THIRD DIVISION

[G.R. No. 112360. July 18, 2000]

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF

APPEALS and TRANSWORLD KNITTING MILLS, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to
annul and set aside the July 15, 1993 Decision [1] and October 22, 1993 Resolution[2] of the
Court of Appeals[3] in CA-G.R. CV NO. 28779, which modified the Ruling [4] of the Regional
Trial Court of Pasig, Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire
Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for
One Million (P1,000,000.00) Pesos and eventually increased to One Million Five Hundred
Thousand (P1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13,
1981.
Pertinent portions of subject policy on the buildings insured, and location thereof, read:
"On stocks of finished and/or unfinished products, raw materials and supplies of
every kind and description, the properties of the Insureds and/or held by them in
trust, on commission or on joint account with others and/or for which they (sic)
responsible in case of loss whilst contained and/or stored during the currency of
this Policy in the premises occupied by them forming part of the buildings situate
(sic) within own Compound at MAGDALO STREET, BARRIO UGONG, PASIG,
METRO MANILA, PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under
galvanized iron roof and occupied as hosiery mills, garment and lingerie factory,
transistor-stereo assembly plant, offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under galvanized iron
roof occupied as canteen and guardhouse, partly by building of two and partly
one storey constructed of concrete below, timber above undergalvanized iron
roof occupied as garage and quarters and partly by open space and/or tracking/
packing, beyond which is the aforementioned Magdalo Street; on its right and

left by driveway, thence open spaces, and at the rear by open spaces.'" [5]
The same pieces of property insured with the petitioner were also insured with New India
Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion
of its four-span building and partly gutting the left and right sections thereof. A two-storey
building (behind said four-span building) where fun and amusement machines and spare
parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India
Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance companies an action
for collection of sum of money and damages, docketed as Civil Case No. 46106 before
Branch 161 of the then Court of First Instance of Rizal; praying for judgment ordering Rizal
Insurance and New India to pay the amount of P2,747, 867.00 plus legal interest,
P400,000.00 as attorney's fees, exemplary damages, expenses of litigation of P50,000.00
and costs of suit.[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the
contents of the four-span building, which was partly burned, and not the damage caused by
the fire on the two-storey annex building. [7]
On January 4, 1990, the trial court rendered its decision; disposing as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold
(sic) Knitting Mills, Inc. the amount of P826, 500.00 representing the actual
value of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting
Mills, Inc., went to the Court of Appeals, which came out with its decision of July 15, 1993
under attack, the decretal portion of which reads:
"WHEREFORE, and upon all the foregoing, the decision of the court below is
MODIFIED in that defendant New India Assurance Company has and is hereby
required to pay plaintiff-appellant the amount of P1,818,604.19 while the other
Rizal Surety has to pay the plaintiff-appellant P470,328.67, based on the actual
losses sustained by plaintiff Transworld in the fire, totalling P2,790,376.00 as
against the amounts of fire insurance coverages respectively extended by New

India in the amount of P5,800,000.00 and Rizal Surety and Insurance Company
in the amount of P1,500,000.00.
No costs.
SO ORDERED."[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India appealed
to this Court theorizing inter alia that the private respondent could not be compensated for the
loss of the fun and amusement machines and spare parts stored at the two-storey building
because it (Transworld) had no insurable interest in said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New
India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for
Reconsideration before the Court of Appeals, and on October 22, 1993, the Court of Appeals
reconsidered its decision of July 15, 1993, as regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as
the imposition of legal interest is concerned, that, on the assessment against
New India Assurance Company on the amount of P1,818,604.19 and that
against Rizal Surety & Insurance Company on the amount of P470,328.67, from
May 26, 1982 when the complaint was filed until payment is made. The rest of
the said decision is retained in all other respects.
SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the
present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX
BUILDING WHERE THE BULK OF THE BURNED PROPERTIES WERE
STORED, WAS INCLUDED IN THE COVERAGE OF THE INSURANCE
POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN
NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY),
TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT
THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH MALICE IN
FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN NOT ORDERING
TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND PUNITIVE
DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND

EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL CODE). [11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon protected only the
contents of the main building (four-span),[12] and did not include those stored in the two-storey
annex building. On the other hand, the private respondent theorized that the so called "annex"
was not an annex but was actually an integral part of the four-span building [13] and therefore,
the goods and items stored therein were covered by the same fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation of the stipulation in
subject fire insurance policy regarding its coverage, which reads:
"xxx contained and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic) within own
Compound xxx"
Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit
its coverage to what were stored in the four-span building. As opined by the trial court of
origin, two requirements must concur in order that the said fun and amusement machines and
spare parts would be deemed protected by the fire insurance policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied by
Transworld and second, said areas must form part of the building described in
the policy xxx"[14]
'Said building of four-span lofty one storey in height with
mezzanine portions is constructed of reinforced concrete and
hollow blocks and/or concrete under galvanized iron roof and
occupied as hosiery mills, garment and lingerie factory, transistorstereo assembly plant, offices, ware house and caretaker's
quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by the Court of
Appeals are conclusive on the parties and not reviewable by this Court, and the same carry
even more weight when the Court of Appeals has affirmed the findings of fact arrived at by the
lower court.[15]
In the case under consideration, both the trial court and the Court of Appeals found that the so
called "annex " was not an annex building but an integral and inseparable part of the fourspan building described in the policy and consequently, the machines and spare parts stored
therein were covered by the fire insurance in dispute. The letter-report of the Manila Adjusters
and Surveyor's Company, which petitioner itself cited and invoked, describes the "annex"
building as follows:
"Two-storey building constructed of partly timber and partly concrete hollow

blocks under g.i. roof which is adjoining and intercommunicating with the repair
of the first right span of the lofty storey building and thence by property fence
wall."[16]
Verily, the two-storey building involved, a permanent structure which adjoins and
intercommunicates with the "first right span of the lofty storey building", [17] formed part thereof,
and meets the requisites for compensability under the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was already existing when
subject fire insurance policy contract was entered into on January 12, 1981, having been
constructed sometime in 1978,[18] petitioner should have specifically excluded the said twostorey building from the coverage of the fire insurance if minded to exclude the same but if did
not, and instead, went on to provide that such fire insurance policy covers the products, raw
materials and supplies stored within the premises of respondent Transworld which was an
integral part of the four-span building occupied by Transworld, knowing fully well the existence
of such building adjoining and intercommunicating with the right section of the four-span
building.
After a careful study, the Court does not find any basis for disturbing what the lower courts
found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has
created a doubt regarding the portions of the building insured thereby. Article 1377 of the New
Civil Code provides:
"Art.1377. The interpretation of obscure words or stipulations in a contract shall
not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the petitioner,
Rizal Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy
contract under scrutiny. Citing the aforecited provision of law in point, the Court in Landicho
vs. Government Service Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of which it is
settled that the 'terms in an insurance policy, which are ambiguous, equivocal,
or uncertain x x x are to be construed strictly and most strongly against the
insurer, and liberally in favor of the insured so as to effect the dominant purpose
of indemnity or payment to the insured, especially where forfeiture is involved'
(29 Am. Jur., 181), and the reason for this is that the 'insured usually has no
voice in the selection or arrangement of the words employed and that the
language of the contract is selected with great care and deliberation by experts
and legal advisers employed by, and acting exclusively in the interest of, the
insurance company.' (44 C.J.S., p. 1174)."" [20]
Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company,

Inc. vs. Vda. De Songco,[21] to wit:

"'This rigid application of the rule on ambiguities has become necessary in view
of current business practices. The courts cannot ignore that nowadays
monopolies, cartels and concentration of capital, endowed with overwhelming
economic power, manage to impose upon parties dealing with them cunningly
prepared 'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to 'take it or
leave it' labelled since Raymond Saleilles 'contracts by adherence' (contrats
[sic] d'adhesion), in contrast to these entered into by parties bargaining on an
equal footing, such contracts (of which policies of insurance and international
bills of lading are prime example) obviously call for greater strictness and
vigilance on the part of courts of justice with a view to protecting the weaker
party from abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec.
1934, 27 February 1942.)'"[22]
The issue of whether or not Transworld has an insurable interest in the fun and amusement
machines and spare parts, which entitles it to be indemnified for the loss thereof, had been
settled in G.R. No. L-111118, entitled New India Assurance Company, Ltd., vs. Court of
Appeals, where the appeal of New India from the decision of the Court of Appeals under
review, was denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises, precludes the
relitigation of a particular fact or issue in another action between the same parties based on a
different claim or cause of action. "xxx the judgment in the prior action operates as estoppel
only as to those matters in issue or points controverted, upon the determination of which the
finding or judgment was rendered. In fine, the previous judgment is conclusive in the second
case, only as those matters actually and directly controverted and determined and not as to
matters merely involved therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc.
vs. Court of Appeals,[24] held that the issue of negligence of the shipping line, which issue had
already been passed upon in a case filed by one of the insurers, is conclusive and can no
longer be relitigated in a similar case filed by another insurer against the same shipping line
on the basis of the same factual circumstances. Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had
been negligent, or so negligent as to have proximately caused the collision
between them, was an issue that was actually, directly and expressly raised,
controverted and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved
that issue in his Decision and held the 'Don Carlos' to have been negligent
rather than the 'Yotai Maru' and, as already noted, that Decision was affirmed
by this Court in G.R. No. L-48839 in a Resolution dated 6 December 1987. The

Reyes Decision thus became final and executory approximately two (2) years
before the Sison Decision, which is assailed in the case at bar, was
promulgated. Applying the rule of conclusiveness of judgment, the question of
which vessel had been negligent in the collision between the two (2) vessels,
had long been settled by this Court and could no longer be relitigated in C.A.G.R. No. 61206-R. Private respondent Go Thong was certainly bound by the
ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals
fell into clear and reversible error when it disregarded the Decision of this Court
affirming the Reyes Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering that private
respondent's insurable interest in, and compensability for the loss of subject fun and
amusement machines and spare parts, had been adjudicated, settled and sustained by the
Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118, in a
Resolution, dated February 2, 1994, the same can no longer be relitigated and passed upon
in the present case. Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by
the ruling of the Court of Appeals and of this Court that the private respondent has an
insurable interest in the aforesaid fun and amusement machines and spare parts; and should
be indemnified for the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the amount of
P470,328.67, it being the total loss and damage suffered by Transworld for which petitioner
Rizal Insurance is liable.[26]
All things studiedly considered and viewed in proper perspective, the Court is of the
irresistible conclusion, and so finds, that the Court of Appeals erred not in holding the
petitioner, Rizal Surety Insurance Company, liable for the destruction and loss of the insured
buildings and articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22,
1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No
pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes, JJ., concur.

[1] Annex

"A"; Rollo, pp. 27-49.

[2] Annex

"B"; Rollo, pp. 51- 52.

Special Tenth Division; composed of Associate Justices: Cezar D. Francisco (Ponente), Gloria C.
Paras (Chairman), and Ricardo P. Galvez (Member)
[3]

[4]

Penned by Judge Efren D. Villanueva.

[5]

Decision, Annex "A"; Rollo, pp. 28-29.

[6]

Rollo, p. 59.

[7]

Rollo, p. 62.

[8]

Decision, Rollo, pp. 78-79.

[9]

Decision, Rollo, p. 49.

[10]

Resolution, Rollo, p. 52.

[11]

Petition, Rollo, pp. 12-13.

[12] Answer,

Rollo, p. 62.

[13]

Rollo, p. 76.

[14]

Rollo, p. 77.

Borromeo vs. Court of Appeals, G.R. No. 75908, October 22, 1999; citing: Meneses vs. Court of
Appeals, 246 SCRA 162, p.171; Coca Cola Bottlers Phil., Inc vs. Court of Appeals, 229 SCRA 533;
and Binalay vs. Manalo, 195 SCRA 374.
[15]

[16]

Petitioner, Rollo, p. 17.

[17]

Rollo, p. 17.

[18]

Decision, Rollo, p. 69.

[19]

44 SCRA 7.

Ibid., pp. 12-13, citing: Calanoc vs. Court of Appeals, 98 Phil. 79, 84. See, also, H.E. Heacock Co.
vs. Macondray, 42, Phil. 205; Rivero vs. Robe, 54 Phil. 982; Asturias Sugar Central vs. The Pure Cane
Molasses Co., 57 Phil. 519; Gonzales vs. La Previsora Filipina, 74 Phil. 165; Del Rosario vs. The
Equitable Insurance, 620 O.G. 5400, 5403-04.
[20]

[21]

25 SCRA 70.

[22]

Ibid., p. 75.

Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, 197 SCRA 201, p. 209; citing: Tingson
vs. Court of Appeals, 49 SCRA 429.
[23]

[24]

Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, supra.

[25]

Ibid., pp. 210-211.

[26]

Rollo, p. 43.

FIRST DIVISION

BLUE CROSS HEALTH CARE, G.R. No. 169737

INC.,
Petitioner, Present:
PUNO, C.J., Chairperson,
SANDOVAL-GUTIERREZ,
- v e r s u s - CORONA,
AZCUNA and
LEONARDO-DE CASTRO, JJ.
NEOMI* and DANILO OLIVARES,

Respondents. Promulgated:
February 12, 2008
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
DECISION

CORONA, J.:
This is a petition for review on certiorari[1] of a decision[2] and resolution[3] of the
Court of Appeals (CA) dated July 29, 2005 and September 21, 2005, respectively, in
CA-G.R. SP No. 84163 which affirmed the decision of the Regional Trial Court (RTC),
Makati City, Branch 61 dated February 2, 2004 in Civil Case No. 03-1153,[4] which in
turn reversed the decision of the Metropolitan Trial Court (MeTC), Makati City, Branch
66 dated August 5, 2003 in Civil Case No. 80867.[5]
Respondent Neomi T. Olivares applied for a health care program with petitioner Blue
Cross Health Care, Inc., a health maintenance firm. For the period October 16, 2002 to
October 15, 2003,[6] she paid the amount of P11,117. For the same period, she also

availed of the additional service of limitless consultations for an additional amount of

P1,000. She paid these amounts in full on October 17, 2002. The application was
approved on October 22, 2002. In the health care agreement, ailments due to preexisting conditions were excluded from the coverage.[7]
On November 30, 2002, or barely 38 days from the effectivity of her health insurance,
respondent Neomi suffered a stroke and was admitted at the Medical City which was
one of the hospitals accredited by petitioner. During her confinement, she underwent
several laboratory tests. On December 2, 2002, her attending physician, Dr. Edmundo
Saniel,[8] informed her that she could be discharged from the hospital. She incurred
hospital expenses amounting to P34,217.20. Consequently, she requested from the
representative of petitioner at Medical City a letter of authorization in order to settle her
medical bills. But petitioner refused to issue the letter and suspended payment pending
the submission of a certification from her attending physician that the stroke she suffered
was not caused by a pre-existing condition.[9]
She was discharged from the hospital on December 3, 2002. On December 5, 2002, she
demanded that petitioner pay her medical bill. When petitioner still refused, she and her
husband, respondent Danilo Olivares, were constrained to settle the bill.[10] They
thereafter filed a complaint for collection of sum of money against petitioner in the
MeTC on January 8, 2003.[11] In its answer dated January 24, 2003, petitioner
maintained that it had not yet denied respondents' claim as it was still awaiting Dr.
Saniel's report.

In a letter to petitioner dated February 14, 2003, Dr. Saniel stated that:
This is in response to your letter dated February 13, 2003. [Respondent] Neomi T. Olivares called by
phone on January 29, 2003. She stated that she is invoking patient-physician confidentiality. That she
no longer has any relationship with [petitioner]. And that I should not release any medical information
concerning her neurologic status to anyone without her approval. Hence, the same day I instructed my
secretary to inform your office thru Ms. Bernie regarding [respondent's] wishes.
xxx xxx xxx[12]

In a decision dated August 5, 2003, the MeTC dismissed the complaint for lack of cause
of action. It held:
xxx the best person to determine whether or not the stroke she suffered was not caused by preexisting conditions is her attending physician Dr. Saniel who treated her and conducted the test
during her confinement. xxx But since the evidence on record reveals that it was no less than
[respondent Neomi] herself who prevented her attending physician from issuing the required
certification, petitioner cannot be faulted from suspending payment of her claim, for until and
unless it can be shown from the findings made by her attending physician that the stroke she
suffered was not due to pre-existing conditions could she demand entitlement to the benefits of
her policy.[13]

On appeal, the RTC, in a decision dated February 2, 2004, reversed the ruling of the
MeTC and ordered petitioner to pay respondents the following amounts: (1) P34,217.20
representing the medical bill in Medical City and P1,000 as reimbursement for
consultation fees, with legal interest from the filing of the complaint until fully paid; (2)
P20,000 as moral damages; (3) P20,000 as exemplary damages; (4) P20,000 as
attorney's fees and (5) costs of suit.[14] The RTC held that it was the burden of
petitioner to prove that the stroke of respondent Neomi was excluded from the coverage
of the health care program for being caused by a pre-existing condition. It was not able
to discharge that burden.[15]
Aggrieved, petitioner filed a petition for review under Rule 42 of the Rules of Court in

the CA. In a decision promulgated on July 29, 2005, the CA affirmed the decision of the
RTC. It denied reconsideration in a resolution promulgated on September 21, 2005.
Hence this petition which raises the following issues: (1) whether petitioner was able to
prove that respondent Neomi's stroke was caused by a pre-existing condition and
therefore was excluded from the coverage of the health care agreement and (2) whether
it was liable for moral and exemplary damages and attorney's fees.
The health care agreement defined a pre-existing condition as:
x x x a disability which existed before the commencement date of membership whose
natural history can be clinically determined, whether or not the Member was aware of
such illness or condition. Such conditions also include disabilities existing prior to
reinstatement date in the case of lapse of an Agreement. Notwithstanding, the following
disabilities but not to the exclusion of others are considered pre-existing conditions
including their complications when occurring during the first year of a Members
coverage:
I.
Tumor of Internal Organs
II.
Hemorrhoids/Anal Fistula
III.
Diseased tonsils and sinus conditions requiring surgery
IV.
Cataract/Glaucoma
V.
Pathological Abnormalities of nasal septum or turbinates
VI.
Goiter and other thyroid disorders
VII.
Hernia/Benign prostatic hypertrophy
VIII.
Endometriosis
IX.
Asthma/Chronic Obstructive Lung disease
X.
Epilepsy
XI.
Scholiosis/Herniated disc and other Spinal column
abnormalities
XII.
Tuberculosis
XIII.
Cholecysitis
XIV.
Gastric or Duodenal ulcer
XV.
Hallux valgus
XVI.
Hypertension and other Cardiovascular diseases
XVII.
Calculi
XVIII.
Tumors of skin, muscular tissue, bone or any form of blood
dyscracias

Diabetes Mellitus
XX.
Collagen/Auto-Immune disease
After the Member has been continuously covered for 12 months, this pre-existing
provision shall no longer be applicable except for illnesses specifically excluded by an
endorsement and made part of this Agreement.[16]
XIX.

Under this provision, disabilities which existed before the commencement of the
agreement are excluded from its coverage if they become manifest within one year from
its effectivity. Stated otherwise, petitioner is not liable for pre-existing conditions if they
occur within one year from the time the agreement takes effect.
Petitioner argues that respondents prevented Dr. Saniel from submitting his report
regarding the medical condition of Neomi. Hence, it contends that the presumption that
evidence willfully suppressed would be adverse if produced should apply in its favor.
[17]
Respondents counter that the burden was on petitioner to prove that Neomi's stroke was
excluded from the coverage of their agreement because it was due to a pre-existing
condition. It failed to prove this.[18]
We agree with respondents.
In Philamcare Health Systems, Inc. v. CA,[19] we ruled that a health care agreement is in
the nature of a non-life insurance.[20] It is an established rule in insurance contracts that
when their terms contain limitations on liability, they should be construed strictly against
the insurer. These are contracts of adhesion the terms of which must be interpreted and
enforced stringently against the insurer which prepared the contract. This doctrine is
equally applicable to health care agreements.[21]
Petitioner never presented any evidence to prove that respondent Neomi's stroke was

due to a pre-existing condition. It merely speculated that Dr. Saniel's report would be
adverse to Neomi, based on her invocation of the doctor-patient privilege. This was a
disputable presumption at best.
Section 3 (e), Rule 131 of the Rules of Court states:
Sec. 3. Disputable presumptions. The following presumptions are satisfactory if
uncontradicted, but may be contradicted and overcome by other evidence:
xxx xxx xxx
(e) That evidence willfully suppressed would be adverse if produced.

Suffice it to say that this presumption does not apply if (a) the evidence is at the disposal
of both parties; (b) the suppression was not willful; (c) it is merely corroborative or
cumulative and (d) the suppression is an exercise of a privilege.[22] Here, respondents'
refusal to present or allow the presentation of Dr. Saniel's report was justified. It was
privileged communication between physician and patient.
Furthermore, as already stated, limitations of liability on the part of the insurer or health
care provider must be construed in such a way as to preclude it from evading its
obligations. Accordingly, they should be scrutinized by the courts with extreme
jealousy[23] and care and with a jaundiced eye.[24] Since petitioner had the burden of
proving exception to liability, it should have made its own assessment of whether
respondent Neomi had a pre-existing condition when it failed to obtain the attending
physician's report. It could not just passively wait for Dr. Saniel's report to bail it out.
The mere reliance on a disputable presumption does not meet the strict standard required
under our jurisprudence.
Next, petitioner argues that it should not be held liable for moral and exemplary

damages, and attorney's fees since it did not act in bad faith in denying respondent
Neomi's claim. It insists that it waited in good faith for Dr. Saniel's report and that, based
on general medical findings, it had reasonable ground to believe that her stroke was due
to a pre-existing condition, considering it occurred only 38 days after the coverage took
effect.[25]
We disagree.
The RTC and CA found that there was a factual basis for the damages adjudged against
petitioner. They found that it was guilty of bad faith in denying a claim based merely on
its own perception that there was a pre-existing condition:
[Respondents] have sufficiently shown that [they] were forced to engage in a dispute with
[petitioner] over a legitimate claim while [respondent Neomi was] still experiencing the effects
of a stroke and forced to pay for her medical bills during and after her hospitalization despite
being covered by [petitioners] health care program, thereby suffering in the process extreme
mental anguish, shock, serious anxiety and great stress. [They] have shown that because of the
refusal of [petitioner] to issue a letter of authorization and to pay [respondent Neomi's] hospital
bills, [they had] to engage the services of counsel for a fee of P20,000.00. Finally, the refusal
of petitioner to pay respondent Neomi's bills smacks of bad faith, as its refusal [was] merely
based on its own perception that a stroke is a pre-existing condition. (emphasis supplied)

This is a factual matter binding and conclusive on this Court.[26] We see no

reason to disturb these findings.
WHEREFORE, the petition is hereby DENIED. The July 29, 2005 decision and
September 21, 2005 resolution of the Court of Appeals in CA-G.R. SP No. 84163 are
AFFIRMED.
Treble costs against petitioner.
SO ORDERED.

RENATO C. CORONA

Associate Justice
WE CONCUR:
REYNATO S. PUNO
Chief Justice
Chairperson
ANGELINA SANDOVAL-GUTIERREZ
ADOLFO S. AZCUNA
Associate Justice
Associate Justice
TERESITA J. LEONARDO-DE CASTRO
Associate Justice
C E R T I FI C AT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
REYNATO S. PUNO

Chief Justice
* The petition spelled the name of respondent as Noemi Olivares but in the decision of the Court of
Appeals, Neomi was used since she signed as such in the verification and certificate of non-forum
shopping attached to her complaint.
[1]

Under Rule 45 of the Rules of Court.

Penned by Associate Justice Japar B. Dimaampao and concurred in by Associate Justices Martin S.
Villarama, Jr. and Edgardo F. Sundiam of the Former Fifteenth Division of the Court of Appeals; rollo,
pp. 17-25.
[2]

[3]

Id., pp. 27-28.

[4]

Penned by Judge Romeo F. Barza; id., pp. 38-43.

[5]

Penned by Judge Perpetua Atal-Pao; id., pp. 44-47.

[6]

Id., p. 178.

[7]

Id., p. 39.

[8]

Id., p. 18.

[9]

Id., p. 39.

[10]

Id., p. 109.

[11]

Id., p. 38.

[12]

Id., p. 29.

[13]

Id., p. 47.

[14]

Id., p. 43.

[15]

Id., p. 42.

[16]

Id., p. 114.

[17]

Id., p. 195.

[18]

Id., p. 214.

[19]

429 Phil. 82 (2002).

[20]

Id., p. 90.

[21]

Id., pp. 93-94, citations omitted.

People v. Andal, 344 Phil. 889, 912 (1997), citing People v. Ducay, G.R. No. 86939, 2 August
1993, 225 SCRA 1 and People v. Navaja, G.R. No. 104044, 30 March 1993, 220 SCRA 624, 633.
[22]

DBP Pool of Accredited Insurance Companies v. Radio Mindanao Network, Inc., G.R. No. 147039,
27 January 2006, 480 SCRA 314, 322, citing Malayan Insurance Corporation v. Court of Appeals, 336
Phil. 977, 989 (1997).
[23]

Western Guaranty Corporation v. Court of Appeals, G.R. No. 91666, 20 July 1990, 187 SCRA 652,
659-660, citing Taurus Taxi Co., Inc. v. The Capital Ins. & Surety Co., Inc., G.R. No. L-23491, 31 July
1968, 24 SCRA 454 and Eagle Star Insurance, Ltd. v. Chia Yu, 96 Phil. 696 (1955).
[24]

[25]

Rollo, pp. 196-198.

[26]

PAL, Inc. v. CA, 326 Phil. 824, 835 (1996), citations omitted.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 115278 May 23, 1995

FORTUNE INSURANCE AND SURETY CO., INC., petitioner,
vs.

COURT OF APPEALS and PRODUCERS BANK OF THE PHILIPPINES, respondents.

DAVIDE, JR., J.:

The fundamental legal issue raised in this petition for review on certiorari is whether the petitioner is
liable under the Money, Security, and Payroll Robbery policy it issued to the private respondent or
whether recovery thereunder is precluded under the general exceptions clause thereof. Both the trial
court and the Court of Appeals held that there should be recovery. The petitioner contends otherwise.
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro Manila, by
private respondent Producers Bank of the Philippines (hereinafter Producers) against petitioner Fortune
Insurance and Surety Co., Inc. (hereinafter Fortune) of a complaint for recovery of the sum of
P725,000.00 under the policy issued by Fortune. The sum was allegedly lost during a robbery of
Producer's armored vehicle while it was in transit to transfer the money from its Pasay City Branch to
its head office in Makati. The case was docketed as Civil Case No. 1817 and assigned to Branch 146
thereof.
After joinder of issues, the parties asked the trial court to render judgment based on the following
stipulation of facts:
1. The plaintiff was insured by the defendants and an insurance policy
was issued, the duplicate original of which is hereto attached as Exhibit
"A";
2. An armored car of the plaintiff, while in the process of transferring cash
in the sum of P725,000.00 under the custody of its teller, Maribeth
Alampay, from its Pasay Branch to its Head Office at 8737 Paseo de
Roxas, Makati, Metro Manila on June 29, 1987, was robbed of the said
cash. The robbery took place while the armored car was traveling along
Taft Avenue in Pasay City;
3. The said armored car was driven by Benjamin Magalong Y de Vera,
escorted by Security Guard Saturnino Atiga Y Rosete. Driver Magalong
was assigned by PRC Management Systems with the plaintiff by virtue of
an Agreement executed on August 7, 1983, a duplicate original copy of
which is hereto attached as Exhibit "B";
4. The Security Guard Atiga was assigned by Unicorn Security Services,
Inc. with the plaintiff by virtue of a contract of Security Service executed
on October 25, 1982, a duplicate original copy of which is hereto attached
as Exhibit "C";
5. After an investigation conducted by the Pasay police authorities, the
driver Magalong and guard Atiga were charged, together with Edelmer

Bantigue Y Eulalio, Reynaldo Aquino and John Doe, with violation of

P.D. 532 (Anti-Highway Robbery Law) before the Fiscal of Pasay City. A
copy of the complaint is hereto attached as Exhibit "D";
6. The Fiscal of Pasay City then filed an information charging the
aforesaid persons with the said crime before Branch 112 of the Regional
Trial Court of Pasay City. A copy of the said information is hereto
attached as Exhibit "E." The case is still being tried as of this date;
7. Demands were made by the plaintiff upon the defendant to pay the
amount of the loss of P725,000.00, but the latter refused to pay as the loss
is excluded from the coverage of the insurance policy, attached hereto as
Exhibit "A," specifically under page 1 thereof, "General Exceptions"
Section (b), which is marked as Exhibit "A-1," and which reads as
follows:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in report of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or
criminal act of the insured or any officer, employee,
partner, director, trustee or authorized representative of the
Insured whether acting alone or in conjunction with others.
...
8. The plaintiff opposes the contention of the defendant and contends that
Atiga and Magalong are not its "officer, employee, . . . trustee or
authorized representative . . . at the time of the robbery. 1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The dispositive portion
thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and against defendant,
and
(a) orders defendant to pay plaintiff the net amount of
P540,000.00 as liability under Policy No. 0207 (as
mitigated by the P40,000.00 special clause deduction and
by the recovered sum of P145,000.00), with interest
thereon at the legal rate, until fully paid;
(b) orders defendant to pay plaintiff the sum of P30,000.00
as and for attorney's fees; and

(c) orders defendant to pay costs of suit.

