WARRANTIES CASES

PRUDENTIAL GUARANTEE v TRANS-ASIA SHIPPING

LINES
FACTS:
Plaintiff [TRANS-ASIA] is the owner of the vessel
M/V Asia Korea. In consideration of payment of
premiums, defendant [PRUDENTIAL] insured M/V
Asia Korea for loss/damage of the hull and
machinery arising from perils, inter alia, of fire and
explosion for the sum of P40 Million, beginning
[from] the period [of] July 1, 1993 up to July 1, 1994.
This is evidenced by Marine Policy No. MH93/1363
(Exhibits "A" to "A-11").
On October 25, 1993, while the policy was in force,
a fire broke out while [M/V Asia Korea was]
undergoing repairs at the port of Cebu.
NOTICE OF CLAIM. On October 26, 1993 plaintiff
[TRANS-ASIA] filed its notice of claim for damage
sustained by the vessel. This is evidenced by a
letter/formal claim of even date (Exhibit "B").
Plaintiff [TRANS-ASIA] reserved its right to
subsequently notify defendant [PRUDENTIAL] as to
the full amount of the claim upon final survey and
determination by average adjuster Richard Hogg
International (Phil.) of the damage sustained by
reason of fire.
Plaintiff [TRANS-ASIA] executed a document
denominated "Loan and Trust receipt. TRANS-ASIA
received P3M as a loan w/o interest from Prudential
Prudential denied Trans Asias claim due to alleged
breach of warranty.
COMPLAINT. TRANS-ASIA filed a complaint for sum
of money against Prudential w/ the RTC seeking the
amount of more then P8M upon the insurance
policy of P11M.
DEFENSE: breach of insurance policy conditions:
WARRANTY VESSEL CLASSED AND CLASS
MAINTAINED.
RTC: in favor of Prudential and return the P3M
loaned amt; determination of the parties liabilities
hinged on whether TRANS-ASIA violated and
breached the policy conditions on WARRANTED
VESSEL CLASSED AND CLASS MAINTAINED. It
interpreted the provision to mean that TRANS-ASIA

is required to maintain the vessel at a certain class

at all times pertinent during the life of the policy.
According to the court a quo, TRANS-ASIA failed to
prove compliance of the terms of the warranty, the
violation thereof entitled PRUDENTIAL, the insured
party, to rescind the contract.
CA: reversed; Pay amt of remaining P8M; it should
be Prudential who has the burden of proof to show
that TRANS-ASIA breached its warranty w/c burden
it failed to discharge. Prudential CANNOT rely on the
lack of cert. to the effect that TRANS-ASIA was
CLASSED AND CLASS MAINTAINED
I
ISSUE: W/N the court of appeals erred in holding
that there was no violation by trans-asia of a
material warranty, namely, warranty clause no. 5, of
the insurance policy
HELD:
PRUDENTIAL failed to establish that TRANS-ASIA
violated and breached the policy condition on
WARRANTED VESSEL CLASSED AND CLASS
MAINTAINED, as contained in the subject insurance
contract.
The warranty condition CLASSED AND CLASS
MAINTAINED was explained by PRUDENTIALs Senior
Manager of the Marine and Aviation Division, Lucio
Fernandez
A classification society is an organization which sets
certain standards for a vessel to maintain in order to
maintain their membership in the classification
society. So, if they failed to meet that standard, they
are considered not members of that class, and thus
breaching the warranty, that requires them to
maintain membership or to maintain their class on
that classification society. And it is not sufficient that
the member of this classification society at the time
of a loss, their membership must be continuous for
the whole length of the policy such that during the
effectivity of the policy, their classification is
suspended, and then thereafter, they get reinstated,
that again still a breach of the warranty that they
maintained their class (sic). Our maintaining team
membership in the classification society thereby
maintaining the standards of the vessel (sic).
We sustain the findings of the Court of Appeals that
PRUDENTIAL was not successful in discharging the

