) its request for reinsurance
cover was accepted by PGAI in a reinsurance binder; 25 (b) it remitted to PGAI the first
three reinsurance premiums which were paid by NEA; 26 and (c) it failed to remit the
fourth and last reinsurance premium to PGAI.27 It, however, denied, inter alia, that: (a)
it had acknowledged its obligation to pay the last quarters reinsurance premium to
PGAI;28 and (b) the IAR policy remained in full force and effect for the entire insurable
period of March 5, 1999 to March 5, 2000. 29 GSIS also proffered the following
affirmative defenses: (a) the complaint states no cause of action against GSIS
because the non-payment of the last reinsurance premium only renders the
reinsurance contract ineffective, and does not give PGAI a right of action to
collect;30 (b) pursuant to the regulations issued by the Commission on Audit, GSIS is
prohibited from advancing payments to PGAI occasioned by the failure of the
principal insured, NEA, to pay the insurance premium; 31 and (c) PGAIs cause of action
lies against NEA since GSIS merely acted as a conduit. 32 By way of counterclaim, GSIS
prayed that PGAI be ordered to pay exemplary damages, including litigation
expenses, and costs of suit.33
On December 18, 2001, PGAI filed a Motion for Judgment on the Pleadings 34 averring
that GSIS essentially admitted the material allegations of the complaint, such as: (a)
the existence of the MOA between NEA and GSIS; (b) the existence of the reinsurance
binder between GSIS and PGAI; (c) the remittance by GSIS to PGAI of the first three
quarterly reinsurance premiums; and (d) the failure/refusal of GSIS to remit the fourth
and last reinsurance premium.35 Hence, PGAI prayed that the RTC render a judgment
on the pleadings pursuant to Section 1, Rule 34 of the Rules of Court (Rules). GSIS
opposed36 the foregoing motion by reiterating the allegations and defenses in its
Answer.
On January 11, 2002, the RTC issued an Order 37 (January 11, 2002 Order) granting
PGAIs Motion for Judgment on the Pleadings. It observed that the admissions of GSIS
that it paid the first three quarterly reinsurance premiums to PGAI affirmed the
validity of the contract of reinsurance between them. As such, GSIS cannot now
renege on its obligation to remit the last and remaining quarterly reinsurance
premium.38 It further pointed out that while it is true that the payment of the
premium is a requisite for the validity of an insurance contract as provided under

Section 77 of Presidential Decree No. (PD) 612, 39 otherwise known as "The Insurance
Code," it was held in Makati Tuscany Condominium Corp. v. CA 40 (Makati Tuscany)
that insurance policies are valid even if the premiums were paid in installments, as in
this case.41 Thus, in view of the foregoing, the RTC ordered GSIS to pay PGAI the last
quarter reinsurance premium in the sum of P32,885,894.52, including interests
amounting toP6,519,515.91 as of July 31, 2000 until full payment, attorneys fees,
and costs of suit.42 Dissatisfied, GSIS filed a notice of appeal.43
Meanwhile, PGAI filed a Motion for Execution Pending Appeal 44 based on the following
reasons: (a) GSIS appeal was patently dilatory since it already acknowledged the
validity of PGAIs claim;45 (b) GSIS posted no valid defense as its Answer raised no
genuine issues;46 and (c) PGAI would suffer serious and irreparable injury as it may be
blacklisted as a consequence of the non-payment of premiums due. 47 PGAI also
manifested its willingness to post a sufficient surety bond to answer for any resulting
damage to GSIS.48 The latter opposed49 the motion asserting that there lies no
sufficient ground or urgency to justify execution pending appeal. It also claimed that
all its funds and properties are exempted from execution citing Section 39 of Republic
Act No. (RA) 8291,50otherwise known as "The Government Service Insurance System
Act of 1997."51
On February 14, 2002, the RTC issued an Order 52 (February 14, 2002 Order) granting
PGAIs Motion for Execution Pending Appeal, conditioned on the posting of a bond. It
further held that only the GSIS Social Insurance Fund is exempt from execution.
Accordingly, PGAI duly posted a surety bond which the RTC approved through an
Order53 dated February 19, 2002, resulting to the issuance of a writ of execution 54 and
notices of garnishment55 (February 19, 2002 issuances), all of even date, against
GSIS.
The CA Proceedings Antecedent to G.R. No. 165585
Aggrieved by the RTCs February 14, 2002 Order, as well as the February 19, 2002
issuances, GSIS without first filing a motion for reconsideration (from the said order
of execution) or a sufficient supersedeas bond 56 filed on February 26, 2002 a
petition for certiorari57 before the CA, docketed as CA-G.R. SP No. 69289, against the
RTC and PGAI. It also impleaded in the said petition the Land Bank of the Philippines
(LBP) and the Development Bank of the Philippines (DBP) as nominal parties so as to
render them subject to the writs and processes of the CA.58
In its petition, GSIS argued that: (a) none of the grounds proffered by PGAI justifies
the issuance of a writ of execution pending appeal; 59 and (b) all funds and assets of
GSIS are exempt from execution and levy in accordance with RA 8291. 60
On April 4, 2002, the CA issued a temporary restraining order (TRO) 61 enjoining the
garnishment of GSIS funds with LBP and DBP. Nevertheless, since the TROs
effectivity lapsed, GSIS funds with the LBP were eventually garnished. 62
On May 26, 2004, the CA rendered a Decision 63 dismissing GSIS petition, upholding,
among others, the validity of the execution pending appeal pursuant to the RTCs
February 14, 2002 Order as well as the February 19, 2002 issuances. It found that the
impending blacklisting of PGAI constitutes a good reason for allowing the execution
pending appeal (also known as "discretionary execution") considering that the