All other claims and counterclaims are accordingly dismissed forthwith.
SO ORDERED. 2
The trial court ruled that Magalong and Atiga were not employees or representatives of Producers. It
Said:
The Court is satisfied that plaintiff may not be said to have selected and engaged
Magalong and Atiga, their services as armored car driver and as security guard having
been merely offered by PRC Management and by Unicorn Security and which latter
firms assigned them to plaintiff. The wages and salaries of both Magalong and Atiga are
presumably paid by their respective firms, which alone wields the power to dismiss
them. Magalong and Atiga are assigned to plaintiff in fulfillment of agreements to
provide driving services and property protection as such in a context which does not
impress the Court as translating into plaintiff's power to control the conduct of any
assigned driver or security guard, beyond perhaps entitling plaintiff to request are
replacement for such driver guard. The finding is accordingly compelled that neither
Magalong nor Atiga were plaintiff's "employees" in avoidance of defendant's liability
under the policy, particularly the general exceptions therein embodied.
Neither is the Court prepared to accept the proposition that driver Magalong and guard
Atiga were the "authorized representatives" of plaintiff. They were merely an assigned
armored car driver and security guard, respectively, for the June 29, 1987 money transfer
from plaintiff's Pasay Branch to its Makati Head Office. Quite plainly it was teller
Maribeth Alampay who had "custody" of the P725,000.00 cash being transferred along a
specified money route, and hence plaintiff's then designated "messenger" adverted to in
the policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case as CA-G.R. CV No.
32946. In its decision 4 promulgated on 3 May 1994, it affirmed in toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and Atiga were
neither employees nor authorized representatives of Producers and ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in favor of the insured and
strictly against the insurance company (New Life Enterprises vs. Court of Appeals, 207
SCRA 669; Sun Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554). Contracts
of insurance, like other contracts, are to be construed according to the sense and meaning
of the terms which the parties themselves have used. If such terms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and popular

sense (New Life Enterprises Case, supra, p. 676; Sun Insurance Office, Ltd. vs. Court of
Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted stipulation is plain,
ordinary and simple. No other interpretation is necessary. The word "employee" must be
taken to mean in the ordinary sense.
The Labor Code is a special law specifically dealing with/and specifically designed to
protect labor and therefore its definition as to employer-employee relationships insofar
as the application/enforcement of said Code is concerned must necessarily be
inapplicable to an insurance contract which defendant-appellant itself had formulated.
Had it intended to apply the Labor Code in defining what the word "employee" refers to,
it must/should have so stated expressly in the insurance policy.
Said driver and security guard cannot be considered as employees of plaintiff-appellee
bank because it has no power to hire or to dismiss said driver and security guard under
the contracts (Exhs. 8 and C) except only to ask for their replacements from the
contractors. 5
On 20 June 1994, Fortune filed this petition for review on certiorari. It alleges that the trial court and
the Court of Appeals erred in holding it liable under the insurance policy because the loss falls within
the general exceptions clause considering that driver Magalong and security guard Atiga were
Producers' authorized representatives or employees in the transfer of the money and payroll from its
branch office in Pasay City to its head office in Makati.
According to Fortune, when Producers commissioned a guard and a driver to transfer its funds from
one branch to another, they effectively and necessarily became its authorized representatives in the care
and custody of the money. Assuming that they could not be considered authorized representatives, they
were, nevertheless, employees of Producers. It asserts that the existence of an employer-employee
relationship "is determined by law and being such, it cannot be the subject of agreement." Thus, if there
was in reality an employer-employee relationship between Producers, on the one hand, and Magalong
and Atiga, on the other, the provisions in the contracts of Producers with PRC Management System for
Magalong and with Unicorn Security Services for Atiga which state that Producers is not their
employer and that it is absolved from any liability as an employer, would not obliterate the relationship.
Fortune points out that an employer-employee relationship depends upon four standards: (1) the
manner of selection and engagement of the putative employee; (2) the mode of payment of wages; (3)
the presence or absence of a power to dismiss; and (4) the presence and absence of a power to control
the putative employee's conduct. Of the four, the right-of-control test has been held to be the decisive
factor. 6 It asserts that the power of control over Magalong and Atiga was vested in and exercised by Producers.
Fortune further insists that PRC Management System and Unicorn Security Services are but "labor-only"
contractors under Article 106 of the Labor Code which provides:

Art. 106. Contractor or subcontractor. There is "labor-only" contracting where the

person supplying workers to an employer does not have substantial capital or investment
in the form of tools, equipment, machineries, work premises, among others, and the
workers recruited and placed by such persons are performing activities which are
directly related to the principal business of such employer. In such cases, the person or
intermediary shall be considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if the latter were directly
employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers, following the ruling in
International Timber Corp. vs. NLRC 7 that a finding that a contractor is a "labor-only" contractor is
equivalent to a finding that there is an employer-employee relationship between the owner of the project and the
employees of the "labor-only" contractor.

On the other hand, Producers contends that Magalong and Atiga were not its employees since it had
nothing to do with their selection and engagement, the payment of their wages, their dismissal, and the
control of their conduct. Producers argued that the rule in International Timber Corp. is not applicable
to all cases but only when it becomes necessary to prevent any violation or circumvention of the Labor
Code, a social legislation whose provisions may set aside contracts entered into by parties in order to
give protection to the working man.
Producers further asseverates that what should be applied is the rule in American President Lines vs.
Clave, 8 to wit:
In determining the existence of employer-employee relationship, the following elements
are generally considered, namely: (1) the selection and engagement of the employee; (2)
the payment of wages; (3) the power of dismissal; and (4) the power to control the
employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which assigned
Magalong as the driver of Producers' armored car and was responsible for his faithful discharge of his
duties and responsibilities, and since Producers paid the monthly compensation of P1,400.00 per driver
to PRC Management Systems and not to Magalong, it is clear that Magalong was not Producers'
employee. As to Atiga, Producers relies on the provision of its contract with Unicorn Security Services
which provides that the guards of the latter "are in no sense employees of the CLIENT."
There is merit in this petition.
It should be noted that the insurance policy entered into by the parties is a theft or robbery insurance
policy which is a form of casualty insurance. Section 174 of the Insurance Code provides:
Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident
or mishap, excluding certain types of loss which by law or custom are considered as
falling exclusively within the scope of insurance such as fire or marine. It includes, but
is not limited to, employer's liability insurance, public liability insurance, motor vehicle
liability insurance, plate glass insurance, burglary and theft insurance, personal accident

and health insurance as written by non-life insurance companies, and other substantially
similar kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance Code contains no
other provisions applicable to casualty insurance or to robbery insurance in particular. These contracts
are, therefore, governed by the general provisions applicable to all types of insurance. Outside of these,
the rights and obligations of the parties must be determined by the terms of their contract, taking into
consideration its purpose and always in accordance with the general principles of insurance law. 9
It has been aptly observed that in burglary, robbery, and theft insurance, "the opportunity to defraud the
insurer the moral hazard is so great that insurers have found it necessary to fill up their policies
with countless restrictions, many designed to reduce this hazard. Seldom does the insurer assume the
risk of all losses due to the hazards insured against." 10 Persons frequently excluded under such provisions
are those in the insured's service and employment. 11 The purpose of the exception is to guard against liability
should the theft be committed by one having unrestricted access to the property. 12 In such cases, the terms
specifying the excluded classes are to be given their meaning as understood in common speech. 13 The terms
"service" and "employment" are generally associated with the idea of selection, control, and compensation. 14

A contract of insurance is a contract of adhesion, thus any ambiguity therein should be resolved against
the insurer, 15 or it should be construed liberally in favor of the insured and strictly against the insurer. 16
Limitations

of

liability

should

be

regarded

with

extreme

jealousy

and must be construed

in such a way, as to preclude the insurer from non-compliance with its obligation. 17 It goes without saying then
that if the terms of the contract are clear and unambiguous, there is no room for construction and such terms
cannot be enlarged or diminished by judicial construction. 18

An insurance contract is a contract of indemnity upon the terms and conditions specified therein. 19 It is
settled that the terms of the policy constitute the measure of the insurer's liability. 20 In the absence of statutory
prohibition to the contrary, insurance companies have the same rights as individuals to limit their liability and to
impose whatever conditions they deem best upon their obligations not inconsistent with public policy.

With the foregoing principles in mind, it may now be asked whether Magalong and Atiga qualify as
employees or authorized representatives of Producers under paragraph (b) of the general exceptions
clause of the policy which, for easy reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent or criminal act of the
insured or any officer, employee, partner, director, trustee or authorized

representative of the Insured whether acting alone or in conjunction with

others. . . . (emphases supplied)
There is marked disagreement between the parties on the correct meaning of the terms "employee" and
"authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude and exempt from
protection and coverage losses arising from dishonest, fraudulent, or criminal acts of persons granted or
having unrestricted access to Producers' money or payroll. When it used then the term "employee," it
must have had in mind any person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of the employeremployee relationship, 21 or as statutorily declared even in a limited sense as in the case of Article 106 of the
Labor Code which considers the employees under a "labor-only" contract as employees of the party employing
them and not of the party who supplied them to the employer. 22

Fortune claims that Producers' contracts with PRC Management Systems and Unicorn Security
Services are "labor-only" contracts.
Producers, however, insists that by the express terms thereof, it is not the employer of
Magalong. Notwithstanding such express assumption of PRC Management Systems and
Unicorn Security Services that the drivers and the security guards each shall supply to
Producers are not the latter's employees, it may, in fact, be that it is because the contracts are,
indeed, "labor-only" contracts. Whether they are is, in the light of the criteria provided for in
Article 106 of the Labor Code, a question of fact. Since the parties opted to submit the case for
judgment on the basis of their stipulation of facts which are strictly limited to the insurance
policy, the contracts with PRC Management Systems and Unicorn Security Services, the
complaint for violation of P.D. No. 532, and the information therefor filed by the City Fiscal of
Pasay City, there is a paucity of evidence as to whether the contracts between Producers and
PRC Management Systems and Unicorn Security Services are "labor-only" contracts.
But even granting for the sake of argument that these contracts were not "labor-only" contracts, and
PRC Management Systems and Unicorn Security Services were truly independent contractors, we are
satisfied that Magalong and Atiga were, in respect of the transfer of Producer's money from its Pasay
City branch to its head office in Makati, its "authorized representatives" who served as such with its
teller Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the specific duty to
safely transfer the money to its head office, with Alampay to be responsible for its custody in transit;
Magalong to drive the armored vehicle which would carry the money; and Atiga to provide the needed
security for the money, the vehicle, and his two other companions. In short, for these particular tasks,

the three acted as agents of Producers. A "representative" is defined as one who represents or stands in
the place of another; one who represents others or another in a special capacity, as an agent, and is
interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general exceptions clause of the
insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of Appeals in CAG.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of the Regional Trial Court of
Makati in Civil Case No. 1817 are REVERSED and SET ASIDE. The complaint in Civil Case No.
1817 is DISMISSED.
No pronouncement as to costs.
SO ORDERED.
Bellosillo and Kapunan, JJ., concur.
Padilla, J., took no part.
Quiason, J., is on leave.

Footnotes
1 Rollo, 46-47 (emphases supplied).
2 Id., 8.
3 Rollo, 10-11.
4 Annex "A" of Petition; Id., 45-53. Per Austria-Martinez, A., J., with Marigomen, A.
and Reyes, R., JJ., concurring.
5 Rollo, 51-52.
6 Citing in the Petition, Broadway Motors, Inc. vs. NLRC, 156 SCRA 522 [1987], and in
the Memorandum, Vallum Security Services vs. NLRC, 224 SCRA 781 [1993].
7 169 SCRA 341 [1989].
8 114 SCRA 832 [1982].
9 MARIA CLARA M. CAMPOS, Insurance, 1983 ed., 199.
10 WILLIAM B. VANCE, Handbook on the Law of Insurance, 3rd ed. by Buist M.
Andersen [1951], 1014.
11 Bowling vs. Hamblen County Motor Co., 66 S.W. 2d 229, 16 Tenn. App. 52.
12 Barret vs. Commercial Standard Ins. Co., Tex. Civ. App., 145 S.W. 2d 315.

13 Ledvinka vs. Home Ins. Co. of New York, 115 A. 596, 139 Md. 434, 19 A.L.R. 167.
14 Id.; Gulf Finance & Securities Co. vs. National Fire Ins. Co., 7 La. App. 8.
15 CAMPOS, op. cit., 22.
16 Verendia vs. Court of Appeals, 217 SCRA 417 [1993].
17 CAMPOS, op. cit., 13.
18 43 Am Jur 2d Insurance 271 [1982].
19 Stokes vs. Malayan Insurance, 127 SCRA 766 [1984].
20 Paramount Insurance Corp. vs. Japzon, 211 SCRA 879 [1992].
21 See Broadway Motors, Inc. vs. NLRC, supra note 6; Canlubang Security Agency
Corp. vs. NLRC, 216 SCRA 280 [1992]; Vallum Security Services vs. NLRC, supra
note 6; and Villuga vs. NLRC, 225 SCRA 537 [1993].
22 See International Timber Corp. vs. NLRC, supra note 7; Baguio vs. NLRC, 202
SCRA 465 [1965].
23 Black's Law Dictionary, Fifth ed., 1170.

SECOND DIVISION
[G.R. No. 156167. May 16, 2005]
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE CORPORATION,
respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner
GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION.
Petitioner assails the appellate court decision[1] which dismissed its two appeals and affirmed the
judgment of the trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
companys liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to its
earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties
within its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to
the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said

resort insured originally with the American Home Assurance Company (AHAC-AIU). In the first four
insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C,
D, E and F; also Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was extended
only to plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and
E and two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to
the two (2) swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that subsequently AHAC(AIU) issued
in plaintiffs favor Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989
(Exhs. G also G-1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1,
D-1, Exhibits E and F-1 was deleted and the entry under Endorsements/Warranties at the time of issue
read that plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to March 14,
1990 under Policy No. 206-4568061-9 (Exh. H) which carried the entry under Endorsement/Warranties
at Time of Issue, which read Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of
P10,700.00 and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:
Item -P7,691,000.00 - on the Clubhouse only
@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake
shock only) @ 0.100%
116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 2064568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in the policy to
be issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of
March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that

in the computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in
question, contained on the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the premium
against the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and
3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in
Policy No. 31944 issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the sum included additional premium
the Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the
contrary, that this insurance covers loss or damage to shock to any of the property insured by this
Policy occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A, 6-D
and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990
an earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy
No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were
damaged.[2]
After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance
Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim,
then assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and
Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster, requested petitioner to submit
various documents in support of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc.,
through its Vice-President A.R. de Leon,[4] rendered a preliminary report[5] finding extensive damage
caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that
except for the swimming pools, all affected items have no coverage for earthquake shocks.[6] On
August 11, 1990, petitioner filed its formal demand[7] for settlement of the damage to all its properties
in the Agoo Playa Resort. On August 23, 1990, respondent denied petitioners claim on the ground that
its insurance policy only afforded earthquake shock coverage to the two swimming pools of the resort.

Petitioner and respondent failed to arrive at a settlement.[9] Thus, on January 24, 1991, petitioner
filed a complaint[10] with the regional trial court of Pasig praying for the payment of the following:
[8]

1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with
interest thereon, as computed under par. 29 of the policy (Annex B) until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff
on account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims.
[12]

On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of
earthquake shock, the same premium it paid against earthquake shock only on the two swimming pools
in all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G). From this fact the Court must
consequently agree with the position of defendant that the endorsement rider (Exhibit 7-C) means that
only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the
language used in an insurance contract or application is such as to create ambiguity the same should be
resolved against the party responsible therefor, i.e., the insurance company which prepared the contract.
To the mind of [the] Court, the language used in the policy in litigation is clear and unambiguous hence
there is no need for interpretation or construction but only application of the provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had earthquake
shock coverage and were heavily damaged by the earthquake which struck on July 16, 1990. Defendant
having admitted that the damage to the swimming pools was appraised by defendants adjuster at
P386,000.00, defendant must, by virtue of the contract of insurance, pay plaintiff said amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant is
liable only for the damage caused to the two (2) swimming pools and that defendant has made known
to plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of the other
damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the
action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the
plaintiffs right to come to Court in the honest belief that their Complaint is meritorious. The prayer,
therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE
HUNDRED EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2)
swimming pools, with interest at 6% per annum from the date of the filing of the Complaint until

defendants obligation to plaintiff is fully paid.

No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
Appeals based on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY
RECOVER FOR THE DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY
NO. 31944, CONSIDERING ITS PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE
ISSUANCE OF SAID POLICY AND THE ACTUATIONS OF THE PARTIES SUBSEQUENT TO
THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO
RECOVER UNDER DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING
ITSELF TO A CONSIDERATION OF THE SAID POLICY ISOLATED FROM THE
CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE ACTUATIONS OF THE
PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS
ENTITLED TO THE DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER
ANNUM ON CLAIMS ON PROCEEDS OF POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it
attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that
the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC
(AIU) and upon which the subject insurance contract with Philippine Charter Insurance Corporation is
said to have been based and copied (Exh. I), covered an extended earthquake shock insurance on all the
insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the
imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting to
P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused
on the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable only, it
then cannot be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the
award thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised,
it will not be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002).
Moreover, being the award thereof an exception rather than a rule, it is necessary for the court to make
findings of facts and law that would bring the case within the exception and justify the grant of such

award (Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc.,
G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiff-appellants action is not
baseless and highly speculative, We find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the
Trial Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues:[16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER
RESPONDENTS INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING
POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE
INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER
FOR DAMAGES WITH INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS
FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and not
only the swimming pools. It used the words any property insured by this policy, and it should be
interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in
the body of the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual
Payment Agreement On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it
deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the
insurance policy, because the rider is the more deliberate expression of the agreement of the contracting
parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner
and against respondent. It was respondent which caused the ambiguity when it made the policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools
from the coverage for the risk of fire. It should not be used to limit the respondents liability for

earthquake shock to the two swimming pools only.

Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under
the extended coverage. The premium for the earthquake shock coverage was already included in the
premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend earthquake
shock coverage to all insured properties. When it secured an insurance policy from respondent,
petitioner told respondent that it wanted an exact replica of its latest insurance policy from American
Home Assurance Company (AHAC-AIU), which covered all the resorts properties for earthquake
shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner
that it was covered for earthquake shock. Respondents insurance adjuster, Bayne Adjusters and
Surveyors, Inc., likewise requested petitioner to submit the necessary documents for its building claims
and other repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance
policy it issued to petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the
Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in order to
establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments:[18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
coverage against earthquake shock to petitioners insured properties other than on the two swimming
pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were insured against
earthquake shock. From 1988 until 1990, the provisions in its policy were practically identical to its
earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a letter[19] by its
representative Manuel C. Quijano, categorically stated that its previous policy, from which respondents
policy was copied, covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy
only covered earthquake shock damage on the two swimming pools. The amount was the same amount
paid by petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No
additional premium was paid to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to
the two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of
petitioners properties. As per its agreement with petitioner, respondent copied its policy from the
AHAC-AIU policy provided by petitioner. Although the first five policies contained the said
qualification in their riders title, in the last two policies, this qualification in the title was deleted.
AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This
inadvertence did not make the policy incomplete, nor did it broaden the scope of the endorsement
whose descriptive title was merely enumerated. Any ambiguity in the policy can be easily resolved by
looking at the other provisions, specially the enumeration of the items insured, where only the two
swimming pools were noted as covered for earthquake shock damage.

Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase Item
5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock only) meant that
only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the
policies from 1989 to 1990, the only difference being the designation of the two swimming pools as
Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all the
properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium for
coverage of the swimming pools against earthquake shock. No other premium was paid for earthquake
shock coverage on the other properties. In addition, the use of the qualifier ANY instead of ALL to
describe the property covered was done deliberately to enable the parties to specify the properties
included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included
in the earthquake shock coverage. Petitioners own evidence shows that it only required respondent to
follow the exact provisions of its previous policy from AHAC-AIU. Respondent complied with this
requirement. Respondents only deviation from the agreement was when it modified the provisions
regarding the replacement cost endorsement. With regard to the issue under litigation, the riders of the
old policy and the policy in issue are identical.
Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The adjusters letter
notifying petitioner to present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy
reflect the parties clear intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to
any deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be
considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as included,
viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only)
[20]

Second, under the breakdown for premium payments,[21] it was stated that:

PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in consequence,
directly or indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils
of Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED
IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 %
OF THE NET PREMIUM x x x POLICY HEREBY UNDERTAKES TO CONTINUE THE
INSURANCE UNDER THE ABOVE NAMED x x x AND TO PAY THE PREMIUM.
Earthquake Endorsement
In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .
additional premium the Company agrees, notwithstanding what is stated in the printed conditions of
this Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire)
to any of the property insured by this Policy occasioned by or through or in consequence of
Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be
hereby expressly varied) and that any reference therein to loss or damage by fire should be deemed to
apply also to loss or damage occasioned by or through or in consequence of Earthquake.[24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured
properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.[25] All its parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character. Petitioner cannot focus on
the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and
riders, taken and interpreted together, indubitably show the intention of the parties to extend earthquake
shock coverage to the two swimming pools only.

A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. Thus,
an insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large
group of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.[26] (Emphasis
ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured
against a specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a
debt as soon as the risk attaches.[28] In the subject policy, no premium payments were made with regard
to earthquake shock coverage, except on the two swimming pools. There is no mention of any premium
payable for the other resort properties with regard to earthquake shock. This is consistent with the
history of petitioners previous insurance policies from AHAC-AIU. As borne out by petitioners
witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the
period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two
swimming pools only?
A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a
provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming
pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?
A. Yes, sir.

Q. Did you also do this through your insurance agency?

A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to
your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you
give written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must
extend to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect
of extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an
earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to
your instructions that all properties must be covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company marked
Exhibit G?
Atty. Mejia: Yes.
Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no
more limitation referring to the two swimming pools only, I was contented already that the previous
limitation pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA
Warranty & Annual Payment Agreement on Long Term Policies[29] to the insurance policy as proof
of the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely
an enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the

policy is subject, as required under Section 50, paragraph 2 of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the
coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone. As
explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by
counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6)
policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries
an earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated
in Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake
shock as provided for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in each of the
six (6) policies extend to the two (2) swimming pools only?
WITNESS:
Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the Clauses
and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we

do cover earthquake shock. For building we covered it for full earthquake coverage which includes
earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other things other than
swimming pool? You are covering building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we can issue
earthquake shock solely but that the moment I see this, the thing that comes to my mind is either
insuring a swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive
[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G
and H respectively entend the coverage against earthquake shock to all the properties indicated in the
respective schedules attached to said policies, what can you say about that testimony of plaintiffs
witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure
you that this one covers the two swimming pools with respect to earthquake shock endorsement. Based
on it, if we are going to look at the premium there has been no change with respect to the rates.
Everytime (sic) there is a renewal if the intention of the insurer was to include the earthquake shock, I
think there is a substantial increase in the premium. We are not only going to consider the two (2)
swimming pools of the other as stated in the policy. As I see, there is no increase in the amount of the
premium. I must say that the coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do some
computation based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III
TSN, September 7, 1992
pp. 4-6

ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during
your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming pools was
deleted from the policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the qualifying phrase
for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued
with no specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts to
the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the
earthquake shock endorsement included all its properties in the resort. Respondent only insured the
properties as intended by the petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty.
Omlas (sic) to copy from Exhibit H for purposes of procuring the policy from Philippine Charter
Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this
American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.

Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging
will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
coverage of Exhibits I and H sometime in the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well
as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy
wordings and rates were copied from the insurance policy I sent them but it was only when this case
erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any time
between those indicated in Exhibit I and those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the same
P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock which I
understood before that this provision will have to be placed here because this particular provision under
the peril of earthquake shock only is requested because this is an insurance policy and therefore cannot
be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved. Atty.
Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and
Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement for
earthquake shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the
policy issued by Philippine Charter Insurance Corporation?

A. I remember that when I returned to the office after the inspection, I got a photocopy of the insurance
coverage policy and it was indicated under Item 3 specifically that the coverage is only for earthquake
shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had found out
in the policy and he confirmed to me indeed only Item 3 which were the two swimming pools have
coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the
swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I found out that
under Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in
parenthesis (against the peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items have no computation for payment of
premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the
general rule that insurance contracts are contracts of adhesion which should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it.[31] A contract of
adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while
the other party merely affixes his signature or his "adhesion" thereto. Through the years, the courts
have held that in these type of contracts, the parties do not bargain on equal footing, the weaker party's
participation being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as
traps for the weaker party whom the courts of justice must protect.[32] Consequently, any ambiguity
therein is resolved against the insurer, or construed liberally in favor of the insured.[33]
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided.[34] Thus, we have called on lower courts to
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of
the claims of contending parties. In Development Bank of the Philippines v. National
Merchandising Corporation, et al.,[35] the parties, who were acute businessmen of experience, were
presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it
did not know the provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU.
The testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of
petitioner, is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991

pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in
Agoo Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we
had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American
Home Insurance policy are to be incorporated in the PCIC policy?
A. Yes, sir.
Q. What steps did you take?
A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him
that the policy and wordings shall be copied from the AIU Policy No. 206-4568061-9.
Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 2064568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some terms,
specifically in the replacement cost endorsement, but the principal provisions of the policy remained
essentially similar to AHAC-AIUs policy. Consequently, we cannot apply the "fine print" or "contract
of adhesion" rule in this case as the parties intent to limit the coverage of the policy to the two
swimming pools only is not ambiguous.[37]
IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The petition for certiorari is
dismissed. No costs.
SO ORDERED.
Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

[1]

The decision was penned by Justice Jose L. Sabio, Jr., of the 10th Division of the Court of Appeals.

[2]

Rollo, pp. 10-12.

[3]

Original Records, p. 50.

[4]

Vice-President for the Fire, Engineering and Allied Claims Division.

[5]

Original Records, pp. 44-48.

[6]

Original Records, p. 47.

[7]

Id., p. 49.

[8]

Id., p. 50.

[9]

Id., pp. 50-54.

[10]

Id., pp. 1-7.

[11]

Id., pp. 6-7.

[12]

Original Records, pp. 28-42.

[13]

Original Records, pp. 400-401.

[14]

CA Rollo, p. 42.

[15]

CA Rollo, pp. 184-186.

[16]

Rollo, p. 402.

[17]

Rollo, pp. 408-409.

[18]

Rollo, pp. 348-395.

[19]

Exhibit 9.

[20]

Original Records, p. 17.

[21]

Original Records, p. 17.

[22]

Original Records, p. 68.

[23]

Rollo, p. 70.

[24]

Original Records, p. 71.

Ruiz v. Sheriff of Manila, 34 SCRA 83 (1970); National Union Fire Insurance Company of
Pittsburg v. Stolt-Nielsen Philippines, Inc., 184 SCRA 682 (1990).
[25]

See Vance, pp. 1-2, cited in Agbayani, Commercial Laws of the Philippines, vol. 2, (1986), p. 6;
Philamcare Health Systems, Inc. v. Court of Appeals, 379 SCRA 356 (2002).
[26]

[27]

43 Am. Jur. 2d 878.

[28]

De Leon, Hector S., The Insurance Code of the Philippines (1992), p. 194.

[29]

Exhibits I and I-2.

The underwriter for Phil-American Insurance Corporation (formerly AIU) who reviewed the Agoo
Playa Resort insurance policies.
[30]

Western Guaranty Corporation v. Court of Appeals, 187 SCRA 652 (1990); Verendia v. Court of
Appeals, 217 SCRA 417 (1993).
[31]

[32]

Philippine National Bank v. Court of Appeals, 196 SCRA 536 (1991).

Verendia v. Court of Appeals, 217 SCRA 417 (1993); New Life Enterprises v. Court of Appeals, 207
SCRA 669 (1992); Sun Insurance Office, Ltd. v. Court of Appeals, 211 SCRA 554 (1992).
[33]

Pan American World Airways, Inc. v. Rapadas, 209 SCRA 67 (1992); BPI Credit Corporation v.
Court of Appeals, 204 SCRA 601 (1991); Serra v. Court of Appeals, 229 SCRA 60 (1994).
[34]

[35]

40 SCRA 624 (1971).

Testimony of the vice president for corporate affairs and corporate secretary of petitioner, TSN,
September 23, 1991.
[36]

[37]

Sweet Lines, Inc. v. Teves, 83 SCRA 361 (1978); Tan v. Court of Appeals, 174 SCRA 403 (1989).