burden of evidence that TRANS-ASIA breached the

subject policy condition on CLASSED AND CLASS
MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager
of its Marine and Aviation Division, Lucio Fernandez,
made a categorical admission that at the time of the
procurement of the insurance contract in July 1993,
TRANS-ASIAs vessel, "M/V Asia Korea" was properly
classed by Bureau Veritas,
NOT TANTAMOUNT TO BREACH. We are in accord
with the ruling of the Court of Appeals that the lack
of a certification in PRUDENTIALs records to the
effect that TRANS-ASIAs "M/V Asia Korea" was
CLASSED AND CLASS MAINTAINED at the time of the
occurrence of the fire cannot be tantamount to the
conclusion that TRANS-ASIA in fact breached the
warranty contained in the policy.
WARRANTY. We are not unmindful of the clear
language of Sec. 74 of the Insurance Code which
provides that, "the violation of a material warranty,
or other material provision of a policy on the part of
either party thereto, entitles the other to rescind." It
is generally accepted that "[a] warranty is a
statement or promise set forth in the policy, or by
reference incorporated therein, the untruth or nonfulfillment of which in any respect, and without
reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment,
renders
the
policy
VOIDABLE
by
the
insurer."However, it is similarly indubitable that for
the breach of a warranty to avoid a policy, the same
must be duly shown by the party alleging the same.
We cannot sustain an allegation that is unfounded.
IN THE CASE AT BAR: Consequently, PRUDENTIAL,
not having shown that TRANS-ASIA breached the
warranty condition, CLASSED AND CLASS
MAINTAINED, it remains that TRANS-ASIA must be
allowed to recover its rightful claims on the policy.
ASSUMING ARGUENDO THAT THERE WAS A
VIOLATION OF WARRANTY: PRUDENTIAL made a
valid waiver of the same.
WAIVER. Third, after the loss, Prudential renewed
the insurance policy of Trans-Asia for two (2)
consecutive years, from noon of 01 July 1994 to
noon of 01 July 1995, and then again until noon of
01 July 1996. This renewal is deemed a waiver of any
breach of warranty.

RULING: PAY P8M REPRESENTING THE BAL. OF THE

LOSS SUFFERED BY TRANS-ASIA

YOUNG v MIDLAND TEXTILE INSURANCE

FACTS:
The plaintiff conducted a candy and fruit store on
the Escolta, in the city of Manila, and occupied a
building at 321 Calle Claveria, as a residence
and bodega.
The defendant, in consideration of the payment of a
premium of P60, entered into a contract of
insurance with the plaintiff (policy No. 509105) by
the terms of which the defendant company, upon
certain conditions, promised to pay to the plaintiff
the sum of P3,000, in case said residence
and bodega and contends should be destroyed by
fire.
WARRANTY. On the conditions of said contract of
insurance is found in "warranty B" and is as follows:
"Waranty B. It is hereby declared and agreed
that during the pendency of this policy no
hazardous goods stored or kept for sale, and no
hazardous trade or process be carried on, in the
building to which this insurance applies, or in any
building connected therewith
The
plaintiff
placed
in
said
residence
and bodega three boxes, 18 by 18 by 20 inches
measurement, which belonged to him and which
were filed with fireworks.
FIRE. On the 18th day of March, q913, said residence
and bodega and the contents thereof were partially
destroyed by fire.
ALLEGATION: Said fireworks had been given to the
plaintiff by the former owner of the Luneta Candy
Store; that the plaintiff intended to use the same in
the celebration of the Chinese new year; that the
authorities of the city of Manila had prohibited the
use of fireworks on said occasion, and that the
plaintiff then placed the same in said bodega, where
they remained from the 4th or 5th of February,
1913, until after the fire of the 18th of March, 1913.
Said fireworks were found in part of the bldg NOT
destroyed by fire
RTC: In favor of the plaintiff