imposition of international sanctions on any single local insurance company puts in

grave and immediate jeopardy not only the viability of that company but also the
integrity of the entire local insurance system including that of the state insurance
agency. It pointed out that the insurance business thrives on credibility which is
maintained by honoring financial commitments.
On the claimed exemption of GSIS funds from execution, the CA held that such
exemption only covers funds under the Social Insurance Fund which remains liable for
the payment of benefits like retirement, disability and death compensation and not
those covered under the General Insurance Fund, as in this case, which are meant for
investment in the business of insurance and reinsurance.64
GSIS motion for reconsideration 65 was denied by the CA in a Resolution 66 dated
October 6, 2004. Hence, the petition for review on certiorari in G.R. No. 165585. 67
The CA Proceedings Antecedent to G.R. No. 176982
Separately, GSIS also assailed the RTCs January 11, 2002 Order which granted PGAIs
Motion for Judgment on the Pleadings through an appeal 68 filed on October 7, 2002,
docketed as CA G.R. CV No. 73965.
GSIS averred that the RTC gravely erred in: (a) rendering judgment on the pleadings
since it specifically denied the material allegations in PGAIs complaint; (b) ordering
execution pending appeal since there are no justifiable reasons for the same; and (c)
effecting execution against funds and assets of GSIS given that RA 8291 exempts the
same from levy, execution and garnishment.69
For its part, PGAI maintained that: (a) the judgment on the pleadings was in order
given that GSIS never disputed the facts as alleged in its complaint; (b) the
discretionary execution was proper in view of the dilatory methods employed by GSIS
in order to evade the payment of a valid obligation; and (c) the general insurance
fund of GSIS, which was attached and garnished by the RTC, is not exempt from
execution.70
In a Decision71 dated October 30, 2006, the CA sustained the RTCs January 11, 2002
Order but deleted the awards of interest and attorneys fees for lack of factual and
legal basis.72
The CA ruled that judgment on the pleadings was proper since GSIS did not
specifically deny the genuineness, due execution, and perfection of its reinsurance
contract with PGAI.73 In fact, PGAI even settled reinsurance claims during the
covering period rendering the reinsurance contract not only perfected but partially
executed as well.74
Passing on the issue of the exemption from execution of GSIS funds, the CA, citing
Rubia v. GSIS75 (Rubia), held that the exemption provided for by RA 8291 is not
absolute since it only pertains to the social security benefits of its members; thus,
funds used by the GSIS for business investments and commercial ventures, as in this
case, may be attached and garnished.76