Republic of the Philippines

SUPREME COURT
Baguio City
SECOND DIVISION
G.R. No. 166245

April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse and set aside the
November 26, 2004 Decision1 of the Court of Appeals (CA) in CA-G.R. CV No. 57810 is the query:
May the inaction of the insurer on the insurance application be considered as approval of the
application?
The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company (Philamlife) entered
into an agreement denominated as Creditor Group Life Policy No. P-19202 with petitioner Eternal
Gardens Memorial Park Corporation (Eternal). Under the policy, the clients of Eternal who purchased
burial lots from it on installment basis would be insured by Philamlife. The amount of insurance
coverage depended upon the existing balance of the purchased burial lots. The policy was to be
effective for a period of one year, renewable on a yearly basis.
The relevant provisions of the policy are:
ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more than 65 years of age, is

indebted to the Assured for the unpaid balance of his loan with the Assured, and is accepted for
Life Insurance coverage by the Company on its effective date is eligible for insurance under the
Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance up to P50,000.00. However,
a declaration of good health shall be required for all Lot Purchasers as part of the application.
The Company reserves the right to require further evidence of insurability satisfactory to the
Company in respect of the following:
1. Any amount of insurance in excess of P50,000.00.
2. Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.
The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of the unpaid
balance of his loan (including arrears up to but not exceeding 2 months) as reported by the
Assured to the Company or the sum of P100,000.00, whichever is smaller. Such benefit shall be
paid to the Assured if the Lot Purchaser dies while insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is
not approved by the Company.3
Eternal was required under the policy to submit to Philamlife a list of all new lot purchasers, together
with a copy of the application of each purchaser, and the amounts of the respective unpaid balances of
all insured lot purchasers. In relation to the instant petition, Eternal complied by submitting a letter
dated December 29, 1982,4 containing a list of insurable balances of its lot buyers for October 1982.
One of those included in the list as "new business" was a certain John Chuang. His balance of
payments was PhP 100,000. On August 2, 1984, Chuang died.
Eternal sent a letter dated August 20, 19845 to Philamlife, which served as an insurance claim for
Chuangs death. Attached to the claim were the following documents: (1) Chuangs Certificate of
Death; (2) Identification Certificate stating that Chuang is a naturalized Filipino Citizen; (3) Certificate
of Claimant; (4) Certificate of Attending Physician; and (5) Assureds Certificate.
In reply, Philamlife wrote Eternal a letter on November 12, 1984, 6 requiring Eternal to submit the
following documents relative to its insurance claim for Chuangs death: (1) Certificate of Claimant
(with form attached); (2) Assureds Certificate (with form attached); (3) Application for Insurance
accomplished and signed by the insured, Chuang, while still living; and (4) Statement of Account
showing the unpaid balance of Chuang before his death.

Eternal transmitted the required documents through a letter dated November 14, 1984, 7 which was
received by Philamlife on November 15, 1984.
After more than a year, Philamlife had not furnished Eternal with any reply to the latters insurance
claim. This prompted Eternal to demand from Philamlife the payment of the claim for PhP 100,000 on
April 25, 1986.8
In response to Eternals demand, Philamlife denied Eternals insurance claim in a letter dated May 20,
1986,9 a portion of which reads:
The deceased was 59 years old when he entered into Contract #9558 and 9529 with Eternal
Gardens Memorial Park in October 1982 for the total maximum insurable amount of
P100,000.00 each. No application for Group Insurance was submitted in our office prior to his
death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of Insurability
provision, "a declaration of good health shall be required for all Lot Purchasers as party of the
application." We cite further the provision on Effective Date of Coverage under the policy
which states that "there shall be no insurance if the application is not approved by the
Company." Since no application had been submitted by the Insured/Assured, prior to his death,
for our approval but was submitted instead on November 15, 1984, after his death, Mr. John Uy
Chuang was not covered under the Policy. We wish to point out that Eternal Gardens being the
Assured was a party to the Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote our approval per se of the
insurance coverage but are held by us in trust for the payor until the prerequisites for insurance
coverage shall have been met. We will however, return all the premiums which have been paid
in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC) for a sum of
money against Philamlife, docketed as Civil Case No. 14736. The trial court decided in favor of
Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to pay
the sum of P100,000.00, representing the proceeds of the Policy of John Uy Chuang, plus legal
rate of interest, until fully paid; and, to pay the sum of P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he accomplished
before his death, as testified to by Eternals witness and evidenced by the letter dated December 29,
1982, stating, among others: "Encl: Phil-Am Life Insurance Application Forms & Cert." 10 It further
ruled that due to Philamlifes inaction from the submission of the requirements of the group insurance

on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes acceptance of the
premiums during the same period, Philamlife was deemed to have approved Chuangs application. The
RTC said that since the contract is a group life insurance, once proof of death is submitted, payment
must follow.
Philamlife appealed to the CA, which ruled, thus:
WHEREFORE, the decision of the Regional Trial Court of Makati in Civil Case No. 57810 is
REVERSED and SET ASIDE, and the complaint is DISMISSED. No costs.
SO ORDERED.11
The CA based its Decision on the factual finding that Chuangs application was not enclosed in
Eternals letter dated December 29, 1982. It further ruled that the non-accomplishment of the submitted
application form violated Section 26 of the Insurance Code. Thus, the CA concluded, there being no
application form, Chuang was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore determined
by this Honorable Court, or has decided it in a way not in accord with law or with the applicable
jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife before
the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May 29,
1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual issues raised before
the CA and first level courts, considering their findings of facts are conclusive and binding on this
Court. However, such rule is subject to exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when
the inference made is manifestly mistaken, absurd or impossible; (3) when there is grave abuse
of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the
findings of facts are conflicting; (6) when in making its findings the [CA] went beyond the
issues of the case, or its findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings [of the CA] are contrary to the trial court; (8) when the
findings are conclusions without citation of specific evidence on which they are based; (9) when
the facts set forth in the petition as well as in the petitioners main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are premised on the supposed
absence of evidence and contradicted by the evidence on record; and (11) when the Court of

Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.12 (Emphasis supplied.)
In the instant case, the factual findings of the RTC were reversed by the CA; thus, this Court may
review them.
Eternal claims that the evidence that it presented before the trial court supports its contention that it
submitted a copy of the insurance application of Chuang before his death. In Eternals letter dated
December 29, 1982, a list of insurable interests of buyers for October 1982 was attached, including
Chuang in the list of new businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in the letter that
was apparently received by Philamlife on January 15, 1983. Finally, Eternal alleged that it provided a
copy of the insurance application which was signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is insufficient, arguing that
Eternal must present evidence showing that Philamlife received a copy of Chuangs insurance
application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife stamped as received,
states that the insurance forms for the attached list of burial lot buyers were attached to the letter. Such
stamp of receipt has the effect of acknowledging receipt of the letter together with the attachments.
Such receipt is an admission by Philamlife against its own interest. 13 The burden of evidence has
shifted to Philamlife, which must prove that the letter did not contain Chuangs insurance application.
However, Philamlife failed to do so; thus, Philamlife is deemed to have received Chuangs insurance
application.
To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal letter is stamped as
received, the contents of the letter are correct and accounted for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due to
inconsistencies is groundless. The trial court is in the best position to determine the reliability and
credibility of the witnesses, because it has the opportunity to observe firsthand the witnesses
demeanor, conduct, and attitude. Findings of the trial court on such matters are binding and conclusive
on the appellate court, unless some facts or circumstances of weight and substance have been
overlooked, misapprehended, or misinterpreted,14 that, if considered, might affect the result of the
case.15
An examination of the testimonies of the witnesses mentioned by Philamlife, however, reveals no
overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original insurance application of

Chuang was, as shown by the testimony of Edilberto Mendoza:

Atty. Arevalo:
Q Where is the original of the application form which is required in case of new coverage?
[Mendoza:]
A It is [a] standard operating procedure for the new client to fill up two copies of this form and
the original of this is submitted to Philamlife together with the monthly remittances and the
second copy is remained or retained with the marketing department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking for the
location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with that
payment together with the new clients all the originals I see to it before I sign the transmittal
letter the originals are attached therein.16
In other words, the witness admitted not knowing where the original insurance application was, but
believed that the application was transmitted to Philamlife as an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on whether one or two
insurance application forms were accomplished and the testimony of Mendoza on who actually filled
out the application form, these are minor inconsistencies that do not affect the credibility of the
witnesses. Thus, we ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as these negate any
suspicion that the testimonies have been rehearsed.17
We reiterated the above ruling in Merencillo v. People:
Minor discrepancies or inconsistencies do not impair the essential integrity of the prosecutions
evidence as a whole or reflect on the witnesses honesty. The test is whether the testimonies
agree on essential facts and whether the respective versions corroborate and substantially
coincide with each other so as to make a consistent and coherent whole.18

In the present case, the number of copies of the insurance application that Chuang executed is not at
issue, neither is whether the insurance application presented by Eternal has been falsified. Thus, the
inconsistencies pointed out by Philamlife are minor and do not affect the credibility of Eternals
witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss without approving the
application.
This question must be answered in the affirmative.
As earlier stated, Philamlife and Eternal entered into an agreement denominated as Creditor Group Life
Policy No. P-1920 dated December 10, 1980. In the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he contracts a loan
with the Assured. However, there shall be no insurance if the application of the Lot Purchaser is
not approved by the Company.
An examination of the above provision would show ambiguity between its two sentences. The first
sentence appears to state that the insurance coverage of the clients of Eternal already became effective
upon contracting a loan with Eternal while the second sentence appears to require Philamlife to
approve the insurance contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which must be construed
liberally in favor of the insured and strictly against the insurer in order to safeguard the latters interest.
Thus, in Malayan Insurance Corporation v. Court of Appeals, this Court held that:
Indemnity and liability insurance policies are construed in accordance with the general rule of
resolving any ambiguity therein in favor of the insured, where the contract or policy is prepared
by the insurer. A contract of insurance, being a contract of adhesion, par excellence, any
ambiguity therein should be resolved against the insurer; in other words, it should be
construed liberally in favor of the insured and strictly against the insurer. Limitations of liability
should be regarded with extreme jealousy and must be construed in such a way as to preclude
the insurer from noncompliance with its obligations.19 (Emphasis supplied.)
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we reiterated the above
ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts should construe
them in such a way as to preclude the insurer from non-compliance with his obligation. Being a
contract of adhesion, the terms of an insurance contract are to be construed strictly against the
party which prepared the contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the insurance contract, ambiguity must be

strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid
forfeiture.20
Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920 dated December 10,
1980, must be construed in favor of the insured and in favor of the effectivity of the insurance contract.
On the other hand, the seemingly conflicting provisions must be harmonized to mean that upon a
partys purchase of a memorial lot on installment from Eternal, an insurance contract covering the lot
purchaser is created and the same is effective, valid, and binding until terminated by Philamlife by
disapproving the insurance application. The second sentence of Creditor Group Life Policy No. P-1920
on the Effective Date of Benefit is in the nature of a resolutory condition which would lead to the
cessation of the insurance contract. Moreover, the mere inaction of the insurer on the insurance
application must not work to prejudice the insured; it cannot be interpreted as a termination of the
insurance contract. The termination of the insurance contract by the insurer must be explicit and
unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on equal footing is
inaccurate at best. Insurance contracts are wholly prepared by the insurer with vast amounts of
experience in the industry purposefully used to its advantage. More often than not, insurance contracts
are contracts of adhesion containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of insurance. As such,
insurance contracts are imbued with public interest that must be considered whenever the rights and
obligations of the insurer and the insured are to be delineated. Hence, in order to protect the interest of
insurance applicants, insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor the application as a
valid, binding, and effective insurance contract.21
WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CA-G.R. CV No.
57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the Makati City RTC, Branch
138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life Insurance
Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP 100,000 from
the time of extra-judicial demand by Eternal until Philamlifes receipt of the May 29, 1996 RTC
Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of PhP 100,000
from June 17, 1996 until full payment of this award; and

(4) To pay Eternal attorneys fees in the amount of PhP 10,000.

No costs.
SO ORDERED.
Carpio-Morales, Acting Chairperson, Tinga, Brion, Chico-Nazario*, JJ., concur.

Footnotes
* Additional

member as per February 6, 2008 raffle.

Rollo, pp. 45-54. Penned by Associate Justice Santiago Javier Ranada and concurred in by
Associate Justices Marina L. Buzon (Chairperson) and Mario L. Guaria III.
2

Records, pp. 57-62.

Id. at 58.

Id. at 139.

Id. at 160.

Id. at 162.

Id. at 163.

Id. at 164.

Id. at 165.

10

Rollo, p. 44.

11

Id. at 54.

12

G.R. No. 156360, January 14, 2005, 448 SCRA 220, 228-229.

13

Rules of Court, Rule 130, Sec. 26.

14

People v. Jaberto, G.R. No. 128147, May 12, 1999, 307 SCRA 93, 102.

15

People v. Oliquino, G.R. No. 171314, March 6, 2007, 517 SCRA 579, 588.

16 TSN,

September 13, 1990, p. 8.

17

G.R. No. 136105, October 23, 2001, 368 SCRA 102, 108.

18

G.R. Nos. 142369-70, April 13, 2007, 521 SCRA 31, 43.

19

G.R. No. 119599, March 20, 1997, 270 SCRA 242, 254.

20

G.R. No. 125678, March 18, 2002, 379 SCRA 356, 366.

21

R. E. Keeton & A. I. Widiss, Insurance Law A Guide to Fundamental Principles, Legal

Doctrines and Commercial Practices 77-78.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 175666

July 29, 2013

MANILA BANKERS LIFE INSURANCE CORPORATION, Petitioner.

vs.
CRESENCIA P. ABAN, Respondent.
DECISION
DEL CASTILLO, J.:
The ultimate aim of Section 48 of the Insurance Code is to compel insurers to solicit business from or
provide insurance coverage only to legitimate and bona fide clients, by requiring them to thoroughly
investigate those they insure within two years from effectivity of the policy and while the insured is
still alive. If they do not, they will be obligated to honor claims on the policies they issue, regardless of
fraud, concealment or misrepresentation. The law assumes that they will do just that and not sit on their
laurels, indiscriminately soliciting and accepting insurance business from any Tom, Dick and Harry.
Assailed in this Petition for Review on Certiorari 1 are the September 28, 2005 Decision2 of the Court
of Appeals' (CA) in CA-G.R. CV No. 62286 and its November 9, 2006 Resolution 3 denying the
petitioners Motion for Reconsideration.4
Factual Antecedents
On July 3, 1993, Delia Sotero (Sotero) took out a life insurance policy from Manila Bankers Life
Insurance Corporation (Bankers Life), designating respondent Cresencia P. Aban (Aban), her niece, 5 as
her beneficiary.
Petitioner issued Insurance Policy No. 747411 (the policy), with a face value of P100,000.00, in
Soteros favor on August 30, 1993, after the requisite medical examination and payment of the
insurance premium.6
On April 10, 1996,7 when the insurance policy had been in force for more than two years and seven

months, Sotero died. Respondent filed a claim for the insurance proceeds on July 9, 1996. Petitioner
conducted an investigation into the claim,8 and came out with the following findings:
1. Sotero did not personally apply for insurance coverage, as she was illiterate;
2. Sotero was sickly since 1990;
3. Sotero did not have the financial capability to pay the insurance premiums on Insurance
Policy No. 747411;
4. Sotero did not sign the July 3, 1993 application for insurance;9 and
5. Respondent was the one who filed the insurance application, and x x x designated herself as
the beneficiary.10
For the above reasons, petitioner denied respondents claim on April 16, 1997 and refunded the
premiums paid on the policy.11
On April 24, 1997, petitioner filed a civil case for rescission and/or annulment of the policy, which was
docketed as Civil Case No. 97-867 and assigned to Branch 134 of the Makati Regional Trial Court. The
main thesis of the Complaint was that the policy was obtained by fraud, concealment and/or
misrepresentation under the Insurance Code,12 which thus renders it voidable under Article 139013 of
the Civil Code.
Respondent filed a Motion to Dismiss14 claiming that petitioners cause of action was barred by
prescription pursuant to Section 48 of the Insurance Code, which provides as follows:
Whenever a right to rescind a contract of insurance is given to the insurer by any provision of this
chapter, such right must be exercised previous to the commencement of an action on the contract.
After a policy of life insurance made payable on the death of the insured shall have been in force
during the lifetime of the insured for a period of two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindible by reason of the
fraudulent concealment or misrepresentation of the insured or his agent.
During the proceedings on the Motion to Dismiss, petitioners investigator testified in court, stating
among others that the insurance underwriter who solicited the insurance is a cousin of respondents
husband, Dindo Aban,15 and that it was the respondent who paid the annual premiums on the policy.16
Ruling of the Regional Trial Court
On December 9, 1997, the trial court issued an Order17 granting respondents Motion to Dismiss, thus:
WHEREFORE, defendant CRESENCIA P. ABANs Motion to Dismiss is hereby granted. Civil Case
No. 97-867 is hereby dismissed.

SO ORDERED.18
In dismissing the case, the trial court found that Sotero, and not respondent, was the one who procured
the insurance; thus, Sotero could legally take out insurance on her own life and validly designate as
she did respondent as the beneficiary. It held further that under Section 48, petitioner had only two
years from the effectivity of the policy to question the same; since the policy had been in force for more
than two years, petitioner is now barred from contesting the same or seeking a rescission or annulment
thereof.
Petitioner moved for reconsideration, but in another Order 19 dated October 20, 1998, the trial court
stood its ground.
Petitioner interposed an appeal with the CA, docketed as CA-G.R. CV No. 62286. Petitioner
questioned the dismissal of Civil Case No. 97-867, arguing that the trial court erred in applying Section
48 and declaring that prescription has set in. It contended that since it was respondent and not Sotero
who obtained the insurance, the policy issued was rendered void ab initio for want of insurable
interest.
Ruling of the Court of Appeals
On September 28, 2005, the CA issued the assailed Decision, which contained the following decretal
portion:
WHEREFORE, in the light of all the foregoing, the instant appeal is DISMISSED for lack of merit.
SO ORDERED.20
The CA thus sustained the trial court. Applying Section 48 to petitioners case, the CA held that
petitioner may no longer prove that the subject policy was void ab initio or rescindible by reason of
fraudulent concealment or misrepresentation after the lapse of more than two years from its issuance. It
ratiocinated that petitioner was equipped with ample means to determine, within the first two years of
the policy, whether fraud, concealment or misrepresentation was present when the insurance coverage
was obtained. If it failed to do so within the statutory two-year period, then the insured must be
protected and allowed to claim upon the policy.
Petitioner moved for reconsideration,21 but the CA denied the same in its November 9, 2006
Resolution.22 Hence, the present Petition.
Issues
Petitioner raises the following issues for resolution:
I
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE ORDER OF
THE TRIAL COURT DISMISSING THE COMPLAINT ON THE GROUND OF
PRESCRIPTION IN CONTRAVENTION (OF) PERTINENT LAWS AND APPLICABLE

JURISPRUDENCE.
II
WHETHER THE COURT OF APPEALS ERRED IN SUSTAINING THE APPLICATION
OF THE INCONTESTABILITY PROVISION IN THE INSURANCE CODE BY THE
TRIAL COURT.
III
WHETHER THE COURT OF APPEALS ERRED IN DENYING PETITIONERS
MOTION FOR RECONSIDERATION.23
Petitioners Arguments
In praying that the CA Decision be reversed and that the case be remanded to the trial court for the
conduct of further proceedings, petitioner argues in its Petition and Reply 24 that Section 48 cannot
apply to a case where the beneficiary under the insurance contract posed as the insured and obtained
the policy under fraudulent circumstances. It adds that respondent, who was merely Soteros niece, had
no insurable interest in the life of her aunt.
Relying on the results of the investigation that it conducted after the claim for the insurance proceeds
was filed, petitioner insists that respondents claim was spurious, as it appeared that Sotero did not
actually apply for insurance coverage, was unlettered, sickly, and had no visible source of income to
pay for the insurance premiums; and that respondent was an impostor, posing as Sotero and
fraudulently obtaining insurance in the latters name without her knowledge and consent.
Petitioner adds that Insurance Policy No. 747411 was void ab initio and could not have given rise to
rights and obligations; as such, the action for the declaration of its nullity or inexistence does not
prescribe.25
Respondents Arguments
Respondent, on the other hand, essentially argues in her Comment26 that the CA is correct in applying
Section 48. She adds that petitioners new allegation in its Petition that the policy is void ab initio
merits no attention, having failed to raise the same below, as it had claimed originally that the policy
was merely voidable.
On the issue of insurable interest, respondent echoes the CAs pronouncement that since it was Sotero
who obtained the insurance, insurable interest was present. Under Section 10 of the Insurance Code,
Sotero had insurable interest in her own life, and could validly designate anyone as her beneficiary.
Respondent submits that the CAs findings of fact leading to such conclusion should be respected.
Our Ruling

The Court denies the Petition.

The Court will not depart from the trial and appellate courts finding that it was Sotero who obtained
the insurance for herself, designating respondent as her beneficiary. Both courts are in accord in this
respect, and the Court is loath to disturb this. While petitioner insists that its independent investigation
on the claim reveals that it was respondent, posing as Sotero, who obtained the insurance, this claim is
no longer feasible in the wake of the courts finding that it was Sotero who obtained the insurance for
herself. This finding of fact binds the Court.
With the above crucial finding of fact that it was Sotero who obtained the insurance for herself
petitioners case is severely weakened, if not totally disproved. Allegations of fraud, which are
predicated on respondents alleged posing as Sotero and forgery of her signature in the insurance
application, are at once belied by the trial and appellate courts finding that Sotero herself took out the
insurance for herself. "Fraudulent intent on the part of the insured must be established to entitle the
insurer to rescind the contract."27 In the absence of proof of such fraudulent intent, no right to rescind
arises.
Moreover, the results and conclusions arrived at during the investigation conducted unilaterally by
petitioner after the claim was filed may simply be dismissed as self-serving and may not form the basis
of a cause of action given the existence and application of Section 48, as will be discussed at length
below.
Section 48 serves a noble purpose, as it regulates the actions of both the insurer and the insured. Under
the provision, an insurer is given two years from the effectivity of a life insurance contract and while
the insured is alive to discover or prove that the policy is void ab initio or is rescindible by reason of
the fraudulent concealment or misrepresentation of the insured or his agent. After the two-year period
lapses, or when the insured dies within the period, the insurer must make good on the policy, even
though the policy was obtained by fraud, concealment, or misrepresentation. This is not to say that
insurance fraud must be rewarded, but that insurers who recklessly and indiscriminately solicit and
obtain business must be penalized, for such recklessness and lack of discrimination ultimately work to
the detriment of bona fide takers of insurance and the public in general.
Section 48 regulates both the actions of the insurers and prospective takers of life insurance. It gives
insurers enough time to inquire whether the policy was obtained by fraud, concealment, or
misrepresentation; on the other hand, it forewarns scheming individuals that their attempts at insurance
fraud would be timely uncovered thus deterring them from venturing into such nefarious enterprise.
At the same time, legitimate policy holders are absolutely protected from unwarranted denial of their
claims or delay in the collection of insurance proceeds occasioned by allegations of fraud, concealment,
or misrepresentation by insurers, claims which may no longer be set up after the two-year period
expires as ordained under the law.
Thus, the self-regulating feature of Section 48 lies in the fact that both the insurer and the insured are
given the assurance that any dishonest scheme to obtain life insurance would be exposed, and attempts
at unduly denying a claim would be struck down. Life insurance policies that pass the statutory two-

year period are essentially treated as legitimate and beyond question, and the individuals who wield
them are made secure by the thought that they will be paid promptly upon claim. In this manner,
Section 48 contributes to the stability of the insurance industry.
Section 48 prevents a situation where the insurer knowingly continues to accept annual premium
payments on life insurance, only to later on deny a claim on the policy on specious claims of fraudulent
concealment and misrepresentation, such as what obtains in the instant case. Thus, instead of
conducting at the first instance an investigation into the circumstances surrounding the issuance of
Insurance Policy No. 747411 which would have timely exposed the supposed flaws and irregularities
attending it as it now professes, petitioner appears to have turned a blind eye and opted instead to
continue collecting the premiums on the policy. For nearly three years, petitioner collected the
premiums and devoted the same to its own profit. It cannot now deny the claim when it is called to
account. Section 48 must be applied to it with full force and effect.
The Court therefore agrees fully with the appellate courts pronouncement that
the "incontestability clause" is a provision in law that after a policy of life insurance made payable on
the death of the insured shall have been in force during the lifetime of the insured for a period of two
(2) years from the date of its issue or of its last reinstatement, the insurer cannot prove that the policy is
void ab initio or is rescindible by reason of fraudulent concealment or misrepresentation of the insured
or his agent.
The purpose of the law is to give protection to the insured or his beneficiary by limiting the rescinding
of the contract of insurance on the ground of fraudulent concealment or misrepresentation to a period of
only two (2) years from the issuance of the policy or its last reinstatement.
The insurer is deemed to have the necessary facilities to discover such fraudulent concealment or
misrepresentation within a period of two (2) years. It is not fair for the insurer to collect the premiums
as long as the insured is still alive, only to raise the issue of fraudulent concealment or
misrepresentation when the insured dies in order to defeat the right of the beneficiary to recover under
the policy.
At least two (2) years from the issuance of the policy or its last reinstatement, the beneficiary is given
the stability to recover under the policy when the insured dies. The provision also makes clear when the
two-year period should commence in case the policy should lapse and is reinstated, that is, from the
date of the last reinstatement.
After two years, the defenses of concealment or misrepresentation, no matter how patent or wellfounded, will no longer lie.
Congress felt this was a sufficient answer to the various tactics employed by insurance companies to
avoid liability.
The so-called "incontestability clause" precludes the insurer from raising the defenses of false
representations or concealment of material facts insofar as health and previous diseases are concerned
if the insurance has been in force for at least two years during the insureds lifetime. The phrase "during

the lifetime" found in Section 48 simply means that the policy is no longer considered in force after the
insured has died. The key phrase in the second paragraph of Section 48 is "for a period of two years."
As borne by the records, the policy was issued on August 30, 1993, the insured died on April 10, 1996,
and the claim was denied on April 16, 1997. The insurance policy was thus in force for a period of 3
years, 7 months, and 24 days. Considering that the insured died after the two-year period, the plaintiffappellant is, therefore, barred from proving that the policy is void ab initio by reason of the insureds
fraudulent concealment or misrepresentation or want of insurable interest on the part of the beneficiary,
herein defendant-appellee.
Well-settled is the rule that it is the plaintiff-appellants burden to show that the factual findings of the
trial court are not based on substantial evidence or that its conclusions are contrary to applicable law
and jurisprudence. The plaintiff-appellant failed to discharge that burden.28
Petitioner claims that its insurance agent, who solicited the Sotero account, happens to be the cousin of
respondents husband, and thus insinuates that both connived to commit insurance fraud. If this were
truly the case, then petitioner would have discovered the scheme earlier if it had in earnest conducted
an investigation into the circumstances surrounding the Sotero policy. But because it did not and it
investigated the Sotero account only after a claim was filed thereon more than two years later, naturally
it was unable to detect the scheme. For its negligence and inaction, the Court cannot sympathize with
its plight. Instead, its case precisely provides the strong argument for requiring insurers to diligently
conduct investigations on each policy they issue within the two-year period mandated under Section
48, and not after claims for insurance proceeds are filed with them.
Besides, if insurers cannot vouch for the integrity and honesty of their insurance agents/salesmen and
the insurance policies they issue, then they should cease doing business. If they could not properly
screen their agents or salesmen before taking them in to market their products, or if they do not
thoroughly investigate the insurance contracts they enter into with their clients, then they have only
themselves to blame. Otherwise said, insurers cannot be allowed to collect premiums on insurance
policies, use these amounts collected and invest the same through the years, generating profits and
returns therefrom for their own benefit, and thereafter conveniently deny insurance claims by
questioning the authority or integrity of their own agents or the insurance policies they issued to their
premium-paying clients. This is exactly one of the schemes which Section 48 aims to prevent.
Insurers may not be allowed to delay the payment of claims by filing frivolous cases in court, hoping
that the inevitable may be put off for years or even decades by the pendency of these unnecessary
court cases. In the meantime, they benefit from collecting the interest and/or returns on both the
premiums previously paid by the insured and the insurance proceeds which should otherwise go to their
beneficiaries. The business of insurance is a highly regulated commercial activity in the country, 29 and
is imbued with public interest.30 "An insurance contract is a contract of adhesion which must be

construed liberally in favor of the insured and strictly against the insurer in order to safeguard the
formers interest."31
WHEREFORE, the Petition is DENIED. The assailed September 28, 2005 Decision and the November
9, 2006 Resolution of the Court of Appeals in CA-G.R. CV No. 62286 are AFFIRMED.
SO ORDERED.
MARIANO C. DEL CASTILLO
Associate Justice
WE CONCUR:
ANTONIO T. CARPIO
Associate Justice
Chairperson
ARTURO D. BRION
JOSE PORTUGAL PEREZ
Associate Justice
Associate Justice
ESTELA M. PERLAS-BERNABE
Associate Justice
ATT E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.
ANTONIO T. CARPIO
Associate Justice
Chairperson
C E R T I F I CAT I O N
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Decision had been reached in consultation before the case was
assigned to the writer of the opinion of the Court's Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
1

Rollo, pp. 3-14.