ISSUE: Whether or not the placing of said fireworks

in the building insured, under the conditions above
enumerated, they being "hazardous goods," is a
violation of the terms of the contract of insurance
and especially of "warranty B"
HELD:
"Warranty B" provides that "no hazardous goods
be stored" in the building insured. It is admitted by
both parties that the fireworks are "hazardous
goods."
Both the plaintiff and defendant agree that if they
were "hazardous goods," and if they were "stored,"
then the act of the plaintiff was a violation of the
terms of the contract of insurance and the
defendant was justified in repudiating its liability
thereunder.
This leads us to a consideration of the meaning of
the accord "stored" as used in said "warranty B."
While the word "stored" has been variously defined
by authors, as well as by courts, we have found no
case exactly analogous to the present.
DEPENDS ON THE INTENTION OF THE PARTIES.
Whether a particular article is "stored" or not must,
in some degree, depend upon the intention of the
parties. The interpretation of the word "stored" is
quite difficult, in view of the many decisions upon
the various conditions presented. Nearly all of the
cases cited by the lower court are cases where the
article was being put to some reasonable and actual
use, which might easily have been permitted by the
terms of the policy, and within the intention of the
parties, and excepted from the operation of the
warranty, like the present.
STORE. The author of the Century Dictionary
defines the world "store" to be a deposit in a store
or warehouse for preservation or safe keeping; o
place in a warehouse or other place of deposit for
safe keeping. See also the definitions given by the
Standard Dictionary, to the same effect.
Said definitions, of course, do not include a deposit
in a store, in small quantities, for daily use. "Daily
use" precludes the idea of a deposit for preservation
or safe keeping, as well as a deposit for future
consumption, or safe keeping.

IN THE CASE AT BAR: In the present case no claim is

made that the "hazardous goods" were placed in
the bodega for present or daily use. It is admitted
that they were placed in the bodega "for future
use," or for future consumption, or for safe keeping.
The plaintiff makes no claim that he deposited
them there with any other idea than "for future
use" for future consumption. It seems clear to us
that the "hazardous goods" in question were
"stored" in the bodega, as that word is generally
defined. That being true, suppose the defendant had
made an examination of the premises, even in the
absence of a fire, and had found he "hazardous
goods" there, under the conditions above described,
would it not have been justified, then and there, in
declaring the policy null and of no effect by reason
of a violation of its terms on he par of the plaintiff?
The compliance of the insured with the terms of the
contract is a condition precedent to the right of
recovery. If the insured has violated or failed to
perform the conditions of the contract, and such a
violation or want of performance has not been
waived by the insurer, then the insured cannot
recover.
The violation of the terms of the contract, by virtue
of the provisions of the policy itself, terminated, at
the election of either party, he contractual relations.
The plaintiff paid a premium based upon the risk at
the time the policy was issued. Certainly it cannot be
denied that the placing of the firecrackers in the
building insured increased the risk. The plaintiff had
not paid a premium based upon the increased risk,
neither had the defendant issued a policy upon the
theory of a different risk. The plaintiff was enjoying,
if his contention may be allowed may be allowed,
the benefits of an insurance policy upon one risk,
whereas, as a matter of fact, it was issued upon an
entirely different risk. The defendant had neither
been paid nor had issues a policy to cover the
increased risk. An increase of risk which is
substantial and which is continued for a
considerable period of time, is a direct and certain
injury to the insurer, and changes the basis upon
which the contract of insurance rests.
RULING: DEFENDANT-INSURER RELIEVED FROM
LIAB.

AMERICAN HOME ASSURANCE

TANTUCO ENTERPRISES, INC.