GSIS motion for reconsideration 77 was denied by the CA in a Resolution 78 dated

March 12, 2007. Hence, the present petition for review on certiorari in G.R. No.
176982.79
The Issues Before the Court
In these consolidated petitions, the essential issues are the following: (a) in G.R. No.
165585, whether the CA erred in (1) upholding the RTCs February 14, 2002 Order
authorizing execution pending appeal, and (2) ruling that only the Social Insurance
Fund and not the General Fund of the GSIS is exempt from garnishment; and (b) in
G.R. No. 176982, whether the CA erred in sustaining the RTCs January 11, 2002
Order rendering judgment on the pleadings.
The Courts Ruling
The petitions are partly meritorious.
A. Good reasons to allow execution pending appeal and the nature of the exemption
under Section 39 of RA 8291.
The execution of a judgment pending appeal is an exception to the general rule that
only a final judgment may be executed.80 In order to grant the same pursuant to
Section 2,81 Rule 39 of the Rules, the following requisites must concur: (a) there must
be a motion by the prevailing party with notice to the adverse party; (b) there must
be a good reason for execution pending appeal; and (c) the good reason must be
stated in a special order.82
Good reasons call for the attendance of compelling circumstances warranting
immediate execution for fear that favorable judgment may yield to an empty victory.
In this regard, the Rules do not categorically and strictly define what constitutes
"good reason," and hence, its presence or absence must be determined in view of the
peculiar circumstances of each case. As a guide, jurisprudence dictates that the
"good reason" yardstick imports a superior circumstance that will outweigh injury or
damage to the adverse party. 83 Corollarily, the requirement of "good reason" does not
necessarily entail unassailable and flawless basis but at the very least, an invocation
thereof must be premised on solid footing.84
In the case at bar, the RTC, as affirmed by the CA, granted PGAIs motion for
execution pending appeal on the ground that the impending sanctions against it by
foreign underwriters/reinsurers constitute good reasons therefor. It must, however, be
observed that PGAI has not proffered any evidence to substantiate its claim, as it
merely presented bare allegations thereon. It is hornbook doctrine that mere
allegations do not constitute proof. As held in Real v. Belo, 85 "it is basic in the rule of
evidence that bare allegations, unsubstantiated by evidence, are not equivalent to
proof. In short, mere allegations are not evidence." 86 Hence, without any sufficient
basis to support the existence of its alleged "good reasons," it cannot be said that the
second requisite to allow an execution pending appeal exists. To reiterate, the
requirement of "good reasons" must be premised on solid footing so as to ensure that
the "superior circumstance" which would impel immediate execution is not merely
contrived or based on speculation. This, however, PGAI failed to demonstrate in the
present case. In fine, the Court therefore holds that the CAs affirmance of the RTCs

February 14, 2002 Order authorizing execution pending appeal, as well as the
February 19, 2002 issuances related thereto, was improper.
Nevertheless, while an execution pending appeal should not lie in view of the abovediscussed reasons, it must be noted that the funds and assets of GSIS may after the
resolution of the appeal and barring any provisional injunction thereto be subject to
execution, attachment, garnishment or levy since the exemption under Section 39 of
RA 829187 does not operate to deny private entities from properly enforcing their
contractual claims against GSIS.88 This has been established in the case of Rubia
wherein the Court held as follows:
The declared policy of the State in Section 39 of the GSIS Charter granting GSIS an
exemption from tax, lien, attachment, levy, execution, and other legal processes
should be read together with the grant of power to the GSIS to invest its "excess
funds" under Section 36 of the same Act. Under Section 36, the GSIS is granted the
ancillary power to invest in business and other ventures for the benefit of the
employees, by using its excess funds for investment purposes. In the exercise of such
function and power, the GSIS is allowed to assume a character similar to a private
corporation. Thus, it may sue and be sued, as also explicitly granted by its charter.
Needless to say, where proper, under Section 36, the GSIS may be held liable for the
contracts it has entered into in the course of its business investments. For GSIS
cannot claim a special immunity from liability in regard to its business ventures under
said Section.
Nor can it deny contracting parties, in our view, the right of redress and the
enforcement of a claim, particularly as it arises from a purely contractual relationship
of a private character between an individual and the GSIS. 89(Emphases supplied and
citations omitted)
Thus, the petition in G.R. No. 165585 is partly granted.
B. Propriety of judgment on the pleadings.
Judgment on the pleadings is appropriate when an answer fails to tender an issue, or
otherwise admits the material allegations of the adverse partys pleading. The rule is
stated in Section 1, Rule 34 of the Rules which reads as follows:
Sec. 1. Judgment on the pleadings. Where an answer fails to tender an issue, or
otherwise admits the material allegations of the adverse partys pleading, the court
may, on motion of that party, direct judgment on such pleading. x x x.
In this relation, jurisprudence dictates that an answer fails to tender an issue if it
does not comply with the requirements of a specific denial as set out in Sections
890 and 10,91 Rule 8 of the Rules, resulting in the admission of the material allegations
of the adverse partys pleadings.92
As such, it is a form of judgment that is exclusively based on the submitted pleadings
without the introduction of evidence as the factual issues remain uncontroverted. 93