CA rollo, pp. 38-47; penned by Associate Justice Amelita G. Tolentino and concurred in by
Associate Justices Danilo B. Pine and Vicente S.E. Veloso.
3

Id. at 59-60; penned by Associate Justice Amelita G. Tolentino and concurred in by Associate

Justices Regalado E. Maambong and Vicente S.E. Veloso.

4

Id. at 48-56.

Rollo, p. 6.

Id. at 6-7, 71.

Records, p. 23.

Rollo, p. 7.

Id. at 7, 16.

10

Records, p. 2.

11

Id.

12

Presidential Decree No. 612.

13

Art. 1390. The following contracts are voidable or annullable, even though there may have
been no damage to the contracting parties:
(1) Those where one of the parties is incapable of giving consent to a contract;
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue
influence or fraud.
These contracts are binding, unless they are annulled by a proper action in court. They
are susceptible of ratification.
14

Records, pp. 19-22.

15 TSN,

May 5, 1998, pp. 12-13; records, pp. 95-96.

16

Id. at 15; id. at 98.

17

Records, pp. 55-56; penned by Judge Ignacio M. Capulong.

18

Id. at 56.

19

Id. at 116-119.

20

CA rollo, p. 46.

21

Id. at 48-56.

22

Id. at 59-60.

23

Rollo, p. 9.

24

Id. at 69-75.

25

Citing Article 1410 of the Civil Code:

Art. 1410. The action or defense for the declaration of the inexistence of a contract does
not prescribe.

26

Rollo, pp. 57-67.

27

Great Pacific Life Assurance Corporation v. Court of Appeals, 375 Phil. 142, 152 (1999).

28

CA rollo, pp. 44-46.

29

Tongko v. The Manufacturers Life Insurance Company (Phils.), Inc., G.R. No. 167622, June
29, 2010, 622 SCRA 58, 75.
30

Republic v. Del Monte Motors, Inc., 535 Phil. 53, 60 (2006); White Gold Marine Services,
Inc. v. Pioneer Insurance & Surety Corporation, 502 Phil. 692, 700 (2005).
31

Eternal Gardens Memorial Park Corporation v. Philippine American Life Insurance

Company, G.R. No. 166245, April 9, 2008, 551 SCRA 1, 13.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 75605 January 22, 1993

RAFAEL (REX) VERENDIA, petitioner,
vs.
COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES, respondents.
G.R. No. 76399 January 22, 1993
FIDELITY & SURETY CO. OF THE PHILIPPINES, INC., petitioner,
vs.
RAFAEL VERENDIA and THE COURT OF APPEALS, respondents.
B.L. Padilla for petitioner.
Sabino Padilla, Jr. for Fidelity & Surety, Co.

MELO, J.:
The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety
Insurance Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F18876 effective between June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia's
residential building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the amount of
P385,000.00. Designated as beneficiary was the Monte de Piedad & Savings Bank. Verendia also
insured the same building with two other companies, namely, The Country Bankers Insurance
for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development
Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30, 198l.
While the three fire insurance policies were in force, the insured property was completely
destroyed by fire on the early morning of December 28, 1980. Fidelity was accordingly informed
of the loss and despite demands, refused payment under its policy, thus prompting Verendia to
file a complaint with the then Court of First Instance of Quezon City, praying for payment of
P385,000.00, legal interest thereon, plus attorney's fees and litigation expenses. The complaint
was later amended to include Monte de Piedad as an "unwilling defendant" (P. 16, Record).
Answering the complaint, Fidelity, among other things, averred that the policy was avoided by
reason of over-insurance; that Verendia maliciously represented that the building at the time of
the fire was leased under a contract executed on June 25, 1980 to a certain Roberto Garcia, when
actually it was a Marcelo Garcia who was the lessee.
On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor
of Fidelity. In sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of
the policy was also violated by Verendia in that the insured failed to inform Fidelity of his other
insurance coverages with Country Bankers Insurance and Development Insurance.
Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on
March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.), the
appellate court reversed for the following reasons: (a) there was no misrepresentation concerning
the lease for the contract was signed by Marcelo Garcia in the name of Roberto Garcia; and (b)
Paragraph 3 of the policy contract requiring Verendia to give notice to Fidelity of other contracts
of insurance was waived by Fidelity as shown by its conduct in attempting to settle the claim of
Verendia (pp. 32-33, Rollo of G.R. No. 76399).
Fidelity received a copy of the appellate court's decision on April 4, 1986, but instead of directly
filing a motion for reconsideration within 15 days therefrom, Fidelity filed on April 21, 1986, a
motion for extension of 3 days within which to file a motion for reconsideration. The motion for
extension was not filed on April 19, 1986 which was the 15th day after receipt of the decision
because said 15th day was a Saturday and of course, the following day was a Sunday (p. 14.,
Rollo of G.R. No. 75605). The motion for extension was granted by the appellate court on April
30, 1986 (p. 15. ibid.), but Fidelity had in the meantime filed its motion for reconsideration on
April 24, 1986 (p. 16, ibid.).

Verendia filed a motion to expunge from the record Fidelity's motion for reconsideration on the
ground that the motion for extension was filed out of time because the 15th day from receipt of
the decision which fell on a Saturday was ignored by Fidelity, for indeed, so Verendia contended,
the Intermediate Appellate Court has personnel receiving pleadings even on Saturdays.
The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for
reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid .), the petition herein
docketed as G.R. No. 75605 was initiated. Subsequently, or more specifically on October 21, 1986,
the appellate court denied Fidelity's motion for reconsideration and account thereof. Fidelity
filed on March 31, 1986, the petition for review on certiorari now docketed as G.R. No. 76399.
The
two
petitions,
inter-related
as
they
are,
were
consolidated
(p. 54, Rollo of G.R. No. 76399) and thereafter given due course.
Before we can even begin to look into the merits of the main case which is the petition for review
on certiorari, we must first determine whether the decision of the appellate court may still be
reviewed, or whether the same is beyond further judicial scrutiny. Stated otherwise, before
anything else, inquiry must be made into the issue of whether Fidelity could have legally asked
for an extension of the 15-day reglementary period for appealing or for moving for
reconsideration.
As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the
pendency of a motion for extension of time to perfect an appeal does not suspend the running of
the period sought to be extended (Garcia vs. Buenaventura 74 Phil. 611 [1944]). To the same
effect were the rulings in Gibbs vs. CFI of Manila (80 Phil. 160 [1948]) Bello vs. Fernando (4
SCRA 138 [1962]), and Joe vs. King (20 SCRA 1120 [1967]).
The above cases notwithstanding and because the Rules of Court do not expressly prohibit the
filing of a motion for extension of time to file a motion for reconsideration in regard to a final
order or judgment, magistrates, including those in the Court of Appeals, held sharply divided
opinions on whether the period for appealing which also includes the period for moving to
reconsider may be extended. The matter was not definitely settled until this Court issued its
Resolution in Habaluyas Enterprises, Inc. vs. Japson (142 SCRA [1986]), declaring that beginning
one month from the promulgation of the resolution on May 30, 1986
. . . the rule shall be strictly enforced that no motion for extension of time to file a
motion for new trial or reconsideration shall be filed . . . (at p. 212.)
In the instant case, the motion for extension was filed and granted before June 30, 1986,
although, of course, Verendia's motion to expunge the motion for reconsideration was not finally
disposed until July 22, 1986, or after the dictum in Habaluyas had taken effect. Seemingly,
therefore, the filing of the motion for extension came before its formal proscription under
Habaluyas, for which reason we now turn our attention to G.R. No. 76399.
Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the contract

of lease submitted by Verendia to support his claim on the fire insurance policy constitutes a false
declaration which would forfeit his benefits under Section 13 of the policy and (b) whether or not,
in submitting the subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia's
claim in the amount stated in said receipt. 1
Verging on the factual, the issue of the veracity or falsity of the lease contract could have been
better resolved by the appellate court for, in a petition for review on certiorari under Rule 45, the
jurisdiction of this Court is limited to the review of errors of law. The appellate court's findings
of fact are, therefore, conclusive upon this Court except in the following cases: (1) when the
conclusion is a finding grounded entirely on speculation, surmises, or conjectures; (2) when the
inference made is manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of
discretion in the appreciation of facts; (4) when the judgment is premised on a misapprehension
of facts; (5) when the findings of fact are conflicting; and (6) when the Court of Appeals in
making its findings went beyond the issues of the case and the same are contrary to the
admissions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433 [1991]).
In view of the conflicting findings of the trial court and the appellate court on important issues in
these consolidated cases and it appearing that the appellate court judgment is based on a
misapprehension of facts, this Court shall review the evidence on record.
The contract of lease upon which Verendia relies to support his claim for insurance benefits, was
entered into between him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980
(Exh. "1"), a couple of days after the effectivity of the insurance policy. When the rented
residential building was razed to the ground on December 28, 1980, it appears that Robert
Garcia (or Roberto Garcia) was still within the premises. However, according to the investigation
report prepared by Pat. Eleuterio M. Buenviaje of the Antipolo police, the building appeared to
have "no occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic) portion of
said
compound"
(Exh. "E"). These pieces of evidence belie Verendia's uncorroborated testimony that Marcelo
Garcia, whom he considered as the real lessee, was occupying the building when it was burned
(TSN, July 27, 1982, p.10).
Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was
able to locate him. Robert Garcia then executed an affidavit before the National Intelligence and
Security Authority (NISA) to the effect that he was not the lessee of Verendia's house and that his
signature on the contract of lease was a complete forgery. Thus, on the strength of these facts, the
adjuster submitted a report dated December 4, 1981 recommending the denial of Verendia's
claim (Exh. "2").
Ironically, during the trial, Verendia admitted that it was not Robert Garcia who signed the lease
contract. According to Verendia, it was signed by Marcelo Garcia, cousin of Robert, who had
been paying the rentals all the while. Verendia, however, failed to explain why Marcelo had to
sign his cousin's name when he in fact was paying for the rent and why he (Verendia) himself, the

lessor, allowed such a ruse. Fidelity's conclusions on these proven facts appear, therefore, to have
sufficient bases; Verendia concocted the lease contract to deflect responsibility for the fire
towards an alleged "lessee", inflated the value of the property by the alleged monthly rental of
P6,500 when in fact, the Provincial Assessor of Rizal had assessed the property's fair market
value to be only P40,300.00, insured the same property with two other insurance companies for a
total coverage of around P900,000, and created a dead-end for the adjuster by the disappearance
of Robert Garcia.
Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific
Banking Corporation vs. Court of Appeals 168 SCRA 1 [1988]). Its terms and conditions
constitute the measure of the insurer's liability and compliance therewith is a condition precedent
to the insured's right to recovery from the insurer (Oriental Assurance Corporation vs. Court of
Appeals, 200 SCRA 459 [1991], citing Perla Compania de Seguros, Inc. vs. Court of Appeals, 185
SCRA 741 [1991]). As it is also a contract of adhesion, an insurance contract should be liberally
construed in favor of the insured and strictly against the insurer company which usually prepares
it (Western Guaranty Corporation vs. Court of Appeals, 187 SCRA 652 [1980]).
Considering, however, the foregoing discussion pointing to the fact that Verendia used a false
lease contract to support his claim under Fire Insurance Policy No. F-18876, the terms of the
policy should be strictly construed against the insured. Verendia failed to live by the terms of the
policy, specifically Section 13 thereof which is expressed in terms that are clear and
unambiguous, that all benefits under the policy shall be forfeited "If the claim be in any respect
fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent
means or devises are used by the Insured or anyone acting in his behalf to obtain any benefit
under the policy". Verendia, having presented a false declaration to support his claim for benefits
in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of Section 13
of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking
Corporation vs. Court of Appeals, supra). Worse yet, by presenting a false lease contract,
Verendia, reprehensibly disregarded the principle that insurance contracts are uberrimae fidae
and demand the most abundant good faith (Velasco vs. Apostol, 173 SCRA 228 [1989]).
There is also no reason to conclude that by submitting the subrogation receipt as evidence in
court, Fidelity bound itself to a "mutual agreement" to settle Verendia's claims in consideration
of the amount of P142,685.77. While the said receipt appears to have been a filled-up form of
Fidelity, no representative of Fidelity had signed it. It is even incomplete as the blank spaces for a
witness and his address are not filled up. More significantly, the same receipt states that Verendia
had received the aforesaid amount. However, that Verendia had not received the amount stated
therein, is proven by the fact that Verendia himself filed the complaint for the full amount of
P385,000.00 stated in the policy. It might be that there had been efforts to settle Verendia's
claims, but surely, the subrogation receipt by itself does not prove that a settlement had been
arrived at and enforced. Thus, to interpret Fidelity's presentation of the subrogation receipt in
evidence as indicative of its accession to its "terms" is not only wanting in rational basis but

would be substituting the will of the Court for that of the parties.
WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is
GRANTED and the decision of the then Intermediate Appellate Court under review is
REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD.
SO ORDERED.
Gutierrez, Jr., Bidin, Davide, Jr. and Romero, JJ., concur.

# Footnotes
1 Fidelity appears to have agreed with the appellate court that it had waived
Verendia's failure to abide by policy condition No. 3 on disclosure of other
insurance policies by its failure to assign it as an error in the petition in G.R. No.
76399. It must have likewise realized the futility of assigning it as an error because
on the first page of the policy the following is typewritten: "Other insurances
allowed, the amounts to be declared in the event of loss or when required."

FIRST DIVISION
[G.R. No. 125678. March 18, 2002]
PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA
TRINOS, respondents.
DECISION
YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with
petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the
following question:
Have you or any of your family members ever consulted or been treated for high blood pressure, heart
trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to March 1, 1989.
Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondents
husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein.
He was also entitled to avail of out-patient benefits such as annual physical examinations, preventive
health care and other out-patient services.
Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to

March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a
maximum sum of P75,000.00 per disability.[2]
During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila
Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the
hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner
denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a
concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time
of Ernanis confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the
application form. Thus, respondent paid the hospitalization expenses herself, amounting to about
P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical therapist at home.
Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however,
respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and
was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital
where he died on the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action
for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil
Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and attorneys
fees. After trial, the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita
Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the
amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.[3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for
damages and absolved petitioner Reverente.[4] Petitioners motion for reconsideration was denied.[5]
Hence, petitioner brought the instant petition for review, raising the primary argument that a health care
agreement is not an insurance contract; hence the incontestability clause under the Insurance Code[6]
does not apply.
Petitioner argues that the agreement grants living benefits, such as medical check-ups and
hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the
agreement until its expiration one-year thereafter. Petitioner also points out that only medical and
hospitalization benefits are given under the agreement without any indemnification, unlike in an

insurance contract where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts which last longer,[7]
petitioner argues that the incontestability clause does not apply, as the same requires an effectivity
period of at least two years. Petitioner further argues that it is not an insurance company, which is
governed by the Insurance Commission, but a Health Maintenance Organization under the authority of
the Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one
undertakes for a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of
persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium.[8]
Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future,
which may damnify a person having an insurable interest against him, may be insured against. Every
person has an insurable interest in the life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or support, or in
whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money, respecting
property or service, of which death or illness might delay or prevent the performance;
and
(4) of any person upon whose life any estate or interest vested in him depends.
In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement
was his own health. The health care agreement was in the nature of non-life insurance, which is
primarily a contract of indemnity.[9] Once the member incurs hospital, medical or any other expense
arising from sickness, injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his application. It appears that
in the application for health coverage, petitioners required respondents husband to sign an express
authorization for any person, organization or entity that has any record or knowledge of his health to
furnish any and all information relative to any hospitalization, consultation, treatment or any other

medical advice or examination.[10] Specifically, the Health Care Agreement signed by respondents
husband states:
We hereby declare and agree that all statement and answers contained herein and in any addendum
annexed to this application are full, complete and true and bind all parties in interest under the
Agreement herein applied for, that there shall be no contract of health care coverage unless and until an
Agreement is issued on this application and the full Membership Fee according to the mode of payment
applied for is actually paid during the lifetime and good health of proposed Members; that no
information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless
set out in writing in the application; that any physician is, by these presents, expressly authorized to
disclose or give testimony at anytime relative to any information acquired by him in his professional
capacity upon any question affecting the eligibility for health care coverage of the Proposed Members
and that the acceptance of any Agreement issued on this application shall be a ratification of any
correction in or addition to this application as stated in the space for Home Office Endorsement.[11]
(Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to
inquire about the applicants medical history, thus:
I hereby authorize any person, organization, or entity that has any record or knowledge of my health
and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and all information
relative to any hospitalization, consultation, treatment or any other medical advice or examination. This
authorization is in connection with the application for health care coverage only. A photographic copy
of this authorization shall be as valid as the original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:
Failure to disclose or misrepresentation of any material information by the member in the application
or medical examination, whether intentional or unintentional, shall automatically invalidate the
Agreement from the very beginning and liability of Philamcare shall be limited to return of all
Membership Fees paid. An undisclosed or misrepresented information is deemed material if its
revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a
higher Membership Fee for the benefit or benefits applied for.[13]
The answer assailed by petitioner was in response to the question relating to the medical history of the
applicant. This largely depends on opinion rather than fact, especially coming from respondents
husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers
made in good faith and without intent to deceive will not avoid a policy even though they are untrue.
[14] Thus,
(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the
insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its
acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to
the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not
justified in relying upon such statement, but is obligated to make further inquiry. There is a clear

distinction between such a case and one in which the insured is fraudulently and intentionally states to
be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the
impossibility of which is shown by the facts within his knowledge, since in such case the intent to
deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the
insurance contract.[16] Concealment as a defense for the health care provider or insurer to avoid
liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing
evidence rests upon the provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a responsibility under the
agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of
the health care provider attaches once the member is hospitalized for the disease or injury covered by
the agreement or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract
of insurance. The right to rescind should be exercised previous to the commencement of an action on
the contract.[17] In this case, no rescission was made. Besides, the cancellation of health care
agreements as in insurance policies require the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one or more of the
grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the policy;
4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of
insured, to furnish facts on which cancellation is based.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract
contain limitations on liability, courts should construe them in such a way as to preclude the insurer
from non-compliance with his obligation.[19] Being a contract of adhesion, the terms of an insurance
contract are to be construed strictly against the party which prepared the contract the insurer.[20] By
reason of the exclusive control of the insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of
the insured, especially to avoid forfeiture.[21] This is equally applicable to Health Care Agreements.
The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally
construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should
be strictly construed against the provider.[22]
Anent the incontestability of the membership of respondents husband, we quote with approval the
following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had
twelve months from the date of issuance of the Agreement within which to contest the membership of

the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if
the patient was sick of diabetes or hypertension. The periods having expired, the defense of
concealment or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering
that at the time of their marriage, the deceased was previously married to another woman who was still
alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be
made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital
and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the
expenses incurred by respondent for the deceaseds hospitalization, medication and the professional fees
of the attending physicians.[24]
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court
of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.

[1] Record, p. 28.

[2] Exhibit 4, Record, p. 156.
[3] Dated November 16, 1993; penned by Judge Lolita Gal-lang; Rollo, pp. 134-135.
[4] Dated December 14, 1995, penned by Associate Justice Fidel P. Purisima, concurred in by Associate
Justices Fermin A. Martin, Jr. and Conchita Carpio Morales; Rollo, p. 45.
[5] Resolution dated July 23, 1996; Rollo, p. 48.
[6] Section 48 of P.D. No. 1460 otherwise known as the Insurance Code.
[7] Petition, pp. 13-14; Rollo, pp. 22-23.
[8] See Vance pp. 1-2 cited in Agbayani, Commercial Laws of the Philippines, vol. 2, 1986 ed. p. 6.
[9] Cha v. Court of Appeals, 270 SCRA 690, 694 (1997).
[10] Record, p. 28.
[11] Ibid.
[12] Ibid.
[13] Ibid., p. 13.
[14] Bryant v. Modern Woodmen of America, 86 Neb 372, 125 NW 621.
[15] Herrick v. Union Mut. Fire Ins. Co., 48 Me 558; Bryant v. Modern Woodmen of America, supra;

Boutelle v. Westchester Fire Ins. Co., 51 Vt 4 cited in 43 Am Jur 2d 1016.

[16] Great Pacific Life v. Court of Appeals, 316 SCRA 677 [1999], citing Ng Gan Zee v. Asian
Crusader Life Assurance Corp., 122 SCRA 461 [1983].
[17] Section 48, Insurance Code.
[18] Malayan Insurance v. Cruz Arnaldo, 154 SCRA 672 [1987].
[19] Heirs of Ildefonso Cosculluela, Sr. v. Rico General Insurance Corporation, 179 SCRA 511 [1989].
[20] Landicho v. GSIS, 44 SCRA 7 [1972]; Western Guaranty Company v. Court of Appeals, 187
SCRA 652 [1990].
[21] 44 C.J.S. pp. 1166-1175; 29 Am. Jur. 180. See also Aetna Insurance Co. v. Rhodes, 170 F2d 111;
Insurance Co. v. Norton, 96 U.S. 234, 24 L ed 689; Pfeiffer v. Missouri State Life Ins. Co., 174 Ark
783, 297 SW 847.
[22] See Myers v. Kitsap Physicians Service, 78 Wash 2d 286, 474 P2d 109, 66 ALR3d 1196; Hunt v.
Hospital Service Plan, 81 ALR 2d 919 cited in 43 Am Jur 2d 289.
[23] Record, p. 257.
[24] Exhibit B, Exhibits D to D-7; Record, pp. 88-97.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-52756 October 12, 1987
MANILA MAHOGANY MANUFACTURING CORPORATION, petitioner,
vs.
COURT OF APPEALS AND ZENITH INSURANCE CORPORATION, respondents.

PADILLA, J:
Petition to review the decision * of the Court of Appeals, in CA-G.R. No. SP-08642, dated 21 March 1979, ordering petitioner Manila Mahogany
Manufacturing Corporation to pay private respondent Zenith Insurance Corporation the sum of Five Thousand Pesos (P5,000.00) with 6% annual interest from
18 January 1973, attorney's fees in the sum of five hundred pesos (P500.00), and costs of suit, and the resolution of the same Court, dated 8 February 1980,
denying petitioner's motion for reconsideration of it's decision.

From 6 March 1970 to 6 March 1971, petitioner insured its Mercedes Benz 4-door sedan with
respondent insurance company. On 4 May 1970 the insured vehicle was bumped and damaged by a
truck owned by San Miguel Corporation. For the damage caused, respondent company paid petitioner
five thousand pesos (P5,000.00) in amicable settlement. Petitioner's general manager executed a

Release of Claim, subrogating respondent company to all its right to action against San Miguel
Corporation.
On 11 December 1972, respondent company wrote Insurance Adjusters, Inc. to demand reimbursement
from San Miguel Corporation of the amount it had paid petitioner. Insurance Adjusters, Inc. refused
reimbursement, alleging that San Miguel Corporation had already paid petitioner P4,500.00 for the
damages to petitioner's motor vehicle, as evidenced by a cash voucher and a Release of Claim executed
by the General Manager of petitioner discharging San Miguel Corporation from "all actions, claims,
demands the rights of action that now exist or hereafter [sic] develop arising out of or as a consequence
of the accident."
Respondent insurance company thus demanded from petitioner reimbursement of the sum of P4,500.00
paid by San Miguel Corporation. Petitioner refused; hence, respondent company filed suit in the City
Court of Manila for the recovery of P4,500.00. The City Court ordered petitioner to pay respondent
P4,500.00. On appeal the Court of First Instance of Manila affirmed the City Court's decision in toto,
which CFI decision was affirmed by the Court of Appeals, with the modification that petitioner was to
pay respondent the total amount of P5,000.00 that it had earlier received from the respondent insurance
company.
Petitioner now contends it is not bound to pay P4,500.00, and much more, P5,000.00 to respondent
company as the subrogation in the Release of Claim it executed in favor of respondent was conditioned
on recovery of the total amount of damages petitioner had sustained. Since total damages were valued
by petitioner at P9,486.43 and only P5,000.00 was received by petitioner from respondent, petitioner
argues that it was entitled to go after San Miguel Corporation to claim the additional P4,500.00
eventually paid to it by the latter, without having to turn over said amount to respondent. Respondent of
course disputes this allegation and states that there was no qualification to its right of subrogation under
the Release of Claim executed by petitioner, the contents of said deed having expressed all the intents
and purposes of the parties.
To support its alleged right not to return the P4,500.00 paid by San Miguel Corporation, petitioner cites
Art. 2207 of the Civil Code, which states:
If the plaintiff's property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract
complained of the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the amount paid by
the insurance company does not fully cover the injury or loss the aggrieved party shall
be entitled to recover the deficiency from the person causing the loss or injury.
Petitioner also invokes Art. 1304 of the Civil Code, stating.
A creditor, to whom partial payment has been made, may exercise his right for the
remainder, and he shall be preferred to the person who has been subrogated in his place
in virtue of the partial payment of the same credit.

We find petitioners arguments to be untenable and without merit. In the absence of any other evidence
to support its allegation that a gentlemen's agreement existed between it and respondent, not embodied
in the Release of Claim, such ease of Claim must be taken as the best evidence of the intent and
purpose of the parties. Thus, the Court of Appeals rightly stated:
Petitioner argues that the release claim it executed subrogating Private respondent to any
right of action it had against San Miguel Corporation did not preclude Manila Mahogany
from filing a deficiency claim against the wrongdoer. Citing Article 2207, New Civil
Code, to the effect that if the amount paid by an insurance company does not fully cover
the loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss, petitioner claims a preferred right to retain the amount coming from
San Miguel Corporation, despite the subrogation in favor of Private respondent.
Although petitioners right to file a deficiency claim against San Miguel Corporation is
with legal basis, without prejudice to the insurer's right of subrogation, nevertheless
when Manila Mahogany executed another release claim (Exhibit K) discharging San
Miguel Corporation from "all actions, claims, demands and rights of action that now
exist or hereafter arising out of or as a consequence of the accident" after the insurer had
paid the proceeds of the policy- the compromise agreement of P5,000.00 being based on
the insurance policy-the insurer is entitled to recover from the insured the amount of
insurance money paid (Metropolitan Casualty Insurance Company of New York vs.
Badler, 229 N.Y.S. 61, 132 Misc. 132 cited in Insurance Code and Insolvency Law with
comments and annotations, H.B. Perez 1976, p. 151). Since petitioner by its own acts
released San Miguel Corporation, thereby defeating private respondents, the right of
subrogation, the right of action of petitioner against the insurer was also nullified. (Sy
Keng & Co. vs. Queensland Insurance Co., Ltd., 54 O.G. 391) Otherwise stated: private
respondent may recover the sum of P5,000.00 it had earlier paid to petitioner. 1
As held in Phil. Air Lines v. Heald Lumber Co., 2
If a property is insured and the owner receives the indemnity from the insurer, it is
provided in [Article 2207 of the New Civil Code] that the insurer is deemed subrogated
to the rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover the
deficiency. ... Under this legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the insured 3 (Emphasis supplied)
The decision of the respondent court ordering petitioner to pay respondent company, not the P4,500.00
as originally asked for, but P5,000.00, the amount respondent company paid petitioner as insurance, is
also in accord with law and jurisprudence. In disposing of this issue, the Court of Appeals held:
... petitioner is entitled to keep the sum of P4,500.00 paid by San Miguel Corporation
under its clear right to file a deficiency claim for damages incurred, against the
wrongdoer, should the insurance company not fully pay for the injury caused (Article

2207, New Civil Code). However, when petitioner released San Miguel Corporation
from any liability, petitioner's right to retain the sum of P5,000.00 no longer existed,
thereby entitling private respondent to recover the same. (Emphasis supplied)
As has been observed:
... The right of subrogation can only exist after the insurer has paid the otherwise the
insured will be deprived of his right to full indemnity. If the insurance proceeds are not
sufficient to cover the damages suffered by the insured, then he may sue the party
responsible for the damage for the the [sic] remainder. To the extent of the amount he
has already received from the insurer enjoy's [sic] the right of subrogation.
Since the insurer can be subrogated to only such rights as the insured may have, should
the insured, after receiving payment from the insurer, release the wrongdoer who caused
the loss, the insurer loses his rights against the latter. But in such a case, the insurer will
be entitled to recover from the insured whatever it has paid to the latter, unless the
release was made with the consent of the insurer. 4 (Emphasis supplied.)
And even if the specific amount asked for in the complaint is P4,500.00 only and not P5,000.00, still,
the respondent Court acted well within its discretion in awarding P5,000.00, the total amount paid by
the insurer. The Court of Appeals rightly reasoned as follows:
It is to be noted that private respondent, in its companies, prays for the recovery, not of
P5,000.00 it had paid under the insurance policy but P4,500.00 San Miguel Corporation
had paid to petitioner. On this score, We believe the City Court and Court of First
Instance erred in not awarding the proper relief. Although private respondent prays for
the reimbursement of P4,500.00 paid by San Miguel Corporation, instead of P5,000.00
paid under the insurance policy, the trial court should have awarded the latter, although
not prayed for, under the general prayer in the complaint "for such further or other relief
as may be deemed just or equitable, (Rule 6, Sec. 3, Revised Rules of Court; Rosales vs.
Reyes Ordoveza, 25 Phil. 495 ; Cabigao vs. Lim, 50 Phil. 844; Baguiro vs. Barrios
Tupas, 77 Phil 120).
WHEREFORE, premises considered, the petition is DENIED. The judgment appealed from is hereby
AFFIRMED with costs against petitioner.
SO ORDERED.
Yap (Chairman), Melencio-Herrera, Paras and Sarmiento, JJ., concur.
Footnotes
* Penned by Justice Simeon M. Gopengco, with the concurrence of Justices Mama D.
Busran and Isidro C. Borromeo.
1 Rollo at 45-46.