COMPANY

FACTS:
Respondent Tantuco Enterprises, Inc. is engaged in
the coconut oil milling and refining industry. It
owns two oil mills. Both are located at factory
compound at Iyam, Lucena City.
The two oil mills were separately covered by fire
insurance policies issued by petitioner American
1
Home Assurance Co., Philippine Branch. The first
oil mill was insured for three million pesos
(P3,000,000.00) under Policy No. 306-7432324-3 for
2
the period March 1, 1991 to 1992. The new oil mill
was insured for six million pesos (P6,000,000.00)
under Policy No. 306-7432321-9 for the same
3
term. Official receipts indicating payment for the
full amount of the premium were issued by the
4
petitioner's agent.
FIRE. A fire that broke out in the early morning of
September 30,1991 gutted and consumed the new
oil mill.
NOTICE OF CLAIM. Respondent immediately
notified the petitioner of the incident. The latter
then sent its appraisers who inspected the burned
premises and the properties destroyed. Thereafter,
in a letter dated October 15, 1991, petitioner
rejected respondent's claim for the insurance
proceeds on the ground that no policy was issued
by it covering the burned oil mill. It stated that the
description of the insured establishment referred to
another building thus: "Our policy nos. 3067432321-9 (Ps 6M) and 306-7432324-4 (Ps 3M)
extend insurance coverage to your oil mill under
Building No. 5, whilst the affected oil mill was under
Building No. 14.
COMPLAINT. For specific perf. filed w/ RTC.
RTC: petitioner liable
ISSUE: W/N the CA erred in its interpretation of Fire
ext. Appliances Warranty
HELD:
The Petition is devoid of merit.

The primary reason advanced by the petitioner in

resisting the claim of the respondent is that the
burned oil mill is not covered by any insurance
policy.
However, it argues that this specific boundary
description clearly pertains, not to the burned oil
mill, but to the other mill. In other words, the oil mill
gutted by fire was not the one described by the
specific boundaries in the contested policy.
CONTENTIONS UNTENABLE.
In construing the words used descriptive of a
building insured, the greatest liberality is shown by
11
the courts in giving effect to the insurance. In view
of the custom of insurance agents to examine
buildings before writing policies upon them, and
since a mistake as to the identity and character of
the building is extremely unlikely, the courts are
inclined to consider that the policy of insurance
covers any building which the parties manifestly
intended to insure, however inaccurate the
description may be.
Notwithstanding, therefore, the misdescription in
the policy, it is beyond dispute, to our mind, that
what the parties manifestly intended to insure was
the new oil mill. This is obvious from the categorical
statement embodied in the policy, extending its
protection:
"On machineries and equipment with complete
accessories usual to a coconut oil mill including
stocks of copra, copra cake and copra mills whilst
contained in the new oil mill building, situate (sic) at
UNNO. ALONG NATIONAL HIGH WAY, BO. IYAM,
LUCENA CITY UNBLOCKED.
ALLEGED BREACH OF WARRANTY. The said warranty
provides:
"WARRANTED that during the currency of this Policy,
Fire Extinguishing Appliances as mentioned below
shall be maintained in efficient working order on the
premises to which insurance applies.
CONTENTION: Petitioner argues that the warranty
clearly obligates the insured to maintain all the
appliances specified therein. The breach occurred
when the respondent failed to install internal fire
hydrants inside the burned building as warranted.

This fact was admitted by the oil mill's expeller

operator, Gerardo Zarsuela.
NEED NOT PROVIDE FOR ALL. Again, the argument
lacks merit. We agree with the appellate court's
conclusion that the aforementioned warranty did
not require respondent to provide for all the fire
extinguishing appliances enumerated therein.
Additionally, we find that neither did it require that
the appliances are restricted to those mentioned in
the warranty. In other words, what the warranty
mandates is that respondent should maintain in
efficient working condition within the premises of
the insured property, fire fighting equipments such
as, but not limited to, those identified in the list,
which will serve as the oil mill's first line of defense
in case any part of it bursts into flame.

taken out with the Springfield Fire & Marine

Insurance Company. The warehouse was destroyed
by fire on January 11, 1928, while the policy issued
by the latter company was in force.
COMPLAINT. Predicated on this policy the plaintiff
instituted action in the Court of First Instance of
Manila against the defendant to recover a
proportional part of the loss coming to P8,170.59.
Four special defenses were interposed on behalf of
the insurance company, one being planted on a
violation of warranty F fixing the amount of
hazardous goods which might be stored in the
insured building
RTC: Against insurer
WARRANTY F