In this case, records disclose that in its Answer, GSIS admitted the material
allegations of PGAIs complaint warranting the grant of the relief prayed for. In
particular, GSIS admitted that: (a) it made a request for reinsurance cover which PGAI
accepted in a reinsurance binder effective for one year; 94 (b) it remitted only the first
three reinsurance premium payments to PGAI; 95 (c) it failed to pay PGAI the fourth
and final reinsurance premium installment; 96 and (d) it received demand letters from
PGAI.97 It also did not refute the allegation of PGAI that it settled reinsurance claims
during the reinsured period. On the basis of these admissions, the Court finds that
the CA did not err in affirming the propriety of a judgment on the pleadings.
GSIS affirmative defense that the non-payment of the last reinsurance premium
merely rendered the contract ineffective pursuant to Section 77 98 of PD 612 no longer
involves any factual issue, but stands solely as a mere question of law in the light of
the foregoing admissions hence allowing for a judgment on the pleadings. Besides, in
the case of Makati Tuscany, the Court already ruled that the non-payment of
subsequent installment premiums would not prevent the insurance contract from
taking effect; that the parties intended to make the insurance contract valid and
binding is evinced from the fact that the insured paid and the insurer received
several reinsurance premiums due thereon, although the former refused to pay the
remaining balance, viz:
We hold that the subject policies are valid even if the premiums were paid on
installments. The records clearly show that petitioner and private respondent
intended subject insurance policies to be binding and effective notwithstanding the
staggered payment of the premiums. The initial insurance contract entered into in
1982 was renewed in 1983, then in 1984. In those three (3) years, the insurer
accepted all the installment payments. Such acceptance of payments speaks loudly
of the insurers intention to honor the policies it issued to petitioner. Certainly, basic
principles of equity and fairness would not allow the insurer to continue collecting
and accepting the premiums, although paid on installments, and later deny liability
on the lame excuse that the premiums were not prepaid in full.
We therefore sustain the Court of Appeals. We quote with approval the well-reasoned
findings and conclusion of the appellate court contained in its Resolution denying the
motion to reconsider its Decision
While the import of Section 77 is that prepayment of premiums is strictly required as
a condition to the validity of the contract, We are not prepared to rule that the
request to make installment payments duly approved by the insurer, would prevent
the entire contract of insurance from going into effect despite payment and
acceptance of the initial premium or first installment . Section 78 of the Insurance
Code in effect allows waiver by the insurer of the condition of prepayment by making
an acknowledgment in the insurance policy of receipt of premium as conclusive
evidence of payment so far as to make the policy binding despite the fact that
premium is actually unpaid. Section 77 merely precludes the parties from stipulating
that the policy is valid even if premiums are not paid, but does not expressly prohibit
an agreement granting credit extension, and such an agreement is not contrary to
morals, good customs, public order or public policy (De Leon, the Insurance Code, at
p. 175). So is an understanding to allow insured to pay premiums in installments not
so proscribed. At the very least, both parties should be deemed in estoppel to
question the arrangement they have voluntarily accepted.

[I]n the case before Us, petitioner paid the initial installment and thereafter made
staggered payments resulting in full payment of the 1982 and 1983 insurance
policies.1wphi1 For the 1984 policy, petitioner paid two (2) installments although it
refused to pay the balance.
It appearing from the peculiar circumstances that the parties actually intended to
make three (3) insurance contracts valid, effective and binding, petitioner may not be
allowed to renege on its obligation to pay the balance of the premium after the
expiration of the whole term of the third policy (No. AH-CPP-9210651) in March 1985.
Moreover, as correctly observed by the appellate court, where the risk is entire and
the contract is indivisible, the insured is not entitled to a refund of the premiums paid
if the insurer was exposed to the risk insured for any period, however brief or
momentary.99 (Emphases supplied and citation omitted)
Thus, owing to the identical complexion of Makati Tuscany with the present case, the
Court upholds PGAIs right to be paid by GSIS the amount of the fourth and last
reinsurance premium pursuant to the reinsurance contract between them. All told,
the petition in G.R. No. 176982 is denied.
WHEREFORE, the petition in G.R. No. 165585 is PARTLY GRANTED. The Decision dated
May 26, 2004 and Resolution dated October 6, 2004 of the Court of Appeals in CAG.R. SP No. 69289 are MODIFIED only insofar as it upheld the validity of Prudential
Guarantee and Assurance, Inc.s execution pending appeal. In this respect, the Order
dated February 14, 2002 of the Regional Trial Court of Makati, Branch 149 as well as
all other issuances related thereto are set aside.
On the other hand, the petition in G.R. No. 176982 is DENIED. The Decision dated
October 30, 2006 and Resolution dated March 12, 2007 in CA-G.R. CV No. 73965 are
hereby AFFIRMED.
SO ORDERED.