2 101 Phil. 1031 (1957).

3 Id. at 1035.
4 Campos and Campos, NOTES AND SELECTED CASES ON INSURANCE LAW
492 (1960)

THIRD DIVISION
[G.R. No. 150094. August 18, 2004]
FEDERAL EXPRESS CORPORATION, petitioner, vs. AMERICAN HOME ASSURANCE
COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.
DECISION
PANGANIBAN, J.:
Basic is the requirement that before suing to recover loss of or damage to transported goods, the
plaintiff must give the carrier notice of the loss or damage, within the period prescribed by the Warsaw
Convention and/or the airway bill.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, challenging the June 4, 2001
Decision[2] and the September 21, 2001 Resolution[3] of the Court of Appeals (CA) in CA-GR CV No.
58208. The assailed Decision disposed as follows:
WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The
appealed Decision of Branch 149 of the Regional Trial Court of Makati City in Civil Case No. 951219, entitled American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL
EXPRESS CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.), is hereby
AFFIRMED and REITERATED.
Costs against the [petitioner and Cargohaus, Inc.].[4]
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The antecedent facts are summarized by the appellate court as follows:
On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA
delivered to Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal Express
Corporation, a shipment of 109 cartons of veterinary biologicals for delivery to consignee
SMITHKLINE and French Overseas Company in Makati City, Metro Manila. The shipment was
covered by Burlington Airway Bill No. 11263825 with the words, REFRIGERATE WHEN NOT IN

TRANSIT and PERISHABLE stamp marked on its face. That same day, Burlington insured the cargoes
in the amount of $39,339.00 with American Home Assurance Company (AHAC). The following day,
Burlington turned over the custody of said cargoes to Federal Express which transported the same to
Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29, 1994 in Flight
No. 0071-28NRT and was immediately stored at [Cargohaus Inc.s] warehouse. While the second,
consisting of 17 cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 0071-30NRT
which was likewise immediately stored at Cargohaus warehouse. Prior to the arrival of the cargoes,
Federal Express informed GETC Cargo International Corporation, the customs broker hired by the
consignee to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival
of its clients cargoes.
On February 10, 1994, DARIO C. DIONEDA (DIONEDA), twelve (12) days after the cargoes arrived
in Manila, a non-licensed customs broker who was assigned by GETC to facilitate the release of the
subject cargoes, found out, while he was about to cause the release of the said cargoes, that the same
[were] stored only in a room with two (2) air conditioners running, to cool the place instead of a
refrigerator. When he asked an employee of Cargohaus why the cargoes were stored in the cool room
only, the latter told him that the cartons where the vaccines were contained specifically indicated
therein that it should not be subjected to hot or cold temperature. Thereafter, DIONEDA, upon
instructions from GETC, did not proceed with the withdrawal of the vaccines and instead, samples of
the same were taken and brought to the Bureau of Animal Industry of the Department of Agriculture in
the Philippines by SMITHKLINE for examination wherein it was discovered that the ELISA reading of
vaccinates sera are below the positive reference serum.
As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the
shipment and, declaring total loss for the unusable shipment, filed a claim with AHAC through its
representative in the Philippines, the Philam Insurance Co., Inc. (PHILAM) which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED
THIRTY NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against
the [petitioner] imputing negligence on either or both of them in the handling of the cargo.
Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held solidarily
liable for the loss as follows:
WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its CoDefendant Cargohaus] are directed to pay [respondents], jointly and severally, the following:
1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest from the time of
the filing of the complaint to the time the same is fully paid.
2. Attorneys fees in the amount of P50,000.00 and
3. Costs of suit.
SO ORDERED.
Aggrieved, [petitioner] appealed to [the CA].[5]

Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture (Animal and Plant Health
Inspection Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the
appellate court held that the shipping Receipts were a prima facie proof that the goods had indeed been
delivered to the carrier in good condition. We quote from the ruling as follows:
Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to the
carrier in good condition [i.e., the shipping receipts], and that the carrier delivered the goods in a
damaged condition, a presumption is raised that the damage occurred through the fault or negligence of
the carrier, and this casts upon the carrier the burden of showing that the goods were not in good
condition when delivered to the carrier, or that the damage was occasioned by some cause excepting
the carrier from absolute liability. This the [petitioner] failed to discharge. x x x.[6]
Found devoid of merit was petitioners claim that respondents had no personality to sue. This argument
was supposedly not raised in the Answer or during trial.
Hence, this Petition.[7]
The Issues
In its Memorandum, petitioner raises the following issues for our consideration:
I.
Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the
Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?
II.
Is the conclusion of the Honorable Court of Appeals petitioners claim that respondents have no
personality to sue because the payment was made by the respondents to Smithkline when the insured
under the policy is Burlington Air Express is devoid of merit correct or not?
III.
Is the conclusion of the Honorable Court of Appeals that the goods were received in good condition,
correct or not?
IV.
Are Exhibits F and G hearsay evidence, and therefore, not admissible?
V.
Is the Honorable Court of Appeals correct in ignoring and disregarding respondents own admission that
petitioner is not liable? and
VI.
Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?[8]

Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court? (2)
Is Federal Express liable for damage to or loss of the insured goods?
This Courts Ruling
The Petition has merit.
Preliminary Issue:
Propriety of Review
The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question
of law cognizable by the Supreme Court.[9]
In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the
conclusions drawn from such facts. Hence, this case is a proper subject for review by this Court.
Main Issue:
Liability for Damages
Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it -because the payment made to Smithkline was erroneous.
Pertinent to this issue is the Certificate of Insurance[10] (Certificate) that both opposing parties cite in
support of their respective positions. They differ only in their interpretation of what their rights are
under its terms. The determination of those rights involves a question of law, not a question of fact. As
distinguished from a question of law which exists when the doubt or difference arises as to what the
law is on a certain state of facts -- there is a question of fact when the doubt or difference arises as to
the truth or the falsehood of alleged facts; or when the query necessarily invites calibration of the
whole evidence considering mainly the credibility of witnesses, existence and relevancy of specific
surrounding circumstance, their relation to each other and to the whole and the probabilities of the
situation.[11]
Proper Payee
The Certificate specifies that loss of or damage to the insured cargo is payable to order x x x upon
surrender of this Certificate. Such wording conveys the right of collecting on any such damage or loss,
as fully as if the property were covered by a special policy in the name of the holder itself. At the back
of the Certificate appears the signature of the representative of Burlington. This document has thus
been duly indorsed in blank and is deemed a bearer instrument.
Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of
being indemnified for loss of or damage to the insured shipment, as fully as if the property were
covered by a special policy in the name of the holder. Hence, being the holder of the Certificate and
having an insurable interest in the goods, Smithkline was the proper payee of the insurance proceeds.
Subrogation
Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt[12]

in favor of respondents. The latter were thus authorized to file claims and begin suit against any such
carrier, vessel, person, corporation or government. Undeniably, the consignee had a legal right to
receive the goods in the same condition it was delivered for transport to petitioner. If that right was
violated, the consignee would have a cause of action against the person responsible therefor.
Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the
insurers entitlement to subrogation pro tanto -- being of the highest equity -- equips it with a cause of
action in case of a contractual breach or negligence.[13] Further, the insurers subrogatory right to sue for
recovery under the bill of lading in case of loss of or damage to the cargo is jurisprudentially upheld.[14]
In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents
and purposes, it stands in the place and in substitution of the consignee. A fortiori, both the insurer and
the consignee are bound by the contractual stipulations under the bill of lading.[15]
Prescription of Claim
From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that
respondents claim and right of action are already barred. The latter, and even the consignee, never filed
with the carrier any written notice or complaint regarding its claim for damage of or loss to the subject
cargo within the period required by the Warsaw Convention and/or in the airway bill. Indeed, this fact
has never been denied by respondents and is plainly evident from the records.
Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:
6. No action shall be maintained in the case of damage to or partial loss of the shipment unless a
written notice, sufficiently describing the goods concerned, the approximate date of the damage or loss,
and the details of the claim, is presented by shipper or consignee to an office of Burlington within (14)
days from the date the goods are placed at the disposal of the person entitled to delivery, or in the case
of total loss (including non-delivery) unless presented within (120) days from the date of issue of the
[Airway Bill].[16]
Relevantly, petitioners airway bill states:
12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the case:
12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest
within fourteen (14) days from receipt of the goods;
12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the goods;
12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and
12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the
issue of the air waybill.
12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was
used, or to the first carrier or to the last carrier or to the carrier who performed the transportation during
which the loss, damage or delay took place.[17]

Article 26 of the Warsaw Convention, on the other hand, provides:

ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without complaint shall
be prima facie evidence that the same have been delivered in good condition and in accordance with
the document of transportation.
(2) In case of damage, the person entitled to delivery must complain to the carrier forthwith after the
discovery of the damage, and, at the latest, within 3 days from the date of receipt in the case of baggage
and 7 days from the date of receipt in the case of goods. In case of delay the complaint must be made at
the latest within 14 days from the date on which the baggage or goods have been placed at his disposal.
(3) Every complaint must be made in writing upon the document of transportation or by separate notice
in writing dispatched within the times aforesaid.
(4) Failing complaint within the times aforesaid, no action shall lie against the carrier, save in the case
of fraud on his part.[18]
Condition Precedent
In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually
constitutes a condition precedent to the accrual of a right of action against a carrier for loss of or
damage to the goods.[19] The shipper or consignee must allege and prove the fulfillment of the
condition. If it fails to do so, no right of action against the carrier can accrue in favor of the former. The
aforementioned requirement is a reasonable condition precedent; it does not constitute a limitation of
action.[20]
The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The
fundamental reasons for such a stipulation are (1) to inform the carrier that the cargo has been
damaged, and that it is being charged with liability therefor; and (2) to give it an opportunity to
examine the nature and extent of the injury. This protects the carrier by affording it an opportunity to
make an investigation of a claim while the matter is fresh and easily investigated so as to safeguard
itself from false and fraudulent claims.[21]
When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a
notice of claim for loss of or damage to goods shipped and the stipulation is not complied with, its
enforcement can be prevented and the liability cannot be imposed on the carrier. To stress, notice is a
condition precedent, and the carrier is not liable if notice is not given in accordance with the
stipulation.[22] Failure to comply with such a stipulation bars recovery for the loss or damage suffered.
[23]

Being a condition precedent, the notice must precede a suit for enforcement.[24] In the present case,
there is neither an allegation nor a showing of respondents compliance with this requirement within the
prescribed period. While respondents may have had a cause of action then, they cannot now enforce it
for their failure to comply with the aforesaid condition precedent.
In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner.

We note that respondents are not without recourse. Cargohaus, Inc. -- petitioners co-defendant in
respondents Complaint below -- has been adjudged by the trial court as liable for, inter alia, actual
damages in the amount of the peso equivalent of US $39,339.[25] This judgment was affirmed by the
Court of Appeals and is already final and executory.[26]
WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains
to Petitioner Federal Express Corporation. No pronouncement as to costs.
SO ORDERED.
Corona, and Carpio-Morales, JJ., concur.
Sandoval-Gutierrez, J., on leave.

[1]

Rollo, pp. 14-33.

Id., pp. 35-43. Twelfth Division. Penned by Justice Martin S. Villarama Jr., with the concurrence of
Justices Conrado M. Vasquez Jr. (Division chair) and Alicia L. Santos (member).
[2]

[3]

Id., pp. 45-47.

[4] Assailed

CA Decision, p. 9; rollo, p. 43.

[5]

Id., pp. 1-3 & 35-37.

[6]

Id., pp. 8 & 42.

The case was deemed submitted for decision on September 20, 2002, upon this Courts receipt of
respondents Memorandum, signed by Atty. Mary Joyce M. Sasan. Petitioners Memorandum, signed by
Atty. Emiliano S. Samson, was received by this Court on August 28, 2002.
[7]

[8]

Petitioners Memorandum, p. 10; rollo, p. 116. Citations omitted.

[9]

Pilar Development Corp. v. IAC, 146 SCRA 215, December 12, 1986.

[10]

Exhibit D; records, p. 142.

[11]

Bernardo v. CA, 216 SCRA 224, December 7, 1992, per Campos Jr., J.

[12]

Exhibit N; records, p 159.

Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., 212 SCRA 194, August 5,
1992 (citing Firemans Fund Insurance Company, Inc. v. Jamila & Company, Inc., 70 SCRA 323, April
7, 1976).
[13]

Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., supra, p. 201, per Regalado,
J. (citing National Development Company v. Court of Appeals, 164 SCRA 593, August 19, 1988).
[14]

[15]

Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., supra.

[16]

Exhibit B of respondent; records, p. 139-A. This airway bill was issued on January 26, 1994.

[17]

Exhibit 5-a of Federal Express; records, p. 189-A.

[18]

51 OG 5091-5092, October 1955.

[19]

Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., supra.

Government of the Philippine Islands v. Inchausti & Co., 24 Phil. 315, February 14, 1913; Triton
Insurance Co. v. Jose, 33 Phil. 194, January 14, 1916.
[20]

[21]

Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., supra, p. 208, per Regalado,

J.
Id. (citing 14 Am. Jur. 2d, Carriers 97; Roldan v. Lim Ponzo & Co., 37 Phil. 285, December 7, 1917;
Consunji v. Manila Port Service, 110 Phil. 231, November 29, 1960).
[22]

[23]

Philippine American General Insurance Co., Inc. v. Sweet Lines, Inc., supra, pp. 208-209.

[24]

Philippine American General Insurance Co. Inc v. Sweet Lines, Inc., supra.

[25]

The insured value of the goods lost.

[26]

Entry of judgment in the Supreme Court was made on March 11, 2003.

THIRD DIVISION
KEPPEL CEBU SHIPYARD, INC.,
Petitioner,
- versus PIONEER INSURANCE AND SURETY
CORPORATION,
Respondent.

G.R. Nos.
180880-81
G.R. Nos.
180896-97
Present:

X----------------------------X

YNARES-SANTIAGO, J.,*

PIONEER INSURANCE AND SURETY

CORPORATION,

Chairperson,

Petitioner,

CHICO-NAZARIO,
VELASCO, JR.,

- versus -

NACHURA, and

KEPPEL CEBU SHIPYARD, INC.,

PERALTA, JJ.

Respondent.

Promulgated:
September 25, 2009

x------------------------------------------------------------------------------------x
DECISION
NACHURA, J.:
Before us are the consolidated petitions filed by the partiesPioneer Insurance and Surety
Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc.[2] (KCSI)to review on
certiorari the Decision[3] dated December 17, 2004 and the Amended Decision[4] dated
December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934.
On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A)
executed a Shiprepair Agreement[5] wherein KCSI would renovate and reconstruct
WG&As M/V Superferry 3 using its dry docking facilities pursuant to its restrictive
safety and security rules and regulations. Prior to the execution of the Shiprepair
Agreement, Superferry 3 was already insured by WG&A with Pioneer for
US$8,472,581.78. The Shiprepair Agreement reads
SHIPREPAIR AGREEMENT[6]

Company: WG & A JEBSENS SHIPMANAGEMENT INC.

Address: Harbour Center II, Railroad & Chicago Sts.
Port Area, City of
We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V SUPERFERRY 3 and KEPPEL
CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the
above-named vessel ordered by the Owners Authorized Representative shall be carried out under the
Keppel Cebu Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on
safety and security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed
upon by the parties:

1.
The Owner shall inform its insurer of Clause 20[7] and 22 (a)
[8] (refer at the back hereof) and shall include Keppel Cebu Shipyard
as a co-assured in its insurance policy.
2.
The Owner shall waive its right to claim for any loss of profit
or loss of use or damages consequential on such loss of use resulting
from the delay in the redelivery of the above vessel.
3.
Owners sub-contractors or workers are not permitted to work
in the yard without the written approval of the Vice President
Operations.
4.
In consideration of Keppel Cebu Shipyard allowing Owner to
carry out own repairs onboard the vessel, the Owner shall indemnify
and hold Keppel Cebu Shipyard harmless from any or all claims,
damages, or liabilities arising from death or bodily injuries to
Owners workers, or damages to the vessel or other property however
caused.
5.
On arrival, the Owner Representative, Captain, Chief Officer
and Chief Engineer will be invited to attend a conference with our
Production, Safety and Security personnel whereby they will be
briefed on, and given copies of Shipyard safety regulations.
6.
An adequate number of officers and crew must remain on
board at all times to ensure the safety of the vessel and compliance of
safety regulations by crew and owner employed workmen.
7.
The ships officers/crew or owner appointed security personnel
shall maintain watch against pilferage and acts of sabotage.
8.
The yard must be informed and instructed to provide the
necessary security arrangement coverage should there be inadequate
or no crew on board to provide the expressed safety and security
enforcement.
9.
The Owner shall be liable to Keppel Cebu Shipyard for any
death and/or bodily injuries for the [K]eppel Cebu Shipyards
employees and/or contract workers; theft and/or damages to Keppel
Cebu Shipyards properties and other liabilities which are caused by
the workers of the Owner.
10. The invoice shall be based on quotation reference 99-KCSI-211
dated December 20, 1999 tariff dated March 15, 1998.
11. Payment term shall be as follows:
12. The Owner and Keppel Cebu Shipyard shall endeavor to settle
amicably any dispute that may arise under this Agreement. Should all
efforts for an amicable settlement fail, the disputes shall be submitted
for arbitration in Metro Manila in accordance with provisions of
Executive Order No. 1008 under the auspices of the Philippine

Arbitration Commission.
(Signed)
BARRY CHIA SOO HOCK _________(Signed)__________
(Printed Name/Signature Above Name) (Printed Name/Signature Above Name)

Vice President Operations Authorized Representative

Keppel Cebu Shipyard, Inc. for and in behalf of:
WG & A Jebsens Shipmgmt.
JAN. 26, 2000 . ________________________
Date Date

On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by fire.
Claiming that the extent of the damage was pervasive, WG&A declared the vessels
damage as a total constructive loss and, hence, filed an insurance claim with Pioneer.
On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of
US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt[9] in favor
of Pioneer, to wit:
LOSS AND SUBROGATION RECEIPT
16 June 2000
Our Claim Ref: MH-NIL-H0-99-00018
US$8,472,581.78
-----------------------------------------------RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S.
DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE
HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS THREE
HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction, compromise and
discharge of all claims for loss and expenses sustained to the vessel SUPERFERRY 3 insured under
Policy Nos. MH-H0-99-0000168-00-D (H&M) and MH-H0-99-0000169 (I.V.) by reason as follows:
Fire on board at Keppel Cebu Shipyard
on 08 February 2000

and in consideration of which the undersigned hereby assigns and transfers to the said company each
and all claims and demands against any person, persons, corporation or property arising from or
connected with such loss or damage and the said company is subrogated in the place of and to the
claims and demands of the undersigned against said person, persons, corporation or property in the
premises to the extent of the amount above-mentioned.
WILLIAM, GOTHONG & ABOITIZ, INC.
&/OR ABOITIZ SHIPPING CORP.
By: (Signed)
______________________________________
Witnesses: (Signed)
______________________________________
(Signed)
______________________________________

Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter
denied any responsibility for the loss of the subject vessel. As KCSI continuously
refused to pay despite repeated demands, Pioneer, on August 7, 2000, filed a Request for
Arbitration before the Construction Industry Arbitration Commission (CIAC) docketed
as CIAC Case No. 21-2000, seeking the following reliefs:
1.
To pay to the claimant Pioneer Insurance and Surety Corporation the sum of U.S.
$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from the
date of the Loss and Subrogation Receipt on 16 June 2000 or from the date of filing of [the] Request
for Arbitration, as may be found proper;
2.
To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A
Jebsens Shipmanagement, Inc. the sum of P500,000,000.00 plus interest thereon from the date of filing
[of the] Request for Arbitration or date of the arbitral award, as may be found proper;
3.
To pay to the claimants herein the sum of P3,000,000.00 for and as attorneys fees; plus
other damages as may be established during the proceedings, including arbitration fees and other
litigation expenses, and the costs of suit.
It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the Shiprepair Agreement
(Annex A) as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very
fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any
legal effect whatsoever.[10]

KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of
Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC granted the
withdrawal on October 22, 2001, thereby dismissing the claim of WG&A against KCSI.
Hence, the arbitration proceeded with Pioneer as the remaining claimant.
In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: (1) on
January 26, 2000, M/V Superferry 3 arrived at KCSI in Lapu-Lapu City, Cebu, for dry
docking and repairs; (2) on the same date, WG&A signed a ship repair agreement with
KCSI; and (3) a fire broke out on board M/V Superferry 3 on February 8, 2000, while
still dry docked in KCSIs shipyard.[11]
As regards the disputed facts, below are the respective positions of the parties, viz.:
Pioneers Theory of the Case:
First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated
to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of
the Respondent. Claimant cited documentary references on the Statutory Source of the Principle of
Subrogation. Claimant then proceeded to explain that the Right of Subrogation:
Is by Operation of Law
exists in Property Insurance
is not Dependent Upon Privity of Contract.
Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that the
Right of Subrogation Entitles Insurer to Recover from the Liable Party.
Second, Respondent Keppel had custody of and control over the M/V Superferry 3 while said vessel
was in Respondent Keppels premises. In its Draft Decision, Claimant stated:
A.
The evidence presented during the hearings indubitably proves that respondent not only
took custody but assumed responsibility and control over M/V Superferry 3 in carrying out the drydocking and repair of the vessel.
B.
The presence on board the M/V Superferry 3 of its officers and crew does not relieve the
respondent of its responsibility for said vessel.
C.
Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the
vessel inside its graving dock and applied its own safety rules to the dry-docking and repairs of the
vessel.

D.
The practice of allowing a shipowner and its sub-contractors to perform maintenance
works while the vessel was within respondents premises does not detract from the fact that control and
custody over M/V Superferry 3 was transferred to the yard.
From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V
Superferry 3.
Third, the Vessels Safety Manual cannot be relied upon as proof of the Masters continuing control over
the vessel.
Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant,
the Yard is liable under the ruling laid down by the Supreme Court in the case. Claimant asserts that
said ruling is applicable hereto as The Law of the Case.
Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa
Loquitur, but from its negligence in this case.
Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder.
According to Claimant;
In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is
solely and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons:
A.
The Control Test The yard exercised control over Sevillejo. The power of control is not
diminished by the failure to exercise control.
B.
There was no independent work contract between Joniga and Sevillejo Joniga was not the
employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred.
C.
The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owners hot
works under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.
Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck A. Claimant
argued that:
A.

The yard, not Dr. Joniga, gave the welders their marching orders, and

B.
Dr. Jonigas authority to request the execution of owners hot works in the passenger areas
was expressly recognized by the Yard Project Superintendent Orcullo.
Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by
the yard, and the owners hotworks were conducted by welders who remained employees of the yard.
Claimant contends that the need, if any, for an owners application for a hot work permit was canceled
out by the yards actual knowledge of Sevillejos whereabouts and the fact that he was in deck A doing
owners hotworks.
Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard
did so at its own risk, and acted as a Less Than Prudent Ship Repairer.

The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a
disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders
never became employees of the owner so as to obligate the latter to be responsible for their conduct and
performance.
Claimant enumerated further badges of yard negligence.
According to Claimant:
A.

Yards water supply was inadequate.

B.

Yard Fire Fighting Efforts and Equipment Were Inadequate.

C.

Yard Safety Practices and Procedures Were Unsafe or Inadequate.

D.

Yard Safety Assistants and Firewatch-Men were Overworked.

Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented
its case against:
(i)

Non-removal of the life jackets theory.

(ii)

Hole-in-the[-]floor theory.

(iii)

Need for a plan theory.

(iv)

The unauthorized hot works theory.

(v)

The report theory.

The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved
in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by
Respondent.

KCSIs Theory of the Case

1.
The Claimant has no standing to file the Request for Arbitration and the Tribunal has no
jurisdiction over the case:
(a)
There is no valid arbitration agreement between the Yard and the Vessel Owner. On
January 26, 2000, when the ship repair agreement (which includes the arbitration agreement) was
signed by WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping.
Consequently, when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry
3, it had no authority to do so. There is, as a result, no binding arbitration agreement between the Vessel
Owner and the Yard to which the Claimant can claim to be subrogated and which can support CIAC
jurisdiction.
(b)
The Claimant is not a real party in interest and has no standing because it has not been
subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the
Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not

been subrogated to any rights which the Vessel may have against the Yard because:
i.
The Claimant has not proved payment of the proceeds of the policies to any specific
party. As a consequence, it has also not proved payment to the Vessel Owner.
ii.
The Claimant had no legally demandable obligation to pay under the policies and did so
only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive
Total Loss unless the expense of recovering and repairing the vessel would exceed the Agreed Value of
P360 million assigned by the parties to the Vessel, a threshold which the actual repair cost for the
Vessel did not reach. Since the Claimant opted to pay contrary to the provisions of the policies, its
payment was voluntary, and there was no resulting subrogation to the Vessel.
iii.
There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant
asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under
Article 2207 and it does not succeed to the Vessels rights under the Ship [R]epair Agreement and the
arbitration agreement. It does not have a right to demand arbitration and will have only a purely civil
law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in
court. Second, since the Yard is not liable for the fire and the resulting damage to the Vessel, then it
derived no benefit from the Claimants payment to the Vessel Owner. Third, in any event, the Claimant
has not proved payment of the proceeds to the Vessel Owner.
2.
The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and
voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can
invalidate the agreement.
3.
The proximate cause of the fire and damage to the Vessel was not any negligence committed by
Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary,
the proximate cause of the fire was Dr. Jonigas and the Vessels deliberate decision to have Angelino
Sevillejo undertake cutting work in inherently dangerous conditions created by them.
(a)
The Claimants material witnesses lied on the record and the Claimant presented no
credible proof of any negligence by Angelino Sevillejo.
(b)
Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot
work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the
flammable lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut
the bulkhead door. These decisions or oversights guaranteed that the cutting would be done in
extremely hazardous conditions and were the proximate cause of the fire and the resulting damage to
the Vessel.
(c)
The Yards expert witness, Dr. Eric Mullen gave the only credible account of the cause and
the mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the
bulkhead door resulted in sparks or hot molten slag which fell through pre-existing holes on the deck
floor and came into contact with and ignited the flammable lifejackets stored in the ceiling void directly
below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could

have come from the cutting of any of the sides of the door. Consequently, the cutting itself of the
bulkhead door under the hazardous conditions created by Dr. Joniga, rather than the positioning of the
doors bottom edge, was the proximate cause of the fire.
(d)
The Manila case is irrelevant to this dispute and in any case, does not establish governing
precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault. Apart
from the differences in the factual setting of the two cases, the Manila City pronouncements regarding
the res ipsa loquitur doctrine are obiter dicta without value as binding precedent. Furthermore, even if
the principle were applied to create a presumption of negligence by the Yard, however, that
presumption is conclusively rebutted by the evidence on record.
(e)
The Vessels deliberate acts and its negligence created the inherently hazardous conditions
in which the cutting work that could otherwise be done safely ended up causing a fire and the damage
to the Vessel. The fire was a direct and logical consequence of the Vessels decisions to: (1) take
Angelino Sevillejo away from his welding work at the Promenade Deck restaurant and instead to
require him to do unauthorized cutting work in Deck A; and (2) to have him do that without satisfying
the requirements for and obtaining a hot work permit in violation of the Yards Safety Rules and without
removing the flammable ceiling and life jackets below, contrary to the requirements not only of the
Yards Safety Rules but also of the demands of standard safe practice and the Vessels own explicit
safety and hot work policies.
(f)
The vessel has not presented any proof to show that the Yard was remiss in its fire fighting
preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary
equipment and trained personnel and employed all those resources immediately and fully to putting out
the 8 February 2000 fire.
4.
Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that
this circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel
for that activity caused the fire, the Yard may still not be held liable for the resulting damage.
(a)
The Yards only contractual obligation to the Vessel in respect of the 26 January 2000 Work
Order was to supply welders for the Promenade Deck restaurant who would then perform welding
work per owner[s] instruction. Consequently, once it had provided those welders, including Angelino
Sevillejo, its obligation to the Vessel was fully discharged and no claim for contractual breach, or for
damages on account thereof, may be raised against the Yard.
(b)

The Yard is also not liable to the Vessel/Claimant on the basis of quasi-delict.

i.
The Vessel exercised supervision and control
over Angelino Sevillejo when he was doing work at the Promenade Deck restaurant and especially
when he was instructed by Dr. Joniga to cut the bulkhead door. Consequently, the Vessel was the party
with actual control over his tasks and is deemed his true and effective employer for purposes of
establishing Article 2180 employer liability.
ii.