To be sure, respondent was able to comply with the

warranty. Within the vicinity of the new oil mill can
be found the following devices: numerous portable
21
fire
extinguishers,
two
fire
hoses, fire
22
23
hydrant, and an emergency fire engine. All of
these equipments were in efficient working order
when the fire occurred.
It ought to be remembered that not only are
warranties strictly construed against the insurer, but
they should, likewise, by themselves be reasonably
24
interpreted. That reasonableness is to be
ascertained in light of the factual conditions
prevailing in each case. Here, we find that there is
no more need for an internal hydrant considering
that inside the burned building were: (1) numerous
portable fire extinguishers, (2) an emergency fire
engine, and (3) a fire hose which has a connection
to one of the external hydrants.
RULING: PETITION DISMISSED.
ANG GIOK CHIP v SPRINGFILED FIRE AND MARITIME
INSURANCE CO.
FACTS:
Ang Giok Chip, doing business under the name and
style of Hua Bee Kong Si, was formerly the owner of
a warehouse situated at No. 643 Calle Reina
Regente, City of Manila. The contents of the
warehouse were insured with the three insurance
companies for the total sum of P60,000. One
insurance policy, in the amount of P10,000, was

It is hereby declared and agreed that during the

currency of this policy no hazardous goods be stored
in the Building to which this insurance applies or in
any building communicating therewith, provided,
always, however, that the Insured be permitted to
stored a small quantity of the hazardous goods
specified below, but not exceeding in all 3 per cent
of the total value of the whole of the goods or
merchandise contained in said warehouse, viz; . . . .
ISSUE: W/N there was violation of Warranty F?
HELD:
"Every express warranty, made at or before the
execution of a policy, must be contained in the
policy itself, or in another instrument signed by the
insured and referred to in the policy, as making a
part of it."
As the Philippine law was taken verbatim from the
law of California, in accordance with well settled
canons of statutory construction, the court should
follow in fundamental points, at least, the
construction placed by California courts on a
California law. Unfortunately the researches of
counsel reveal no authority coming from the courts
of California which is exactly on all fours with the
case before us. However, there are certain
consideration lying at the basis of California law and
certain indications in the California decisions which
point the way for the decision in this case

The law says that every express warranty must be

"contained in the policy itself." The word
"contained," according to the dictionaries, means
"included,"
inclosed,"
"embraced,"
"comprehended," etc. When, therefore, the courts
speak of a rider attached to the policy, and thus
"embodied" therein, or of a warranty "incorporated"
in the policy, it is believed that the phrase
"contained in the policy itself" must necessarily
include such rider and warranty.

This policy of insurance witnesseth, that E. M.

Bachrach, esq., Manila (hereinafter called the
insured), having paid to the undersigned, as
authorized agent of the British American Assurance
Company (hereinafter called the company), the
sum of two thousand pesos Philippine currency
(premium), for insuring against loss or damage by
fire, as hereinafter mentioned, the property
hereinafter described, in the sum of several sums
following, viz:

RIDER WARRANTY F. In other words, the rider,

warranty F, is contained in the policy itself, because
by the contract of insurance agreed to by the parties
it is made to form a part of the same, but is not
another instrument signed by the insured and
referred to in the policy as forming a part of it.

Ten thousand pesos Philippine currency, on goods,

belonging to a general furniture store, such as iron
and brass bedsteads, toilet tables, chairs, ice boxes,
bureaus, washstands, mirrors, and sea-grass
furniture (in accordance with warranty "D" of the
tariff attached hereto) the property of the assured,
in trust, on commission or for which he is
responsible, whilst stored in the ground floor and
first story of house and dwelling No. 16 Calle
Martinez, district 3, block 70, Manila, built, ground
floor of stone and or brick, first story of hard wood
and roofed with galvanized iron bounded in the
front by the said calle, on one side by Calle David
and on the other two sides by buildings of similar
construction and occupation.