Even assuming that the Yard was Angelino

Sevillejos employer, the Yard may nevertheless not be held liable under Article 2180 because Angelino
Sevillejo was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding
for the Promenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by
the Vessel.
iii.
The Yard is nonetheless not liable under
Article 2180 because it exercised due diligence in the selection and supervision of Angelino Sevillejo.
5.
Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million
paid by the Claimant.
(a)
Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount
greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher
amount under its policies. In turn, the right of the Vessel to recover is limited to actual damage to the
MV Superferry 3, at the time of the fire.
(b)
Under the Ship [R]epair Agreement, the liability of the Yard is limited to P50 million a
stipulation which, under the law and decisions of the Supreme Court, is valid, binding and enforceable.
(c)
The Vessel breached its obligation under Clause 22 (a) of the Yards Standard Terms to
name the Yard as co-assured under the policies a breach which makes the Vessel liable for damages.
This liability should in turn be set-off against the Claimants claim for damages.
The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondent
enumerated and disputed these as follows:
1.
Claimants counsel contends that the cutting of the bulkhead door was covered by the 26
January 2000 Work Order.
2.
Claimants counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have
Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000.
3.
Claimants counsel contends that under Article 1727 of the Civil Code, The contractor is
responsible for the work done by persons employed by him.
4.
Claimants counsel contends that [t]he second reason why there was no job spec or job
order for this cutting work, [is] the cutting work was known to the yard and coordinated with Mr. Gerry
Orcullo, the yard project superintendent.
5.
Claimants counsel also contends, to make the Vessels unauthorized hot works activities
seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety
Superintendent, admitted that No hot works could really be hidden from the Yard, your Honors,
because the welding cables and the gas hoses emanating from the dock will give these hotworks away
apart from the assertion and the fact that there were also safety assistants supposedly going around the
vessel.
Respondent disputed the above by presenting its own argument in its Final Memorandum.[12]

On October 28, 2002, the CIAC rendered its Decision[13] declaring both WG&A and
KCSI guilty of negligence, with the following findings and conclusions
The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment
to the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a
contractual obligation of the Yard. However, by requiring, according to its own regulations, that only
Yard welders are to undertake hotworks, it follows that there are certain qualifications of Yard welders
that would be requisite of yard welders against those of the vessel welders. To the Tribunal, this means
that yard welders are aware of the Yard safety rules and regulations on hotworks such as applying for a
hotwork permit, discussing the work in a production meeting, and complying with the conditions of the
hotwork permit prior to implementation. By the requirement that all hotworks are to be done by the
Yard, the Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however
mitigated in that he was not even a foreman, and that the instructions to him was (sic) by an authorized
person. The Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact
that no foreman was included in the five welders issued to the Vessel was never raised in this dispute.
As discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the
work order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of
the Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the
fire that damaged the vessel.[14]

Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered
KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6% per annum from
the time of the filing of the case up to the time the decision is promulgated, and 12%
interest per annum added to the award, or any balance thereof, after it becomes final and
executory. The CIAC further ordered that the arbitration costs be imposed on both
parties on a pro rata basis.[15]
Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018.
KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP No.
73934. The cases were consolidated.
On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision,
disposing as follows:
WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED
while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioners claims in
its entirety. No costs.

The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata.
SO ORDERED.[16]

Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting
that it suffered from serious errors in the appreciation of the evidence and from gross
misapplication of the law and jurisprudence on negligence. KCSI, for its part, filed a
motion for partial reconsideration of the same Decision.
On December 20, 2007, an Amended Decision was promulgated by the Special Division
of Five Former Fifteenth Division of the CA in light of the dissent of Associate Justice
Lucas P. Bersamin,[17] joined by Associate Justice Japar B. Dimaampao. The fallo of
the Amended Decision reads
WHEREFORE, premises considered, the Court hereby decrees that:
1. Pioneers Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay
Pioneer P25 Million, without legal interest, within 15 days from the finality of this Amended Decision,
subject to the following modifications:
1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby
ordered to pay Pioneer P25 Million without legal interest;
2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its Petition (CAG.R. SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay
Pioneer P25 Million, without legal interest, within 15 days from the finality of this Amended Decision;
and
3. The rest of the disposition in the original Decision remains the same.
SO ORDERED.[18]

Hence, these petitions. Pioneer bases its petition on the following grounds:
I
THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON NON-FACTS
LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NON-FACTS REMAIN TO
INVALIDATE THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE VIII
OF THE CONSTITUTION.
II
THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO
THE SUM OF P50,000,000.00, IN THAT:

A. STARE DECISIS RENDERS INAPPLICABLE ANY INVOCATION OF LIMITED LIABILITY BY

THE YARD.
B. THE LIMITATION CLAUSE IS CONTRARY TO PUBLIC POLICY.
C. THE VESSEL OWNER DID NOT AGREE THAT THE YARDS LIABILITY FOR LOSS OR
DAMAGE TO THE VESSEL ARISING FROM YARDS NEGLIGENCE IS LIMITED TO THE SUM
OF P50,000,000.00 ONLY.
D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT LIABILITY, IN THAT:
(i) THE YARD HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V SUPERFERRY 3) ON
08 FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE;
(ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS
EXCLUSIVELY PERFORMED BY YARD WORKERS.
III
THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS CONCURRENTLY
NEGLIGENT, CONSIDERING THAT:
A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER, DID NOT SUPERVISE OR
CONTROL THE REPAIRS.
B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO
THAT SUPERVISED AND CONTROLLED THE REPAIR WORKS.
C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY
ALONE COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME.
D. THE YARD AUTHORIZED THE HOT WORK OF YARD WELDER ANGELINO SEVILLEJO.
E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE PROXIMATE CAUSE OF THE
LOSS.
F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY TO THE
LOSS.
IV
THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE
TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE
FOR THE VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS.
V
THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLE FOR INTEREST.

VI
THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR
ARBITRATION COSTS.[19]

On the other hand, KCSI cites the following grounds for the allowance of its petition, to
wit:
1. ABSENCE OF YARD RESPONSIBILITY

IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT

EXPLANATION, THE CIACS RULING THAT THE YARD WAS EQUALLY NEGLIGENT
BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS PERMIT FOR THE CUTTING WORK
DONE BY ANGELINO SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWN
THAT RULING TO BE COMPLETELY WRONG AND BASELESS.
2. NO CONSTRUCTIVE TOTAL LOSS

IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT
EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING
ITSELF EXPLAINED WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS.
3. FAILURE OR REFUSAL TO ADDRESS
KEPPELS MOTION FOR RECONSIDERATION

FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE
EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION,
KEPPELS PARTIAL MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION
WHICH SHOWED: 1) WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE
VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY
NOT BE REQUIRED TO REIMBURSE PIONEERS PAYMENTS TO THE VESSEL OWNER IN
VIEW OF THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY
PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION.
4. FAILURE TO CREDIT FOR SALVAGE RECOVERY

EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THE FOREGOING ISSUES WERE
CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE
DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED

(P25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE
SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER,
PIONEER, TO REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION.
[20]

To our minds, these errors assigned by both Pioneer and KCSI may be summed up in the
following core issues:
A. To whom may negligence over the fire that broke out on board M/V Superferry 3 be imputed?
B. Is subrogation proper? If proper, to what extent can subrogation be made?
C. Should interest be imposed on the award of damages? If so, how much?
D. Who should bear the cost of the arbitration?

To resolve these issues, it is imperative that we digress from the general rule that in
petitions for review under Rule 45 of the Rules of Court, only questions of law shall be
entertained. Considering the disparate findings of fact of the CIAC and the CA which
led them to different conclusions, we are constrained to revisit the factual circumstances
surrounding this controversy.[21]

The Courts Ruling

A. The issue of negligence
Undeniably, the immediate cause of the fire was the hot work done by Angelino
Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck A.
As established before the CIAC
The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling,[22] p. 20).
Angelino Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water
container on it and as he did so, smoke came up from under Deck A. He got another container of water
which he also poured whence the smoke was coming. In the meantime, other workers in the immediate
vicinity tried to fight the fire by using fire extinguishers and buckets of water. But because the fire was
inside the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because
it was not possible to direct water jets or the fire extinguishers into the space at the source. Fighting the
fire was extremely difficult because the life jackets and the construction materials of the Deck B ceiling
were combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped
into the Deck B accommodation areas at various locations, where there were combustible materials.
Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam
mattresses on deck B (Exh. 1-Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 11-12).[24]

Pioneer contends that KCSI should be held liable because Sevillejo was its employee
who, at the time the fire broke out, was doing his assigned task, and that KCSI was
solely responsible for all the hot works done on board the vessel. KCSI claims
otherwise, stating that the hot work done was beyond the scope of Sevillejos assigned
tasks, the same not having been authorized under the Work Order[25] dated January 26,
2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself
negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga), for failing to
remove the life jackets from the ceiling void, causing the immediate spread of the fire to
the other areas of the ship.
We rule in favor of Pioneer.
First. The Shiprepair Agreement is clear that WG&A, as owner of M/V Superferry 3,
entered into a contract for the dry docking and repair of the vessel under KCSIs
Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on

safety and security. Thus, the CA erred when it said that WG&A would renovate and
reconstruct its own vessel merely using the dry docking facilities of KCSI.
Second. Pursuant to KCSIs rules and regulations on safety and security, only employees
of KCSI may undertake hot works on the vessel while it was in the graving dock in , .
This is supported by Clause 3 of the Shiprepair Agreement requiring the prior written
approval of KCSIs Vice President for Operations before WG&A could effect any work
performed by its own workers or sub-contractors. In the exercise of this authority,
KCSIs Vice-President for Operations, in the letter dated January 2, 1997, banned any hot
works from being done except by KCSIs workers, viz.:
The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be
carried out only by shipyard workers x x x.[26]

WG&A recognized and complied with this restrictive directive such that, during the
arrival conference on January 26, 2000, Dr. Joniga, the vessels passage team leader in
charge of its hotel department, specifically requested KCSI to finish the hot works
started by the vessels contractors on the passenger accommodation decks.[27] This was
corroborated by the statements of the vessels hotel manager Marcelo Rabe[28] and the
vessels quality control officer Joselito Esteban.[29] KCSI knew of the unfinished hot
works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug
confirmed that KCSI was aware that the owners of this vessel (M/V Superferry 3) had
undertaken their own (hot) works prior to arrival alongside (sic) on 26 th January, and
that no hot work permits could thereafter be issued to WG&As own workers because
this was not allowed for the Superferry 3.[30] This shows that Dr. Joniga had authority
only to request the performance of hot works by KCSIs welders as needed in the repair
of the vessel while on dry dock.
Third. KCSI welders covered by the Work Order performed hot works on various areas
of the M/V Superferry 3, aside from its promenade deck. This was a recognition of Dr.
Jonigas authority to request the conduct of hot works even on the passenger

accommodation decks, subject to the provision of the January 26, 2000 Work Order that
KCSI would supply welders for the promenade deck of the ship.
At the CIAC proceedings, it was adequately shown that between February 4 and 6,
2000, the welders of KCSI: (a) did the welding works on the ceiling hangers in the lobby
of Deck A; (b) did the welding and cutting works on the deck beam to access aircon
ducts; and (c) did the cutting and welding works on the protection bars at the tourist
dining salon of Deck B,[31] at a rate of P150.00/welder/hour.[32] In fact, Orcullo,
Project Superintendent of KCSI, admitted that as early as February 3, 2000 (five days
before the fire) [the Yard] had acknowledged Dr. Jonigas authority to order such works
or additional jobs.[33]
It is evident, therefore, that although the January 26, 2000 Work Order was a special
order for the supply of KCSI welders to the promenade deck, it was not restricted to the
promenade deck only. The Work Order was only a special arrangement between KCSI
and WG&A that meant additional cost to the latter.
Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to
the latters direct control and supervision.
Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the power and
the right to discharge or substitute him with another welder; providing him and the other
welders with its equipment; giving him and the other welders marching orders to work
on the vessel; and monitoring and keeping track of his and the other welders activities
on board, in view of the delicate nature of their work.[34] Thus, as such employee,
aware of KCSIs Safety Regulations on Vessels Afloat/Dry, which specifically provides
that (n)o hotwork (welding/cutting works) shall be done on board [the] vessel without
[a] Safety Permit from KCSI Safety Section,[35] it was incumbent upon Sevillejo to
obtain the required hot work safety permit before starting the work he did, including that
done on Deck A where the fire started.

Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the fire
broke out.
It was established that no hot works could be hidden from or remain undetected by
KCSI because the welding cables and the gas hoses emanating from the dock would give
the hot works away. Moreover, KCSI had roving fire watchmen and safety assistants
who were moving around the vessel.[36] This was confirmed by Restituto Rebaca
(Rebaca), KCSIs Safety Supervisor, who actually spotted Sevillejo on Deck A, two
hours before the fire, doing his cutting work without a hot work permit, a fire watchman,
or a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo
from continuing the hot work. However, it is noteworthy that, after purportedly scolding
Sevillejo for working without a permit and telling him to stop until the permit was
acquired and the other safety measures were observed, Rebaca left without pulling
Sevillejo out of the work area or making sure that the latter did as he was told.
Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead
door at Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting
the door level with the deck, until the fire broke out.
This conclusion on the failure of supervision by KCSI was absolutely supported by Dr.
Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSIs
own fire expert, who observed that
4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a
cutter. The dangers of ignition occurring as a result of the two processes are similar in that both electric
arc welding and hot cutting produce heat at the work area and sparks and incendive material that can
travel some distance from the work area. Hence, the safety precautions that are expected to be applied
by the supervisor are the same for both types of work. However, the quantity and incendivity of the
spray from the hot cutting are much greater than those of sparks from electric arc welding, and it may
well be that Angelino Sevillejo would not have a full appreciation of the dangers involved. This
made it all the more important that the supervisor, who should have had such an appreciation,
ensured that the appropriate safety precautions were carried out.[37]

workers, failed to comply with the strict safety standards of KCSI, not only because he
worked without the required permit, fire watch, fire buckets, and extinguishers, but also
because he failed to undertake other precautionary measures for preventing the fire. For
instance, he could have, at the very least, ensured that whatever combustible material
may have been in the vicinity would be protected from the sparks caused by the welding
torch. He could have easily removed the life jackets from the ceiling void, as well as the
foam mattresses, and covered any holes where the sparks may enter.
Conjunctively, since Rebaca was already aware of the hazard, he should have taken all
possible precautionary measures, including those above mentioned, before allowing
Sevillejo to continue with his hot work on Deck A. In addition to scolding Sevillejo,
Rebaca merely checked that no fire had started yet. Nothing more. Also, inasmuch as
KCSI had the power to substitute Sevillejo with another electric arc welder, Rebaca
should have replaced him.
There is negligence when an act is done without exercising the competence that a
reasonable person in the position of the actor would recognize as necessary to prevent an
unreasonable risk of harm to another. Those who undertake any work calling for special
skills are required to exercise reasonable care in what they do.[38] Verily, there is an
obligation all persons have to take due care which, under ordinary circumstances of the
case, a reasonable and prudent man would take. The omission of that care constitutes
negligence. Generally, the degree of care required is graduated according to the danger a
person or property may be subjected to, arising from the activity that the actor pursues or
the instrumentality that he uses. The greater the danger, the greater the degree of care
required. Extraordinary risk demands extraordinary care. Similarly, the more imminent
the danger, the higher degree of care warranted.[39] In this aspect,

KCSI failed to exercise the necessary degree of caution and foresight called for by the
circumstances.
We cannot subscribe to KCSIs position that WG&A, through Dr. Joniga, was negligent.
On the one hand, as discussed above, Dr. Joniga had authority to request the
performance of hot works in the other areas of the vessel. These hot works were deemed
included in the January 26, 2000 Work Order and the Shiprepair Agreement. In the
exercise of this authority, Dr. Joniga asked Sevillejo to do the cutting of the bulkhead
door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing, but
failed to supervise him with the degree of care warranted by the attendant circumstances.
Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void
for two reasons (1) the life jackets were not even contributory to the occurrence of the
fire; and (2) it was not incumbent upon him to remove the same. It was shown during the
hearings before the CIAC that the removal of the life jackets would not have made much
of a difference. The fire would still have occurred due to the presence of other
combustible materials in the area. This was the uniform conclusion of both WG&As[40]
and KCSIs[41] fire experts. It was also proven during the CIAC proceedings that KCSI
did not see the life jackets as being in the way of the hot works, thus, making their
removal from storage unnecessary.[42]
These circumstances, taken collectively, yield the inevitable conclusion that
Sevillejo was negligent in the performance of his assigned task. His negligence was the
proximate cause of the fire on board M/V Superferry 3. As he was then definitely
engaged in the performance of his assigned tasks as an employee of KCSI, his
negligence gave rise to the vicarious liability of his employer[43] under Article 2180 of
the Civil Code, which provides
Art. 2180. The obligation imposed by article 2176 is demandable not only for ones own act or
omission, but also for those of persons for whom one is responsible.
xxxx

Employers shall be liable for the damages caused by their employees and household helpers acting
within the scope of their assigned tasks, even though the former are not engaged in any business or
industry.
xxxx
The responsibility treated of in this article shall cease when the persons herein mentioned prove that
they observed all the diligence of a good father of a family to prevent damage.

KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut
the legal presumption of its negligence in supervising Sevillejo.[44] Consequently, it is
responsible for the damages caused by the negligent act of its employee, and its liability
is primary and solidary. All that is needed is proof that the employee has, by his
negligence, caused damage to another in order to make the employer responsible for the
tortuous act of the former.[45] From the foregoing disquisition, there is ample proof of
the employees negligence.
B. The right of subrogation
Pioneer asseverates that there existed a total constructive loss so that it had to pay
WG&A the full amount of the insurance coverage and, by operation of law, it was
entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It
further argues that the limitation of liability clause found in the Shiprepair Agreement is
null and void for being iniquitous and against public policy.
KCSI counters that a total constructive loss was not adequately proven by Pioneer, and
that there is no proof of payment of the insurance proceeds. KCSI insists on the validity
of the limited-liability clause up to P50,000,000.00, because WG&A acceded to the
provision when it executed the Shiprepair Agreement. KCSI also claims that the salvage
value of the vessel should be deducted from whatever amount it will be made to pay to
Pioneer.
We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V
Superferry 3.
In marine insurance, a constructive total loss occurs under any of the conditions set forth

in Section 139 of the Insurance Code, which provides

Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any
particular portion hereof separately valued by the policy, or otherwise separately insured, and recover
for a total loss thereof, when the cause of the loss is a peril insured against:
(a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover
it from the peril;
(b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x.

It appears, however, that in the execution of the insurance policies over M/V Superferry
3, WG&A and Pioneer incorporated by reference the American Institute Hull Clauses
2/6/77, the Total Loss Provision of which reads
Total Loss
In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the
repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be
taken into account.
There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering
and repairing the Vessel would exceed the Agreed Value in policies on and Machinery. In making this
determination, only expenses incurred or to be incurred by reason of a single accident or a sequence of
damages arising from the same accident shall be taken into account, but expenses incurred prior to
tender of abandonment shall not be considered if such are to be claimed separately under the Sue and
Labor clause. x x x.

In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates
made by three (3) disinterested and qualified shipyards for the cost of the repair of the
vessel, specifically: (a) P296,256,717.00, based on the Philippine currency equivalent of
the quotation dated April 17, 2000 turned in by Tsuneishi Heavy Industries (Cebu) Inc.;
(b) P309,780,384.15, based on the Philippine currency equivalent of the quotation of
Sembawang Shipyard Pte. Ltd., ; and (c) P301,839,974.00, based on the Philippine
currency equivalent of the quotation of Singapore Technologies Marine Ltd. All the
estimates showed that the repair expense would exceed P270,000,000.00, the amount
equivalent to of the vessels insured value of P360,000,000.00. Thus, WG&A opted to
abandon M/V Superferry 3 and claimed from Pioneer the full amount of the policies.
Pioneer paid WG&As claim, and now demands from KCSI the full amount of

P360,000,000.00, by virtue of subrogation.

KCSI denies the liability because, aside from its claim that it cannot be held culpable for
negligence resulting in the destructive fire, there was no constructive total loss, as the
amount of damage was only US$3,800,000.00 or P170,611,260.00, the amount of repair
expense quoted by Simpson, Spence & Young.
In the face of this apparent conflict, we hold that Section 139 of the Insurance Code
should govern, because (1) Philippine law is deemed incorporated in every locally
executed contract; and (2) the marine insurance policies in question expressly provided
the following:
IMPORTANT
This insurance is subject to English jurisdiction, except in the event that loss or losses are payable in
the Philippines, in which case if the said laws and customs of England shall be in conflict with the laws
of the Republic of the Philippines, then the laws of the Republic of the Philippines shall govern.
(Underscoring supplied.)

The CA held that Section 139 of the Insurance Code is merely permissive on account of
the word may in the provision. This is incorrect. Properly considered, the word may in
the provision is intended to grant the insured (WG&A) the option or discretion to choose
the abandonment of the thing insured (M/V Superferry 3), or any particular portion
thereof separately valued by the policy, or otherwise separately insured, and recover for
a total loss when the cause of the loss is a peril insured against. This option or discretion
is expressed as a right in Section 131 of the same Code, to wit:
Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under
Section one hundred thirty-nine.

and acceptable proof of the extent of the damage sustained by the vessel. It is significant
that these estimates were confirmed by the Adjustment Report dated June 5, 2000
submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had
enlisted to verify and confirm the extent of the damage. The Adjustment Report verified
and confirmed that the damage to the vessel amounted to a constructive total loss and
that the claim for P360,000,000.00 under the policies was compensable.[46] It is also
noteworthy that KCSI did not cross-examine Henson Lim, Director of Richards Hogg,
whose affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a
constructive total loss.
Considering the extent of the damage, WG&A opted to abandon the ship and claimed
the value of its policies. Pioneer, finding the claim compensable, paid the claim, with
WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of the
insurance proceeds from Pioneer. On this note, we find as unacceptable the claim of
KCSI that there was no ample proof of payment simply because the person who signed
the Receipt appeared to be an employee of Aboitiz Shipping Corporation.[47] The Loss
and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of
the insurance proceeds to the former, and no controverting evidence was presented by
KCSI to rebut the presumed authority of the signatory to receive such payment.
On the matter of subrogation, Article 2207 of the Civil Code provides
Art. 2207. If the plaintiffs property has been insured and he has received indemnity from the insurance
company for the injury or loss arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person
who has violated the contract. If the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Subrogation is the substitution of one person by another with reference to a lawful claim
or right, so that he who is substituted succeeds to the rights of the other in relation to a
debt or claim, including its remedies or securities. The principle covers a situation
wherein an insurer has paid a loss under an insurance policy is entitled to all the rights

and remedies belonging to the insured against a third party with respect to any loss
covered by the policy. It contemplates full substitution such that it places the party
subrogated in the shoes of the creditor, and he may use all means that the creditor could
employ to enforce payment.[48]
We have held that payment by the insurer to the insured operates as an equitable
assignment to the insurer of all the remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon
payment by the insurance company of the insurance claim. The doctrine of subrogation
has its roots in equity. It is designed to promote and to accomplish justice; and is the
mode that equity adopts to compel the ultimate payment of a debt by one who, in justice,
equity, and good conscience, ought to pay.[49]
We cannot accept KCSIs insistence on upholding the validity Clause 20, which provides
that the limit of its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI
stands as a co-assured in the insurance policies, as found in the Shiprepair Agreement.
Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal
foundation. They are unfair and inequitable under the premises. It was established
during arbitration that WG&A did not voluntarily and expressly agree to these
provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified that he did not sign the
fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were found,
because he did not want WG&A to be bound by them. However, considering that it was
only KCSI that had shipyard facilities large enough to accommodate the dry docking
and repair of big vessels owned by WG&A, such as M/V Superferry 3, in , he had to
sign the front portion of the Shiprepair Agreement; otherwise, the vessel would not be
accepted for dry docking.[50]

prepared by only one party, while the other party merely affixes his signature signifying
his adhesion thereto. Although not invalid, per se, a contract of adhesion is void when
the weaker party is imposed upon in dealing with the dominant bargaining party, and its
option is reduced to the alternative of taking it or leaving it, completely depriving such
party of the opportunity to bargain on equal footing.[51]
Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated
for the full insured value of the vessel or, at the very least, for its actual market value.
There was clearly no intention on the part of WG&A to relinquish such right. It is an
elementary rule that a waiver must be positively proved, since a waiver by implication is
not normally countenanced. The norm is that a waiver must not only be voluntary, but
must have been made knowingly, intelligently, and with sufficient awareness of the
relevant circumstances and likely consequences. There must be persuasive evidence to
show an actual intention to relinquish the right.[52] This has not been demonstrated in
this case.
Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To
allow KCSI to limit its liability to only P50,000,000.00, notwithstanding the fact that
there was a constructive total loss in the amount of P360,000,000.00, would sanction the
exercise of a degree of diligence short of what is ordinarily required. It would not be
difficult for a negligent party to escape liability by the simple expedient of paying an
amount very much lower than the actual damage or loss sustained by the other.[53]
Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to
make each other a co-assured under an insurance policy is to be gleaned principally from
the insurance contract or policy itself and not from any other contract or agreement,
because the insurance policy denominates the assured and the beneficiaries of the
insurance contract. Undeniably, the hull and machinery insurance procured by WG&A
from Pioneer named only the former as the assured. There was no manifest intention on
the part of WG&A to constitute KCSI as a co-assured under the policies. To have

deemed KCSI as a co-assured under the policies would have had the effect of nullifying
any claim of WG&A from Pioneer for any loss or damage caused by the negligence of
KCSI. No ship owner would agree to make a ship repairer a co-assured under such
insurance policy. Otherwise, any claim for loss or damage under the policy would be
rendered nugatory. WG&A could not have intended such a result.[54]
Nevertheless, we concur with the position of KCSI that the salvage value of the
damaged M/V Superferry 3 should be taken into account in the grant of any award. It
was proven before the CIAC that the machinery and the hull of the vessel were
separately sold for P25,290,000.00 (or US$468,333.33) and US$363,289.50,
respectively. WG&As claim for the upkeep of the wreck until the same were sold
amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the
sale of the machinery and the hull, for a net recovery of US$673,812.87, or equivalent to
P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when the Request for
Arbitration was filed. Not considering this salvage value in the award would amount to
unjust enrichment on the part of Pioneer.
C. On the imposition of interest
Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the award
in favor of Pioneer in the amount of P350,146,786.89 should earn interest at 6% per
annum from the filing of the case until the award becomes final and executory.
Thereafter, the rate of interest shall be 12% per annum from the date the award becomes
final and executory until its full satisfaction.
D. On the payment for the cost of arbitration
It is only fitting that both parties should share in the burden of the cost of arbitration, on
a pro rata basis. We find that Pioneer had a valid reason to institute a suit against KCSI,
as it believed that it was entitled to claim reimbursement of the amount it paid to
WG&A. However, we disagree with Pioneer that only KCSI should shoulder the

arbitration costs. KCSI cannot be faulted for defending itself for perceived wrongful acts
and conditions. Otherwise, we would be putting a price on the right to litigate on the part
of Pioneer.
WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No.
180896-97 and the Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are
PARTIALLY GRANTED and the Amended Decision dated December 20, 2007 of the
Court of Appeals is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the
amount of P360,000,000.00 less P30,252,648.09, equivalent to the salvage value
recovered by Pioneer from M/V Superferry 3, or the net total amount of
P329,747,351.91, with six percent (6%) interest per annum reckoned from the time the
Request for Arbitration was filed until this Decision becomes final and executory, plus
twelve percent (12%) interest per annum on the said amount or any balance thereof from
the finality of the Decision until the same will have been fully paid. The arbitration costs
shall be borne by both parties on a pro rata basis. Costs against KCSI.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice

WE CONCUR:
CONSUELO YNARES-SANTIAGO
Acting Chief Justice
Chairperson
MINITA V. CHICO-NAZARIO

PRESBITERO J. VELASCO, JR.

Associate Justice

Associate Justice

DIOSDADO M. PERALTA
Associate Justice

C E RT I FI CAT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in
the above Decision had been reached in consultation before the case was assigned to the
writer of the opinion of the Courts Division.
CONSUELO YNARES-SANTIAGO
Acting Chief Justice

* Acting Chief Justice.

[1]

Rollo (G.R. Nos. 180896-97), pp. 33-109.

[2]

Rollo (G.R. Nos. 180880-81), pp. 338-378.

[3]

Rollo (G.R. Nos. 180896-97), pp. 116-144.

[4]

at 146-165.

[5]

at 483-484.

[6] The Shiprepair Agreement was

duly acknowledged by the parties before a notary public.

20. The Contractor shall not be under any liability to the Customer either in contract or otherwise
except for negligence and such liability shall itself be subject to the following overriding limitations
and exceptions, namely
[7]

(a) The total liability of the Contractor to the Customer (including the liability to replace under Clause
17) or of any Sub-contractor shall be limited in respect of any and/or defect(s) or event(s) to the sum of
Pesos Philippine Currency Fifty Million only x x x.
22(a) The Customer shall keep the vessel adequately insured for the vessels hull and machinery, her
crew and the equipment on board and on other goods owned or held by the Customer against any and
all risks and liabilities and ensure that such insurance policies shall include the Contractor as a coassured.
[8]

[9]

Rollo (G.R. Nos. 180896-97), p. 526.

[10]

at 167.

[11]

at 236.

[12]

at 236-242.

[13]

at 229-320.

[14]

at 286.

[15]

at 319.

[16]

at 143-144.

[17]

Now a member of this Court.

[18]

at 163-164.

[19]

Rollo (G.R. No. 180896-97), pp. 46-48.

[20]

Rollo (G.R. Nos. 180880-81), pp. 356-357.

Prudential Shipping and Management Corporation v. Sta. Rita, G.R. No. 166580, February 8,
2007, 515 SCRA 157.
[21]

[22] The fire

expert presented by Pioneer.

[23]

Dr. Eric Mullen, the fire expert presented by KCSI.

[24]

Rollo (G.R. Nos. 180896-97), p. 262.

[25] The Work

1.

Order dated January 26, 2000 provided to

Supply of 5 welders & equipment as per Owners instructions to promenade deck.

2.
JO# 89/99 Pull-out & clean w/ chemical of Aux. engine blower & change both ball bearing 15
kw, 27 amp, 440 Wtts as required.
3.

Renew sleeve on endcover of motor as required.

4.

Renew deteriorated side frames & fwd pls as required.

5.

Renew deteriorated air vent and sides pls as required.

[26]

CIAC Decision, p. 28.

[27]

Dr. Joniga gave this narration under oath:

5. That at the arrival conference on January 26, 2000, x x x we discussed the projected dry docking
works and the shipyard safety regulations particularly the restriction that only shipyard workers and
welders can perform hot works on board the vessel.
During the said conference, I brought up the need of the hotel department specifically for the yard to
provide welders to the passenger accommodations on Deck A, Deck B and Deck C, according to
owners instructions, meaning, the ship owner through me as the one in charge of the hotel department
could request maintenance works in the passenger decks which may be determined and the need for
which may arise only in the course of the dry docking and which will require hot works by the yards
welders subject to shipyard safety and billing regulations.
My aforementioned input was duly taken note of, and on that same date, a Work Order dated January
26, 2000 signed by the Ship Superintendent Manuel Amagsila and KCSI Project Superintendent Gerry

Orcullo x x x. (Exhibit C-Joniga, p. 2)

4. That upon request of Dr. Joniga during said arrival conference, a Work Order dated January 26,
2000 was signed whereby the ship owner could request for some hot work in the passenger decks as per
Owners instructions with the ships hotel department indicating certain maintenance or renovation in the
course of the dry docking but it will be the yard which will execute the hot works needed. (Exhibit CRabe, p. 2.)
[28]

4. x x x I confirm that said Work Order [of 26 January 2000] required the Yard, and the Yard
agreed, to supply 5 welders and equipment as per owners instructions to promenade deck, because Dr.
Joniga wanted that the unfinished hot works in the promenade deck and passenger areas that were
started in Manila should be finished, otherwise the dry docking would be useless.
[29]

The place mentioned was to promenade deck because the bulk of the work was in the promenade deck,
but included the unfinished hot works in the tourist and other passenger areas, which the Yard knew
because they inspected and went around the vessel when we arrived on January 26, 2000.
The unfinished hot works in the passenger areas were also known to shipyard project superintendent
Gerry Orcullo. Without the Yards express knowledge or permission, no yard welder will just go to
some part of the vessel and do some kind of hot work. As I said only Yard workers performed hot
works on board the vessel. (Exhibit A-Esteban, p. 2.)
[30]

Cabalhugs affidavit-direct testimony dated May 24, 2001.

[31]

Exhibit C-Joniga, par. 6; Exhibit C-Rabe, par. 4; Exhibit A-Esteban, par. 7.

Per the affidavit of The Yards Commercial Manager Khew Kah Khin who said, Later I saw a copy
of the work order for the supply of welders to the owners to carry out the same work and was asked for
a quotation for this. I quoted verbally PhP150 per man per hour. This was an unusual arrangement and I
cannot recall any other occasion on which the Yard welders were supplied in similar circumstances.
[32]

[33] TSN,

Gerry Orcullo, May 22, 2002, pp. 167-170.

[34]

CIAC Decision, p. 58.

[35]

at 52.

[36] TSN, Avelino Aves

[37]

(on cross-examination).

Exhibit 2-Mullen (Supplementary Report on the fire on board Superferry 3).

[38] Far Eastern Shipping Company v. CA, 357 Phil. 703 (1998).

[40]

Ms. Aini Ling, WG&As fire expert, specifically testified:

Sir, if there is no life jacket, of course, there is no ignition of life jackets. x x x

That doesnt mean that they (sic) might not be a fire, your Honor, because there are other combustible
materials in the ceiling void. (TSN, May 21, 2002, pp. 319-320, as quoted in the CIAC Decision, p.

38).
[41] The pertinent

testimony of Dr. Eric Mullen, The Yards fire expert, is as follows:

ATTY. LOMBOS:
Now, you also heard Ms. Ling say that even if she concedes that the removal of the life jackets from
under the ceiling void would have made the most likely source of the fire, ah, would have eliminated
the most likely source of the fire, her opinion was still that there was a possibility of fire from say,
wires or the ceiling material which was plywood she says on top of the Formica. Do you have any
views regarding that?
DR. MULLEN:
In so far as my mechanism, which I firmly believe to be the case that the material fell through the
holes, it would have made that much difference. Because you have the life jackets would ignite easily,
the ceiling itself would ignite easily because the material that is falling down is very incendive (sic) and
in some cases has flames on them. So, it wouldnt have made that much difference had the life jackets
been removed, there was still possibility for fire. (TSN, May 23, 2002, pp. 132-133, as quoted in the
CIAC Decision, p. 38-39).
This fact was admitted during cross-examination by Geoff Phoon, The Yards president, who
testified in this wise:
[42]

ATTY. LIM:
Q Did you require the vessel to take out the life jackets and put them somewhere else or some place
else on board or on shore?
MR. PHOON:
A We dont touch the ship property.
Q You, in fact, did not require that?
A It belongs to the ship, You asked me do I require, I said it belongs to the ship.
Q Up to now you do not require despite
A We dont touch any item unless it is in the way of the work. (TSN, May 22, 2002, pp. 54-55).
[43]

Garcia, Jr. v. , G.R. No. 168512, March 20, 2007, 518 SCRA 568.

Lapanday Agricultural and Development Corporation (LADECO) v. Angala, G.R. No. 153076,
June 21, 2007, 525 SCRA 229.
[44]

[45]

Mercury Drug Corporation v. Huang, G.R. No. 172122, June 22, 2007, 525 SCRA 427.

[46]

CIAC Decision, p. 80.

[47]

KCSIs Petition, pp. 31-32, Rollo (G.R. Nos. 180880-81), pp. 368-369.

[48]

Lorenzo Shipping Corp. v. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004, 431 SCRA 266.

[49]

PHILAMGEN v. Court of Appeals, 339 Phil. 455 (1997).

[50]

Exhibit E-Bello, pp. 3-4.

ACI Philippines, Inc. v. Coquia, G.R. No. 174466, July 14, 2008, 558 SCRA 300; Development
Bank of the v. Perez, G.R. No. 148541, November 11, 2004, 442 SCRA 238.
[51]

Premiere Development Bank v. Central Surety & Insurance Company, Inc., G.R. No. 176246,
February 13, 2009.
[52]

Cebu Shipyard and Engineering Works, Inc. v. William Lines, Inc., G.R. No. 132607, May 5, 1999,
306 SCRA 762, 781.
[53]

[54]

at 780.

[55]

G.R. No. 97412, July 12, 1994, 234 SCRA 78.

Republic of the
SUPREME COURT
Manila
THIRD DIVISION
MALAYAN INSURANCE CO., INC.,

G.R. No. 194320

Petitioner,

Present:

- versus -

VELASCO, JR., J., Chairperson,

RODELIO ALBERTO and

PERALTA,

ENRICO ALBERTO REYES,

MENDOZA,

Respondents.

REYES,* and
PERLAS-BERNABE, JJ.
Promulgated:
February 1, 2012

x-----------------------------------------------------------------------------------------x

DECISION
VELASCO, JR., J.:
The Case

Before Us is a Petition for Review on Certiorari under Rule 45, seeking to reverse and
set aside the July 28, 2010 Decision[1] of the Court of Appeals (CA) and its October 29,
2010 Resolution[2] denying the motion for reconsideration filed by petitioner Malayan
Insurance Co., Inc. (Malayan Insurance). The July 28, 2010 CA Decision reversed and
set aside the Decision[3] dated February 2, 2009 of the Regional Trial Court, Branch 51
in .
The Facts

At around 5 oclock in the morning of December 17, 1995, an accident occurred at the
corner of EDSA and , City, involving four (4) vehicles, to wit: (1) a Nissan Bus operated
by Aladdin Transit with plate number NYS 381; (2) an Isuzu Tanker with plate number
PLR 684; (3) a Fuzo Cargo Truck with plate number PDL 297; and (4) a Mitsubishi
Galant with plate number TLM 732.[4]
Based on the Police Report issued by the on-the-spot investigator, Senior Police Officer
1 Alfredo M. Dungga (SPO1 Dungga), the Isuzu Tanker was in front of the Mitsubishi
Galant with the Nissan Bus on their right side shortly before the vehicular incident. All
three (3) vehicles were at a halt along EDSA facing the south direction when the Fuzo
Cargo Truck simultaneously bumped the rear portion of the Mitsubishi Galant and the
rear left portion of the Nissan Bus. Due to the strong impact, these two vehicles were
shoved forward and the front left portion of the Mitsubishi Galant rammed into the rear
right portion of the Isuzu Tanker.[5]
Previously, particularly on December 15, 1994, Malayan Insurance issued Car Insurance
Policy No. PV-025-00220 in favor of First Malayan Leasing and Finance Corporation
(the assured), insuring the aforementioned Mitsubishi Galant against third party liability,
own damage and theft, among others. Having insured the vehicle against such risks,
Malayan Insurance claimed in its Complaint dated October 18, 1999 that it paid the

damages sustained by the assured amounting to PhP 700,000.[6]

Maintaining that it has been subrogated to the rights and interests of the assured by
operation of law upon its payment to the latter, Malayan Insurance sent several demand
letters to respondents Rodelio Alberto (Alberto) and Enrico Alberto Reyes (Reyes), the
registered owner and the driver, respectively, of the Fuzo Cargo Truck, requiring them to
pay the amount it had paid to the assured. When respondents refused to settle their
liability, Malayan Insurance was constrained to file a complaint for damages for gross
negligence against respondents.[7]
In their Answer, respondents asserted that they cannot be held liable for the vehicular
accident, since its proximate cause was the reckless driving of the Nissan Bus driver.
They alleged that the speeding bus, coming from the service road of EDSA, maneuvered
its way towards the middle lane without due regard to Reyes right of way. When the
Nissan Bus abruptly stopped, Reyes stepped hard on the brakes but the braking action
could not cope with the inertia and failed to gain sufficient traction. As a consequence,
the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant, which, in turn, hit the
rear end of the vehicle in front of it. The Nissan Bus, on the other hand, sideswiped the
Fuzo Cargo Truck, causing damage to the latter in the amount of PhP 20,000.
Respondents also controverted the results of the Police Report, asserting that it was
based solely on the biased narration of the Nissan Bus driver.[8]
After the termination of the pre-trial proceedings, trial ensued. Malayan Insurance
presented the testimony of its lone witness, a motor car claim adjuster, who attested that
he processed the insurance claim of the assured and verified the documents submitted to
him. Respondents, on the other hand, failed to present any evidence.
In its Decision dated February 2, 2009, the trial court, in Civil Case No. 99-95885, ruled
in favor of Malayan Insurance and declared respondents liable for damages. The
dispositive portion reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff against defendants jointly and

severally to pay plaintiff the following:

1. The amount of P700,000.00 with legal interest from the time of the
filing of the complaint;
2. Attorneys fees of P10,000.00 and;
3. Cost of suit.
SO ORDERED.[9]

Dissatisfied, respondents filed an appeal with the CA, docketed as CA-G.R. CV No.
93112. In its Decision dated July 28, 2010, the CA reversed and set aside the Decision of
the trial court and ruled in favor of respondents, disposing:
WHEREFORE, the foregoing considered, the instant appeal is hereby GRANTED and the assailed
Decision dated 2 February 2009 REVERSED and SET ASIDE. The Complaint dated 18 October 1999
is hereby DISMISSED for lack of merit. No costs.
SO ORDERED.[10]

The CA held that the evidence on record has failed to establish not only negligence on
the part of respondents, but also compliance with the other requisites and the consequent
right of Malayan Insurance to subrogation.[11] It noted that the police report, which has
been made part of the records of the trial court, was not properly identified by the police
officer who conducted the on-the-spot investigation of the subject collision. It, thus, held
that an appellate court, as a reviewing body, cannot rightly appreciate firsthand the
genuineness of an unverified and unidentified document, much less accord it evidentiary
value.[12]
Subsequently, Malayan Insurance filed its Motion for Reconsideration, arguing that a
police report is a prima facie evidence of the facts stated in it. And inasmuch as they
never questioned the presentation of the report in evidence, respondents are deemed to
have waived their right to question its authenticity and due execution.[13]
In its Resolution dated October 29, 2010, the CA denied the motion for reconsideration.
Hence, Malayan Insurance filed the instant petition.
The Issues

In its Memorandum[14] dated June 27, 2011, Malayan Insurance raises the following

issues for Our consideration:

I
WHETHER THE CA ERRED IN REFUSING ADMISSIBILITY OF THE POLICE REPORT SINCE
THE POLICE INVESTIGATOR WHO PREPARED THE SAME DID NOT ACTUALLY TESTIFY IN
COURT THEREON.
II
WHETHER THE SUBROGATION OF MALAYAN INSURANCE IS IMPAIRED AND/OR
DEFICIENT.

On the other hand, respondents submit the following issues in its Memorandum[15]
dated July 7, 2011:
I
WHETHER THE CA IS CORRECT IN DISMISSING THE COMPLAINT FOR FAILURE OF
MALAYAN INSURANCE TO OVERCOME THE BURDEN OF PROOF REQUIRED TO
ESTABLISH THE NEGLIGENCE OF RESPONDENTS.
II
WHETHER THE PIECES OF EVIDENCE PRESENTED BY MALAYAN INSURANCE ARE
SUFFICIENT TO CLAIM FOR THE AMOUNT OF DAMAGES.
III
WHETHER THE SUBROGATION OF MALAYAN INSURANCE HAS PASSED COMPLIANCE
AND REQUISITES AS PROVIDED UNDER PERTINENT LAWS.

Essentially, the issues boil down to the following: (1) the admissibility of the police
report; (2) the sufficiency of the evidence to support a claim for gross negligence; and
(3) the validity of subrogation in the instant case.
Our Ruling

The petition has merit.

Admissibility of the Police Report
Malayan Insurance contends that, even without the presentation of the police
investigator who prepared the police report, said report is still admissible in evidence,
especially since respondents failed to make a timely objection to its presentation in

evidence.[16] Respondents counter that since the police report was never confirmed by
the investigating police officer, it cannot be considered as part of the evidence on record.
[17]
Indeed, under the rules of evidence, a witness can testify only to those facts which the
witness knows of his or her personal knowledge, that is, which are derived from the
witness own perception.[18] Concomitantly, a witness may not testify on matters which
he or she merely learned from others either because said witness was told or read or
heard those matters.[19] Such testimony is considered hearsay and may not be received
as proof of the truth of what the witness has learned. This is known as the hearsay rule.
[20]
As discussed in D.M. Consunji, Inc. v. CA,[21] Hearsay is not limited to oral testimony
or statements; the general rule that excludes hearsay as evidence applies to written, as
well as oral statements.
There are several exceptions to the hearsay rule under the Rules of Court, among which
are entries in official records.[22] Section 44, Rule 130 provides:
Entries in official records made in the performance of his duty by a public officer of the , or by a person
in the performance of a duty specially enjoined by law are prima facie evidence of the facts therein
stated.

In Alvarez v. PICOP Resources,[23] this Court reiterated the requisites for the
admissibility in evidence, as an exception to the hearsay rule of entries in official
records, thus: (a) that the entry was made by a public officer or by another person
specially enjoined by law to do so; (b) that it was made by the public officer in the
performance of his or her duties, or by such other person in the performance of a duty
specially enjoined by law; and (c) that the public officer or other person had sufficient
knowledge of the facts by him or her stated, which must have been acquired by the
public officer or other person personally or through official information.
Notably, the presentation of the police report itself is admissible as an exception to the

hearsay rule even if the police investigator who prepared it was not presented in court, as
long as the above requisites could be adequately proved.[24]
Here, there is no dispute that SPO1 Dungga, the on-the-spot investigator, prepared the
report, and he did so in the performance of his duty. However, what is not clear is
whether SPO1 Dungga had sufficient personal knowledge of the facts contained in his
report. Thus, the third requisite is lacking.
Respondents failed to make a timely objection to the police reports presentation in
evidence; thus, they are deemed to have waived their right to do so.[25] As a result, the
police report is still admissible in evidence.
Sufficiency of Evidence
Malayan Insurance contends that since Reyes, the driver of the Fuzo Cargo truck,
bumped the rear of the Mitsubishi Galant, he is presumed to be negligent unless proved
otherwise. It further contends that respondents failed to present any evidence to overturn
the presumption of negligence.[26] Contrarily, respondents claim that since Malayan
Insurance did not present any witness who shall affirm any negligent act of Reyes in
driving the Fuzo Cargo truck before and after the incident, there is no evidence which
would show negligence on the part of respondents.[27]
We agree with Malayan Insurance. Even if We consider the inadmissibility of the police
report in evidence, still, respondents cannot evade liability by virtue of the res ipsa
loquitur doctrine. The D.M. Consunji, Inc. case is quite elucidating:
Petitioners contention, however, loses relevance in the face of the application of res ipsa loquitur by the
CA. The effect of the doctrine is to warrant a presumption or inference that the mere fall of the elevator
was a result of the person having charge of the instrumentality was negligent. As a rule of evidence, the
doctrine of res ipsa loquitur is peculiar to the law of negligence which recognizes that prima facie
negligence may be established without direct proof and furnishes a substitute for specific proof of
negligence.
The concept of res ipsa loquitur has been explained in this wise:
While negligence is not ordinarily inferred or presumed, and while the

mere happening of an accident or injury will not generally give rise to an

inference or presumption that it was due to negligence on defendants
part, under the doctrine of res ipsa loquitur, which means, literally, the
thing or transaction speaks for itself, or in one jurisdiction, that the thing
or instrumentality speaks for itself, the facts or circumstances
accompanying an injury may be such as to raise a presumption, or at least
permit an inference of negligence on the part of the defendant, or some
other person who is charged with negligence.
x x x where it is shown that the thing or instrumentality which caused the injury complained of was
under the control or management of the defendant, and that the occurrence resulting in the injury was
such as in the ordinary course of things would not happen if those who had its control or management
used proper care, there is sufficient evidence, or, as sometimes stated, reasonable evidence, in the
absence of explanation by the defendant, that the injury arose from or was caused by the defendants
want of care.
One of the theoretical bases for the doctrine is its necessity, i.e., that
necessary evidence is absent or not available.
The res ipsa loquitur doctrine is based in part upon the theory that the defendant in charge of the
instrumentality which causes the injury either knows the cause of the accident or has the best
opportunity of ascertaining it and that the plaintiff has no such knowledge, and therefore is compelled
to allege negligence in general terms and to rely upon the proof of the happening of the accident in
order to establish negligence. The inference which the doctrine permits is grounded upon the fact that
the chief evidence of the true cause, whether culpable or innocent, is practically accessible to the
defendant but inaccessible to the injured person.
It has been said that the doctrine of res ipsa loquitur furnishes a bridge by which a plaintiff, without
knowledge of the cause, reaches over to defendant who knows or should know the cause, for any
explanation of care exercised by the defendant in respect of the matter of which the plaintiff complains.
The res ipsa loquitur doctrine, another court has said, is a rule of necessity, in that it proceeds on the
theory that under the peculiar circumstances in which the doctrine is applicable, it is within the power
of the defendant to show that there was no negligence on his part, and direct proof of defendants
negligence is beyond plaintiffs power. Accordingly, some courts add to the three prerequisites for the
application of the res ipsa loquitur doctrine the further requirement that for the res ipsa loquitur
doctrine to apply, it must appear that the injured party had no knowledge or means of knowledge as to
the cause of the accident, or that the party to be charged with negligence has superior knowledge or
opportunity for explanation of the accident.
The CA held that all the requisites of res ipsa loquitur are present in the case at bar:
There is no dispute that appellees husband fell down from the 14th floor of a building to the basement
while he was working with appellants construction project, resulting to his death. The construction site
is within the exclusive control and management of appellant. It has a safety engineer, a project

superintendent, a carpenter leadman and others who are in complete control of the situation therein.
The circumstances of any accident that would occur therein are peculiarly within the knowledge of the
appellant or its employees. On the other hand, the appellee is not in a position to know what caused the
accident. Res ipsa loquitur is a rule of necessity and it applies where evidence is absent or not readily
available, provided the following requisites are present: (1) the accident was of a kind which does not
ordinarily occur unless someone is negligent; (2) the instrumentality or agency which caused the injury
was under the exclusive control of the person charged with negligence; and (3) the injury suffered must
not have been due to any voluntary action or contribution on the part of the person injured. x x x.
No worker is going to fall from the 14th floor of a building to the basement while performing work in a
construction site unless someone is negligent[;] thus, the first requisite for the application of the rule of
res ipsa loquitur is present. As explained earlier, the construction site with all its paraphernalia and
human resources that likely caused the injury is under the exclusive control and management of
appellant[;] thus[,] the second requisite is also present. No contributory negligence was attributed to the
appellees deceased husband[;] thus[,] the last requisite is also present. All the requisites for the
application of the rule of res ipsa loquitur are present, thus a reasonable presumption or inference of
appellants negligence arises. x x x.
Petitioner does not dispute the existence of the requisites for the application of res ipsa loquitur, but
argues that the presumption or inference that it was negligent did not arise since it proved that it
exercised due care to avoid the accident which befell respondents husband.
Petitioner apparently misapprehends the procedural effect of the doctrine. As stated earlier, the
defendants negligence is presumed or inferred when the plaintiff establishes the requisites for the
application of res ipsa loquitur. Once the plaintiff makes out a prima facie case of all the elements, the
burden then shifts to defendant to explain. The presumption or inference may be rebutted or overcome
by other evidence and, under appropriate circumstances a disputable presumption, such as that of due
care or innocence, may outweigh the inference. It is not for the defendant to explain or prove its
defense to prevent the presumption or inference from arising. Evidence by the defendant of say, due
care, comes into play only after the circumstances for the application of the doctrine has been
established.[28]

In the case at bar, aside from the statement in the police report, none of the parties
disputes the fact that the Fuzo Cargo Truck hit the rear end of the Mitsubishi Galant,
which, in turn, hit the rear end of the vehicle in front of it. Respondents, however, point
to the reckless driving of the Nissan Bus driver as the proximate cause of the collision,
which allegation is totally unsupported by any evidence on record. And assuming that
this allegation is, indeed, true, it is astonishing that respondents never even bothered to
file a cross-claim against the owner or driver of the Nissan Bus.

What is at once evident from the instant case, however, is the presence of all the
requisites for the application of the rule of res ipsa loquitur. To reiterate, res ipsa
loquitur is a rule of necessity which applies where evidence is absent or not readily
available. As explained in D.M. Consunji, Inc., it is partly based upon the theory that the
defendant in charge of the instrumentality which causes the injury either knows the
cause of the accident or has the best opportunity of ascertaining it and that the plaintiff
has no such knowledge, and, therefore, is compelled to allege negligence in general
terms and to rely upon the proof of the happening of the accident in order to establish
negligence.
As mentioned above, the requisites for the application of the res ipsa loquitur rule are
the following: (1) the accident was of a kind which does not ordinarily occur unless
someone is negligent; (2) the instrumentality or agency which caused the injury was
under the exclusive control of the person charged with negligence; and (3) the injury
suffered must not have been due to any voluntary action or contribution on the part of
the person injured.[29]
In the instant case, the Fuzo Cargo Truck would not have had hit the rear end of the
Mitsubishi Galant unless someone is negligent. Also, the Fuzo Cargo Truck was under
the exclusive control of its driver, Reyes. Even if respondents avert liability by putting
the blame on the Nissan Bus driver, still, this allegation was self-serving and totally
unfounded. Finally, no contributory negligence was attributed to the driver of the
Mitsubishi Galant. Consequently, all the requisites for the application of the doctrine of
res ipsa loquitur are present, thereby creating a reasonable presumption of negligence on
the part of respondents.
It is worth mentioning that just like any other disputable presumptions or inferences, the
presumption of negligence may be rebutted or overcome by other evidence to the
contrary. It is unfortunate, however, that respondents failed to present any evidence
before the trial court. Thus, the presumption of negligence remains. Consequently, the

CA erred in dismissing the complaint for Malayan Insurances adverted failure to prove
negligence on the part of respondents.
Validity of Subrogation
Malayan Insurance contends that there was
a valid subrogation in the instant case, as
evidenced by the claim check voucher[30]
and the Release of Claim and Subrogation
Receipt[31] presented by it before the trial
court. Respondents, however, claim that the
documents presented by Malayan Insurance
do not indicate certain important details
that would show proper subrogation.
As noted by Malayan Insurance, respondents had all the opportunity, but failed to object
to the presentation of its evidence. Thus, and as We have mentioned earlier, respondents
are deemed to have waived their right to make an objection. As this Court held in Asian
Construction and Development Corporation v. COMFAC Corporation:
The rule is that failure to object to the offered evidence renders it admissible, and the court
cannot, on its own, disregard such evidence. We note that ASIAKONSTRUCTs counsel of record
before the trial court, Atty. Bernard Dy, who actively participated in the initial stages of the case
stopped attending the hearings when COMFAC was about to end its presentation. Thus,
ASIAKONSTRUCT could not object to COMFACs offer of evidence nor present evidence in its
defense; ASIAKONSTRUCT was deemed by the trial court to have waived its chance to do so.
Note also that when a party desires the court to reject the evidence offered, it must so state in the
form of a timely objection and it cannot raise the objection to the evidence for the first time on
appeal. Because of a partys failure to timely object, the evidence becomes part of the evidence in
the case. Thereafter, all the parties are considered bound by any outcome arising from the offer
of evidence properly presented.[32] (Emphasis supplied.)

Bearing in mind that the claim check voucher and the Release of Claim and Subrogation
Receipt presented by Malayan Insurance are already part of the evidence on record, and
since it is not disputed that the insurance company, indeed, paid PhP 700,000 to the

assured, then there is a valid subrogation in the case at bar. As explained in Keppel Cebu
Shipyard, Inc. v. Pioneer Insurance and Surety Corporation:
Subrogation is the substitution of one person by another with reference to a lawful claim or right, so
that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its
remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an
insurance policy is entitled to all the rights and remedies belonging to the insured against a third party
with respect to any loss covered by the policy. It contemplates full substitution such that it places the
party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ
to enforce payment.
We have held that payment by the insurer to the insured operates as an equitable assignment to the
insurer of all the remedies that the insured may have against the third party whose negligence or
wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of,
any privity of contract. It accrues simply upon payment by the insurance company of the insurance
claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish
justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in
justice, equity, and good conscience, ought to pay.[33]

Considering the above ruling, it is only but proper that Malayan Insurance be subrogated
to the rights of the assured.
WHEREFORE, the petition is hereby GRANTED. The CAs July 28, 2010 Decision
and October 29, 2010 Resolution in CA-G.R. CV No. 93112 are hereby REVERSED
and SET ASIDE. The Decision dated February 2, 2009 issued by the trial court in Civil
Case No. 99-95885 is hereby REINSTATED.
No pronouncement as to cost.
SO ORDERED.
PRESBITERO J. VELASCO, JR.
Associate Justice
WE CONCUR:
DIOSDADO M. PERALTA
Associate Justice

JOSE CATRAL BIENVENIDO L. REYES

Associate Justice

Associate Justice

ESTELA M. PERLAS-BERNABE
Associate Justice
ATT E S TAT I O N
I attest that the conclusions in the above Decision had been reached in consultation before
the case was assigned to the writer of the opinion of the Courts Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson
C E R T I FI CAT I O N
Pursuant to Section 13, Article VIII of the Constitution, and the Division
Chairpersons Attestation, I certify that the conclusions in the above Decision had been
reached in consultation before the case was assigned to the writer of the opinion of the
Courts Division.