We are given to understand, and there is no

indication to the contrary, that we have here a
standard insurance policy. We are further given to
understand, and there is no indication to the
contrary, that the issuance of the policy in this case
with its attached rider conforms to well established
practice in the Philippines and elsewhere. We are
further given to understand, and there is no
indication to the contrary, that there are no less
than sixty-nine insurance companies doing business
in the Philippine Islands with outstanding policies
more or less similar to the one involved in this case,
and that to nullify such policies would place an
unnecessary hindrance in the transaction of
insurance business in the Philippines. These are
matters of public policy. We cannot believe that it
was ever the legislative intention to insert in the
Philip.
VALID AND SUFFICIENT RIDER. We have studied this
case carefully and having done so have reached the
definite conclusion that warranty F, a rider attached
to the face of the insurance policy, and referred to in
contract of insurance, is valid and sufficient under
section 65 of the Insurance Act.
RULING: PETITION DISMISSED.

The Company agrees that the insured will be paid

NOT exceeding P10,000 upon a condition that the
insured shall have paid to the company. The policy
includes the Calalac automobile of petitioner;
permission was thereby granted for the use of the
gas for the above automobile while contained in the
reservoir of the car
FIRE. That the plaintiff, on the 18th of April, 1908,
and immediately preceding the outbreak of the
alleged fire, willfully placed a gasoline can containing
10 gallons of gasoline in the upper story of said
building in close proximity to a portion of said goods,
wares, and merchandise, which can was so placed by
the plaintiff as to permit the gasoline to run on the
floor of said second story, and after so placing said
gasoline, he, the plaintiff, placed in close proximity
to said escaping gasoline a lighted lamp containing
alcohol, thereby greatly increasing the risk of fire.

QUAJ CHEE GAN v LAW UNION ROCK

BACHRACH v BRITISH AMERICAN ASSURANCE
CORP.

COMPLAINT.Plaintiff filed a complaint claiming

recovery of sums due upon the insurance policy.
RTC: defendant liable to plaintiff

FACTS:

ISSUE: W/N the keeping of gasoline is in violation of

the policy
HELD:
It is claimed that either gasoline or alcohol was kept
in violation of the policy in the bodega containing
the insured property.
The property insured consisted mainly of household
furniture kept for the purpose of sale. The
preservation of the furniture in a salable condition
by retouching or otherwise was incidental to the
business. The evidence offered by the plaintiff is to
the effect that alcohol was used in preparing varnish
for the purpose of retouching, though he also says
that the alcohol was kept in store and not in
the bodega where the furniture was. It is well settled
that the keeping of inflammable oils on the
premises, though prohibited by the policy, does not
void it if such keeping is incidental to the business
insurer CANNOT avoid payment of loss, though
the keeping of benzene is expressly prohibited.
It may be added that there was no provision in the
policy prohibiting the keeping of paints and
varnishes upon the premises where the insured
property was stored. If the company intended to rely
upon a condition of that character, it ought to have
been plainly expressed in the policy.
It does not positively appear of record that the
automobile in question was not included in the other
policies. It does appear that the automobile was
saved and was considered as a part of the salvaged.
It is alleged that the salvage amounted to P4,000,
including the automobile. This amount (P4,000) was
distributed among the different insurers and the
amount of their responsibility was proportionately
reduced. The defendant and appellant in the present
case made no objection at any time in the lower
court to that distribution of the salvage. The claim is
now made for the first time. No reason is given why
the objection was not made at the time of the
distribution of the salvage, including the automobile,
among all of the insurers.