RENATO C. CORONA
Chief Justice

* Additional member per Special Order No. 1178 dated January 26, 2012.
Rollo, pp. 16-26. Penned by Associate Justice Josefina Guevara-Salonga and concurred in by
Associate Justices Mariflor P. Punzalan Castillo and Franchito N. Diamante.
[1]

[2]

at 29-30.

[3]

at 64-70. Penned by Presiding Judge Gregorio B. Clemea, Jr.

[4]

at 17.

[5]

at 17-18

[6]
[7]

at 18.

[8]

at 18-19.

[9]

at 69-70.

[10]

at 25.

[11]

at 22.

[12]

at 24.

[13]

at 88.

[14]

at 99-107.

[15]

at 110-115.

[16]

at 101.

[17]

at 113.

[18]

RULES OF COURT, Rule 130, Sec. 36.

[19]

D.M. Consunji, Inc. v. CA, G.R. No. 137873, April 20, 2001, 357 SCRA 249, 253-254.

[20]

at 254.

[21]
[22]

G.R. Nos. 162243, 164516 & 171875, December 3, 2009, 606 SCRA 444, 525; citing Africa v.
Caltex, 123 Phil. 272, 277 (1966).
[23]

[24]

at 525-526.

Asian Construction and Development Corporation v. COMFAC Corporation, G.R. No. 163915,
October 16, 2006, 504 SCRA 519, 524.
[25]

[26]

Rollo, p. 105.

[27]

at 113.

[28]

Supra note 19, at 257-260; citations omitted.

[29]

at 259.

[30]

Rollo, p. 106, Exhibit D.

[31]

, Exhibit E.

[32]

Supra note 25.

[33]

G.R. Nos. 180880-81 & 180896-97, September 25, 2009, 601 SCRA 96, 141-142.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 185964

June 16, 2014

ASIAN TERMINALS, INC., Petitioner,

vs.
FIRST LEPANTO-TAISHO INSURANCE CORPORATION, Respondent.
DECISION
REYES, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking to annul and
set aside the Decision2 dated October 10, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99021
which adjudged petitioner Asian Terminals, Inc. (ATI) liable to pay the money claims of respondent
First Lepanto-Taisho Insurance Corporation (FIRST LEPANTO).
The Undisputed Facts
On July 6, 1996,3 3,000 bags of sodium tripolyphosphate contained in 100 plain jumbo bags complete
and in good condition were loaded and received on board M/V "Da Feng" owned by China Ocean
Shipping Co. (COSCO) in favor of consignee, Grand Asian Sales, Inc. (GASI). Based on a Certificate
of Insurance4 dated August 24, 1995, it appears that the shipment was insured against all risks by GASI
with FIRST LEPANTO for P7,959,550.50 under Marine Open Policy No. 0123.
The shipment arrived in Manila on July 18, 1996 and was discharged into the possession and custody
of ATI, a domestic corporation engaged in arrastre business. The shipment remained for quite some
time at ATIs storage area until it was withdrawn by broker, Proven Customs Brokerage Corporation
(PROVEN), on August 8 and 9, 1996 for delivery to the consignee. Upon receipt of the shipment,5
GASI subjected the same to inspection and found that the delivered goods incurred shortages of 8,600
kilograms and spillage of 3,315 kg for a total of11,915 kg of loss/damage valued at P166,772.41.
GASI sought recompense from COSCO, thru its Philippine agent Smith Bell Shipping Lines, Inc.
(SMITH BELL),6 ATI7 and PROVEN8 but was denied. Hence, it pursued indemnification from the
shipments insurer.9
After the requisite investigation and adjustment, FIRST LEPANTO paid GASI the amount of
P165,772.40 as insurance indemnity.10
Thereafter, GASI executed a Release of Claim11 discharging FIRST LEPANTO from any and all
liabilities pertaining to the lost/damaged shipment and subrogating it to all the rights of recovery and
claims the former may have against any person or corporation in relation to the lost/damaged shipment.

As such subrogee, FIRST LEPANTO demanded from COSCO, its shipping agency in the Philippines,
SMITH BELL, PROVEN and ATI, reimbursement of the amount it paid to GASI. When FIRST
LEPANTOs demands were not heeded, it filed on May 29, 1997 a Complaint12 for sum of money
before the Metropolitan Trial Court (MeTC) of Manila, Branch 3. FIRST LEPANTO sought that it be
reimbursed the amount of 166,772.41, twenty-five percent (25%) thereof as attorneys fees, and costs
of suit.
ATI denied liability for the lost/damaged shipment and claimed that it exercised due diligence and care
in handling the same.13 ATI averred that upon arrival of the shipment, SMITH BELL requested for its
inspection14 and it was discovered that one jumbo bag thereof sustained loss/damage while in the
custody of COSCO as evidenced by Turn Over Survey of Bad Order Cargo No. 47890 dated August 6,
199615 jointly executed by the respective representatives of ATI and COSCO. During the withdrawal
of the shipment by PROVEN from ATIs warehouse, the entire shipment was re-examined and it was
found to be exactly in the same condition as when it was turned over to ATI such that one jumbo bag
was damaged. To bolster this claim, ATI submitted Request for Bad Order Survey No. 40622 dated
August 9, 199616 jointly executed by the respective representatives of ATI and PROVEN. ATI also
submitted various Cargo Gate Passes17 showing that PROVEN was able to completely withdraw all
the shipment from ATIs warehouse in good order condition except for that one damaged jumbo bag.
In the alternative, ATI asserted that even if it is found liable for the lost/damaged portion of the
shipment, its contract for cargo handling services limits its liability to not more than P5,000.00 per
package. ATI interposed a counterclaim of P20,000.00 against FIRST LEPANTO as and for attorneys
fees. It also filed a cross-claim against its co-defendants COSCO and SMITH BELL in the event that it
is made liable to FIRST LEPANTO.18
PROVEN denied any liability for the lost/damaged shipment and averred that the complaint alleged no
specific acts or omissions that makes it liable for damages. PROVEN claimed that the damages in the
shipment were sustained before they were withdrawn from ATIs custody under which the shipment
was left in an open area exposed to the elements, thieves and vandals. PROVEN contended that it
exercised due diligence and prudence in handling the shipment. PROVEN also filed a counterclaim for
attorneys fees and damages.19
Despite receipt of summons on December 4, 1996,20 COSCO and SMITH BELL failed to file an
answer to the complaint. FIRST LEPANTO thus moved that they be declared in default21 but the
motion was denied by the MeTC on the ground that under Rule 9, Section 3 of the Rules of Civil
Procedure, "when a pleading asserting a claim states a common cause of action against several
defending parties, some of whom answer and the other fail to do so, the Court shall try the case against
all upon the answers thus filed, and render judgment upon the evidence presented."22
Ruling of the MeTC
In a Judgment23 dated May 30, 2006, the MeTC absolved ATI and PROVEN from any liability and
instead found COSCO to be the party at fault and hence liable for the loss/damage sustained by the
subject shipment. However, the MeTC ruled it has no jurisdiction over COSCO because it is a foreign

corporation. Also, it cannot enforce judgment upon SMITH BELL because no evidence was presented
establishing that it is indeed the Philippine agent of COSCO. There is also no evidence attributing any
fault to SMITH BELL. Consequently, the complaint was dismissed in this wise:
WHEREFORE, in light of the foregoing, judgment is hereby rendered DISMISSING the instant case
for failure of [FIRST LEPANTO] to sufficiently establish its cause o faction against [ATI, COSCO,
SMITH BELL, and PROVEN].
The counterclaims of [ATI and PROVEN] are likewise dismissed for lack of legal basis.
No pronouncement as to cost.
SO ORDERED.24
Ruling of the Regional Trial Court
On appeal, the Regional Trial Court (RTC) reversed the MeTCs findings. In its Decision25 dated
January 26, 2007, the RTC of Manila, Branch 21, in Civil Case No. 06-116237, rejected the contentions
of ATI upon its observation that the same is belied by its very own documentary evidence. The RTC
remarked that, if, as alleged by ATI, one jumbo bag was already in bad order condition upon its receipt
of the shipment from COSCO on July 18, 1996, then how come that the Request for Bad Order Survey
and the Turn Over Survey of Bad Order Cargo were prepared only weeks thereafter or on August 9,
1996 and August 6, 1996, respectively. ATI was adjudged unable to prove that it exercised due
diligence while in custody of the shipment and hence, negligent and should be held liable for the
damages caused to GASI which, in turn, is subrogated by FIRST LEPANTO.
The RTC rejected ATIs contention that its liability is limited only to P5,000.00 per package because its
Management Contract with the Philippine Ports Authority (PPA) purportedly containing the same was
not presented as evidence. More importantly, FIRST LEPANTO or GASI cannot be deemed bound
thereby because they were not parties thereto. Lastly, the RTC did not give merit to ATIs defense that
any claim against it has already prescribed because GASI failed to file any claim within the 15-day
period stated in the gate pass issued by ATI to GASIs broker, PROVEN. Accordingly, the RTC
disposed thus:
WHEREFORE, in light of the foregoing, the judgment on appeal is hereby REVERSED.
[ATI] is hereby ordered to reimburse [FIRST LEPANTO] the amount of [P]165,772.40 with legal
interest until fully paid, to pay [FIRST LEPANTO] 10% of the amount due the latter as and for
attorneys fees plus the costs of suit.
The complaint against [COSCO/SMITH BELL and PROVEN] are DISMISSED for lack of evidence
against them. The counterclaim and cross[-]claim of [ATI] are likewise DISMISSED for lack of merit.
SO ORDERED.26
Ruling of the CA
ATI sought recourse with the CA challenging the RTCs finding that FIRST LEPANTO was validly

subrogated to the rights of GASI with respect to the lost/damaged shipment. ATI argued that there was
no valid subrogation because FIRSTLEPANTO failed to present a valid, existing and enforceable
Marine Open Policy or insurance contract. ATI reasoned that the Certificate of Insurance or Marine
Cover Note submitted by FIRST LEPANTO as evidence is not the same as an actual insurance
contract.
In its Decision27 dated October 10, 2008, the CA dismissed the appeal and held that the Release of
Claim and the Certificate of Insurance presented by FIRST LEPANTO sufficiently established its
relationship with the consignee and that upon proof of payment of the latters claim for damages,
FIRST LEPANTO was subrogated to its rights against those liable for the lost/damaged shipment.
The CA also affirmed the ruling of the RTC that the subject shipment was damaged while in the
custody of ATI. Thus, the CA disposed as follows:
WHEREFORE, premises considered, the assailed Decision is hereby AFFIRMED and the instant
petition is DENIED for lack of merit.
SO ORDERED.28
ATI moved for reconsideration but the motion was denied in the CA Resolution29 dated January 12,
2009. Hence, this petition arguing that:
(a) The presentation of the insurance policy is indispensable in proving the right of FIRST LEPANTO
to be subrogated to the right of the consignee pursuant to the ruling in Wallem Philippines Shipping,
Inc. v. Prudential Guarantee and Assurance Inc.;30
(b) ATI cannot be barred from invoking the defense of prescription as provided for in the gate passes in
consonance with the ruling in International Container Terminal Services, Inc. v. Prudential Guarantee
and Assurance Co, Inc.31
Ruling of the Court
The Court denies the petition.
ATI
due
shipment
control
operator.

failed
care

to

prove
and

was
and

that
diligence

under
possession

it
while
its
as

exercised
the
custody,
arrastre

It must be emphasized that factual questions pertaining to ATIs liability for the loss/damage sustained
by GASI has already been settled in the uniform factual findings of the RTC and the CA that: ATI
failed to prove by preponderance of evidence that it exercised due diligence in handling the shipment.
Such findings are binding and conclusive upon this Court since a review thereof is proscribed by the
nature of the present petition. Only questions of law are allowed in petitions for review on certiorari
under Rule 45 of the Rules of Court. It is not the Courts duty to review, examine, and evaluate or
weigh all over again the probative value of the evidence presented, especially where the findings of the

RTC are affirmed by the CA, as in this case.32

There are only specific instances when the Court deviates from the rule and conducts a review of the
courts a quos factual findings, such as when: (1) the inference made is manifestly mistaken, absurd or
impossible; (2) there is grave abuse of discretion;(3) the findings are grounded entirely on speculations,
surmises or conjectures; (4) the judgment of the CA is based on misapprehension of facts; (5) the CA,
in making its findings, went beyond the issues of the case and the same is contrary to the admissions of
both appellant and appellee; (6) the findings of fact are conclusions without citation of specific
evidence on which they are based; (7) the CA manifestly overlooked certain relevant facts not disputed
by the parties and which, if properly considered, would justify a different conclusion; and (8) the
findings of fact of the CA are premised on the absence of evidence and are contradicted by the evidence
on record.33
None of these instances, however, are present in this case. Moreover, it is unmistakable that ATI has
already conceded to the factual findings of RTC and CA adjudging it liable for the shipments
loss/damage considering the absence of arguments pertaining to such issue in the petition at bar.
These notwithstanding, the Court scrutinized the records of the case and found that indeed, ATI is liable
as the arrastre operator for the lost/damaged portion of the shipment.
The relationship between the consignee and the arrastre operator is akin to that existing between the
consignee and/or the owner of the shipped goods and the common carrier, or that between a depositor
and a warehouseman. Hence, in the performance of its obligations, an arrastre operator should observe
the same degree of diligence as that required of a common carrier and a warehouseman. Being the
custodian of the goods discharged from a vessel, an arrastre operators duty is to take good care of the
goods and to turn them over to the party entitled to their possession.34
In a claim for loss filed by the consignee (or the insurer), the burden of proof to show compliance with
the obligation to deliver the goods to the appropriate party devolves upon the arrastre operator. Since
the safekeeping of the goods is its responsibility, it must prove that the losses were not due to its
negligence or to that of its employees. To avoid liability, the arrastre operator must prove that it
exercised diligence and due care in handling the shipment.35
ATI failed to discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO on the
basis of the Request for Bad Order Survey dated August 9, 1996 purportedly showing that when ATI
received the shipment, one jumbo bag thereof was already in damaged condition.
The RTC and CA were both correct in concluding that ATIs contention was improbable and illogical.
As judiciously discerned by the courts a quo, the date of the document was too distant from the date
when the shipment was actually received by ATI from COSCO on July 18, 1996. In fact, what the
document established is that when the loss/damage was discovered, the shipment has been in ATIs
custody for at least two weeks. This circumstance, coupled with the undisputed declaration of
PROVENs witnesses that while the shipment was in ATIs custody, it was left in an open area exposed
to the elements, thieves and vandals,36 all generate the conclusion that ATI failed to exercise due care
and diligence while the subject shipment was under its custody, control and possession as arrastre

operator.
To prove the exercise of diligence in handling the subject cargoes, an arrastre operator must do more
than merely show the possibility that some other party could be responsible for the loss or the
damage.37 It must prove that it used all reasonable means to handle and store the shipment with due
care and diligence including safeguarding it from weather elements, thieves or vandals.
Non-presentation of the insurance
contract is not fatal to FIRST
LEPANTOs cause of action for
reimbursement as subrogee.
It is conspicuous from the records that ATI put in issue the submission of the insurance contract for the
first time before the CA. Despite opportunity to study FIRST LEPANTOs complaint before the MeTC,
ATI failed to allege in its answer the necessity of the insurance contract. Neither was the same
considered during pre-trial as one of the decisive matters in the case. Further, ATI never challenged the
relevancy or materiality of the Certificate of Insurance presented by FIRST LEPANTO as evidence
during trial as proof of its right to be subrogated in the consignees stead. Since it was not agreed
during the pre-trial proceedings that FIRST LEPANTO will have to prove its subrogation rights by
presenting a copy of the insurance contract, ATI is barred from pleading the absence of such contract in
its appeal. It is imperative for the parties to disclose during pre-trial all issues they intend to raise
during the trial because, they are bound by the delimitation of such issues. The determination of issues
during the pre-trial conference bars the consideration of other questions, whether during trial or on
appeal.38
A faithful adherence to the rule by litigants is ensured by the equally settled principle that a party
cannot change his theory on appeal as such act violates the basic rudiments of fair play and due
process. As stressed in Jose v. Alfuerto:39
[A] party cannot change his theory ofthe case or his cause of action on appeal. Points of law, theories,
issues and arguments not brought to the attention of the lower court will not be considered by the
reviewing court. The defenses not pleaded in the answer cannot, on appeal, change fundamentally the
nature of the issue in the case. To do so would be unfair to the adverse party, who had no opportunity to
present evidence in connection with the new theory; this would offend the basic rules of due process
and fair play.40 (Citation omitted)
While the Court may adopt a liberal stance and relax the rule, no reasonable explanation, however, was
introduced to justify ATIs failure to timely question the basis of FIRST LEPANTOs rights as a
subrogee.
The fact that the CA took cognizance of and resolved the said issue did not cure or ratify ATIs faux
pas. "[A] judgment that goes beyond the issues and purports to adjudicate something on which the
court did not hear the parties, is not only irregular but also extrajudicial and invalid."41 Thus, for
resolving an issue not framed during the pre-trial and on which the parties were not heard during the
trial, that portion of the CAs judgment discussing the necessity of presenting an insurance contract was

erroneous.
At any rate, the non-presentation of the insurance contract is not fatal to FIRST LEPANTOs right to
collect reimbursement as the subrogee of GASI.
"Subrogation is the substitution of one person in the place of another with reference to a lawful claim
or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim,
including its remedies or securities."42 The right of subrogation springs from Article 2207 of the Civil
Code which states:
Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the insured against the wrong-doer or the
person who has violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury.
As a general rule, the marine insurance policy needs to be presented in evidence before the insurer may
recover the insured value of the lost/damaged cargo in the exercise of its subrogatory right. In Malayan
Insurance Co., Inc. v.Regis Brokerage Corp.,43 the Court stated that the presentation of the contract
constitutive of the insurance relationship between the consignee and insurer is critical because it is the
legal basis of the latters right to subrogation.44
In Home Insurance Corporation v. CA,45 the Court also held that the insurance contract was necessary
to prove that it covered the hauling portion of the shipment and was not limited to the transport of the
cargo while at sea. The shipment in that case passed through six stages with different parties involved
in each stage until it reached the consignee. The insurance contract, which was not presented in
evidence, was necessary to determine the scope of the insurers liability, if any, since no evidence was
adduced indicating at what stage in the handling process the damage to the cargo was sustained.46
An analogous disposition was arrived at in the Wallem47 case cited by ATI wherein the Court held that
the insurance contract must be presented in evidence in order to determine the extent of its coverage. It
was further ruled therein that the liability of the carrier from whom reimbursement was demanded was
not established with certainty because the alleged shortage incurred by the cargoes was not definitively
determined.48
Nevertheless, the rule is not inflexible. In certain instances, the Court has admitted exceptions by
declaring that a marine insurance policy is dispensable evidence in reimbursement claims instituted by
the insurer.
In Delsan Transport Lines, Inc. v. CA,49 the Court ruled that the right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. Hence, presentation in evidence of the
marine insurance policy is not indispensable before the insurer may recover from the common carrier
the insured value of the lost cargo in the exercise of its subrogatory right. The subrogation receipt, by
itself, was held sufficient to establish not only the relationship between the insurer and consignee, but

also the amount paid to settle the insurance claim. The presentation of the insurance contract was
deemed not fatal to the insurers cause of action because the loss of the cargo undoubtedly occurred
while on board the petitioners vessel.50
The same rationale was the basis of the judgment in International Container Terminal Services, Inc. v.
FGU Insurance Corporation,51 wherein the arrastre operator was found liable for the lost shipment
despite the failure of the insurance company to offer in evidence the insurance contract or policy. As in
Delsan, it was certain that the loss of the cargo occurred while in the petitioners custody.52
Based on the attendant facts of the instant case, the application of the exception is warranted.1wphi1
As discussed above, it is already settled that the loss/damage to the GASIs shipment occurred while
they were in ATIs custody, possession and control as arrastre operator. Verily, the Certificate of
Insurance53 and the Release of Claim54 presented as evidence sufficiently established FIRST
LEPANTOs right to collect reimbursement as the subrogee of the consignee, GASI.
With ATIs liability having been positively established, to strictly require the presentation of the
insurance contract will run counter to the principle of equity upon which the doctrine of subrogation is
premised. Subrogation is designed to promote and to accomplish justice and is the mode which equity
adopts to compel the ultimate payment of a debt by one who in justice, equity and good conscience
ought to pay.55
The payment by the insurer to the insured operates as an equitable assignment to the insurer of all the
remedies which the insured may have against the third party whose negligence or wrongful act caused
the loss. The right of subrogation is not dependent upon, nor does it grow out of any privity of contract
or upon payment by the insurance company of the insurance claim. It accrues simply upon payment by
the insurance company of the insurance claim.56
ATI cannot invoke prescription
ATI argued that the consignee, thru its insurer, FIRST LEPANTO is barred from seeking payment for
the lost/damaged shipment because the claim letter of GASI to ATI was served only on September 27,
1996 or more than one month from the date the shipment was delivered to the consignees warehouse
on August 9, 1996. The claim of GASI was thus filed beyond the 15-day period stated in ATIs
Management Contract with PPA which in turn was reproduced in the gate passes issued to the
consignees broker, PROVEN, as follows:
Issuance of this Gate Pass Constitutes delivery to and receipt by consignee of the goods as described
above in good order and condition unless an accompanying x x x certificates duly issued and noted on
the face of this Gate Pass appeals. [sic]
This Gate pass is subject to all terms and conditions defined in the Management Contract between the
Philippine Port[s] Authority and Asian Terminals, Inc. and amendment thereto and alterations thereof
particularly but not limited to the [A]rticle VI thereof, limiting the contractors liability to [P]5,000.00
per package unless the importation is otherwise specified or manifested or communicated in writing
together with the invoice value and supported by a certified packing list to the contractor by the

interested party or parties before the discharge of the goods and corresponding arrastre charges have
been paid providing exception or restrictions from liability releasing the contractor from liability
among others unless a formal claim with the required annexes shall have been filed with the contractor
within fifteen (15) days from date of issuance by the contractors or certificate of loss, damages, injury,
or Certificate of non-delivery.57
The contention is bereft of merit. As clarified in Insurance Company of North America v. Asian
Terminals, Inc.,58 substantial compliance with the 15-day time limitation is allowed provided that the
consignee has made a provisional claim thru a request for bad order survey or examination report, viz:
Although the formal claim was filed beyond the 15-day period from the issuance of the examination
report on the request for bad order survey, the purpose of the time limitations for the filing of claims
had already been fully satisfied by the request of the consignees broker for a bad order survey and by
the examination report of the arrastre operator on the result thereof, as the arrastre operator had become
aware of and had verified the facts giving rise to its liability. Hence, the arrastre operator suffered no
prejudice by the lack of strict compliance with the 15-day limitation to file the formal complaint.59
(Citations omitted)
In the present case, ATI was notified of the loss/damage to the subject shipment as early as August 9,
1996 thru a Request for Bad Order Survey60 jointly prepared by the consignees broker, PROVEN, and
the representatives of ATI. For having submitted a provisional claim, GASI is thus deemed to have
substantially complied with the notice requirement to the arrastre operator notwithstanding that a
formal claim was sent to the latter only on September 27, 1996. ATI was not deprived the best
opportunity to probe immediately the veracity of such claims. Verily then, GASI, thru its subrogee
FIRST LEPANTO, is not barred by filing the herein action in court.
ATI cannot rely on the ruling in Prudentiat61 because the consignee therein made no provisional claim
thru request for bad order survey and instead filed a claim for the first time after four months from
receipt of the shipment.
Attorney's fees and interests
All told, ATI is liable to pay FIRST LEPANTO the amount of the Pl 65, 772.40 representing the
insurance indemnity paid by the latter to GASI. Pursuant to Nacar v. Gallery Frames,62 the said
amount shall earn a legal interest at the rate of six percent (6%) per annum from the date of finality of
this judgment until its full satisfaction.
As correctly imposed by the RTC and the CA, ten percent (10%) of the judgment award is reasonable
as and for attorney's fees considering the length of time that has passed in prosecuting the claim.63
WHEREFORE, premises considered, the petition is hereby DENIED. The Decision dated October 10,
2008 of the Court of Appeals in CA-G.R. SP No. 99021 is hereby AFFIRMED insofar as it adjudged
liable and ordered Asian Terminals, Inc., to pay First Lepanto-Taisho Insurance Corp., the amount of
P165,772.40, ten percent (10%) thereof as and for attorney's fees, plus costs of suit. The said amount
shall earn legal interest at the rate of six percent ( 6%) per annum from the date of finality of this

judgment until its full satisfaction.

SO ORDERED.
BIENVENIDO L. REYES
Associate Justice
WE CONCUR:
MARIA LOURDES P. A. SERENO
Chief Justice
Chairperson
TERESITA J. LEONARDO-DE CASTRO
LUCAS P. BERSAMIN
Associate Justice
Associate Justice
MARTIN S. VILLARAMA, JR.
Associate Justice
C E R T I F I CAT I O N
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of
the Court's Division.
MARIA LOURDES P. A. SERENO
Chief Justice

Footnotes
1 Rollo, pp. 13-37.
2 Penned by Associate Justice Marlene Gonzales-Sison, with Associate Justices Juan Q.
Enriquez, Jr. and Isaias P. Dicdican, concurring; id. at 41-51.
3 Id. at 88.
4 Id. at 317.
5 Id. at 92-101.
6 Id. at 104.
7 Id. at 103.
8 Id. at 115.
9 Id. at 102.
10 Id. at 116.
11 Id. at 114.

12 Id. at 61-65.
13 Id. at 67-70.
14 Id. at 217.
15 Id. at 90.
16 Id. at 91.
17 Id. at 119-128.
18 Id. at 67-70.
19 Id. at 151-154.
20 Per the findings of the Regional Trial Court; id. at 215.
21 FIRST LEPANTOs Omnibus Motion dated January 16, 2001, id. at 72-74.
22 MeTC Order dated July 23, 2001, id. 75-76.
23 Issued by Presiding Judge Juan O. Bermejo, Jr.; id. at 155-162.
24 Id. at 162.
25 Issued by Judge Amor A. Reyes; id. at 213-218.
26 Id. at 218.
27 Id. at 41-51.
28 Id. at 50.
29 Id. at 53-54.
30 445 Phil. 136 (2003).
31 377 Phil. 1082 (1999).
32 Asian Terminals, Inc. v. Malayan Insurance Co., Inc., G.R. No. 171406, April 4, 2011, 647
SCRA 111, 126.
33 Id. at 126-127.
34 Asian Terminals, Inc. v. Daehan Fire and Marine Insurance Co., Ltd., G.R. No. 171194,
February 4, 2010, 611 SCRA 555, 562-563.
35 Id. at 563-564.
36 Paragraph 12 of PROVENs Memorandum before the MeTC, rollo, p. 152.
37 Supra note 34, at 563-564.
38 Supra note 32, at 122.

39 G.R. No. 169380, November 26, 2012, 686 SCRA 323.

40 Id. at 340-341.
41Commission on Internal Revenue v. Mirant Pagbilao Corporation, 535 Phil. 481, 490 (2006).
42 Loadmasters Customs Services, Inc. v. Glodel Brokerage Corporation, G.R. No. 179446,
January 10, 2011, 639 SCRA 69, 78-79.
43 563 Phil. 1003 (2007).
44 Id. at 1016.
45 G.R. No. 109293, August 18, 1993, 225 SCRA 411.
46 Id. at 415-416.
47 Supra note 30.
48 Id. at 151-153.
49 420 Phil. 824 (2001).
50 Id. at 835.
51 578 Phil. 751 (2008).
52 Id. at 760.
53 Rollo, p. 105.
54 Id. at 114.
55 PHILAMGEN v. CA, 339 Phil. 455, 466 (1997).
56 Id.
57 Rollo, pp. 119-128.
58 G.R. No. 180784, February 15, 2012, 666 SCRA 226.
59 Id. 245.
60 Rollo, p. 91.
61 Supra note 31.
62 G.R. No. 189871, August 13, 2013, 703 SCRA 439.
63 See New World International Development (Phils.), Inc. v. NYK-Fi/Japan Shipping Corp.,
G.R. No.171468,August24,2011,656SCRA 129, 138-139.