The petitioner is the owner of Norman's Mart

located in the public market of San Francisco,
Agusan del Sur. On 22 December 1989, he obtained
from the private respondent fire insurance policy for
P100,000.00. The period of the policy was from 22
December 1989 to 22 December 1990 and covered
the following: "Stock-in-trade consisting principally
of dry goods such as RTW's for men and women
wear and other usual to assured's business."
The petitioner declared in the policy under the
subheading entitled CO-INSURANCE that Mercantile
Insurance Co., Inc. was the co-insurer for
P50,000.00. From 1989 to 1990, the petitioner had
in his inventory stocks amounting to P392,130.50.
A fire of accidental origin broke out at around 7:30
p.m. at the public market of San Francisco, Agusan
del Sur. The petitioner's insured stock-in-trade were
completely destroyed prompting him to file with
the private respondent a claim under the policy. On
28 December 1990, the private respondent denied
the claim because it found that at the time of the
loss the petitioner's stocks-in-trade were likewise
covered by fire insurance policies No. GA-28146
and No. GA-28144, for P100,000.00 each, issued by
the Cebu Branch of the Philippines First Insurance
3
Co., Inc. (hereinafter PFIC). These policies indicate
that the insured was "Messrs. Discount Mart (Mr.
Armando Geagonia, Prop.)" WITH A MORTGAGE
CLAUSE:
MORTGAGE: Loss, if any shall be payable to Messrs.
Cebu Tesing Textiles, Cebu City as their interest
may appear subject to the terms of this policy. COINSURANCE DECLARED: P100,000
The basis of the private respondent's denial was the
petitioner's alleged violation of Condition 3 of the
policy.
COMPLAINT.Petitioner filed a complaint against
respondent w/ the Insurance Commission for the
recovery of P100,000.00 under the fire insurance
policy.

RULING: JUDGMENT AFFIRMED.

GEAGONIA v CA
FACTS:

CONTENTION OF PETITIONER: No knowledge of the

provisions in the COI that he needed to inform the
insurer of the prior policies; the said reqt was NOT
mentioned to him by the private respondents agent

INSURANCE COMMISSION: Pay P100,000.00.

Petitioner did NOT violate the said Condition as he
had no knowledge of the existence of the two fire
insurance policies obtained from the PFIC; that it
was Cebu Tesing Textiles which procured the PFIC
policies without informing him or securing his
consent; and that Cebu Tesing Textile, as his
creditor, had insurable interest on the stocks.
Petitioner came to know of the PFIC policies only
when he filed his claim with the private respondent
and that Cebu Tesing Textile obtained them and
paid for their premiums without informing him
thereof.
CA: Reversed; petitioner knew of the existence of
the 2 other policies issued by PFIC: the insurance
was taken in the name of private respondent
[petitioner herein]. The policy states that "DISCOUNT
MART (MR. ARMANDO GEAGONIA, PROP)" was the
assured and that "TESING TEXTILES" [was] only the
mortgagee of the goods.
The premiums on both policies were paid for by
private respondent, not by the Tesing Textiles which
is alleged to have taken out the other insurance
without the knowledge of private respondent. In
both invoices, Tesing Textiles is indicated to be only
the mortgagee of the goods insured but the party
to which they were issued were the "DISCOUNT
MART (MR. ARMANDO GEAGONIA)."
ISSUES:
(a) Whether the petitioner had prior knowledge of
the two insurance policies issued by the PFIC when
he obtained the fire insurance policy from the
private respondent, thereby, for not disclosing such
fact, violating Condition 3 of the policy, and (b) if he
had, whether he is precluded from recovering
therefrom.
HELD:
1. The SC agreed w/ CA. His letter of 18 January 1991
to the private respondent conclusively proves this
knowledge. His testimony to the contrary before the
Insurance Commissioner and which the latter relied
upon cannot prevail over a written admission
made ante litem motam. It was, indeed, incredible
that he did not know about the prior policies since
these policies were not new or original. Policy No.
GA-28144 was a renewal of Policy No. F-24758,

while Policy No. GA-28146 had been renewed

twice, the previous policy being F-24792.

NOTE: Condition 3 is NOT proscribed by law. This is

allowed by the Insurance Code which provides that
"[a] policy may declare that a violation of specified
provisions thereof shall avoid it, otherwise the
breach of an immaterial provision does not avoid the
policy." Such a condition is a provision which
invariably appears in fire insurance policies and is
intended to prevent an increase in the moral hazard.
It is commonly known as the additional or "other
insurance" clause and has been upheld as valid and
as a warranty that no other insurance exists. Its
violation
would
thus
avoid
the
policy.
In order to constitute a violation, the other
insurance MUST be upon same subject matter, the
same interest therein, and the same risk.
MORTGAGE. As to a mortgaged property, the
mortgagor and the mortgagee have each an
independent insurable interest therein and both
interests may be one policy, or each may take out a
separate policy covering his interest, either at the
18
same or at separate times. The mortgagor's
insurable interest covers the full value of the
mortgaged property, even though the mortgage
debt is equivalent to the full value of the
19
property. The mortgagee's insurable interest is to
the extent of the debt, since the property is relied
upon as security thereof, and in insuring he is not
insuring the property but his interest or lien
thereon. His insurable interest is prima facie the
value mortgaged and extends only to the amount
of the debt, not exceeding the value of the
20
mortgaged property. Thus, separate insurances
covering different insurable interests may be
obtained by the mortgagor and the mortgagee.
A mortgagor may, however, take out insurance for
the benefit of the mortgagee, which is the usual
practice. The mortgagee may be made the beneficial
payee in several ways. He may become the
ASSIGNEE of the policy with the consent of the
insurer; or the mere PLEDGEE without such consent;
or the original policy may contain a mortgage clause;
or a rider making the policy payable to the
mortgagee "as his interest may appear" may be
attached; or a "standard mortgage clause,"

containing a collateral independent contract

between the mortgagee and insurer, may be
attached; or the policy, though by its terms payable
absolutely to the mortgagor, may have been
procured by a mortgagor under a contract duty to
insure for the mortgagee's benefit, in which case
the mortgagee acquires an equitable lien upon the
proceeds,
IN CASE AT BAR: In the policy obtained by the
mortgagor with loss payable clause in favor of the
mortgagee as his interest may appear, the
MORTGAGEE IS ONLY A BENEFICIARY under the
contract, and recognized as such by the insurer but
NOT made a party to the contract himself. Hence,
any act of the mortgagor which defeats his right
22
will also defeat the right of the mortgagee. This
kind of policy covers only such interest as the
23
mortgagee has at the issuing of the policy.
On the other hand, a mortgagee may also procure a
policy as a contracting party in accordance with the
terms of an agreement by which the mortgagor is
24
to pay the premiums upon such insurance. It has
been noted, however, that although the mortgagee
is himself the insured, as where he applies for a
policy, fully informs the authorized agent of his
interest, pays the premiums, and obtains on the
assurance that it insures him, the policy is in fact in
the form used to insure a mortgagor with loss
payable clause.
The fire insurance policies issued by the PFIC name
the petitioner as the assured and contain a
mortgage clause: Loss, if any, shall be payable to
MESSRS. TESING TEXTILES, Cebu City as their interest
may appear subject to the terms of this policy.
This is clearly a simple loss payable clause,

NOT a standard mortgage clause.

CARDINAL RULE: It is to be interpreted liberally in
favor of the insured and strictly against the
company, the reason being, undoubtedly, to afford
the greatest protection which the insured was
endeavoring to secure when he applied for
insurance. It is also a cardinal principle of law that
forfeitures are not favored and that any
construction which would result in the forfeiture of
the policy benefits for the person claiming
thereunder, will be avoided, if it is possible to
construe the policy in a manner which would permit

recovery, as, for example, by finding a waiver for

such forfeiture.
ERGO, Condition 3 of the subject policy is NOT
totally free from ambiguity and must, perforce, be
meticulously analyzed. Such analysis leads us to
conclude that (a) the prohibition applies only to
double insurance, and (b) the nullity of the policy
shall only be to the extent exceeding P200,000.00
of the total policies obtained.
DOUBLE INSURANCE. The first conclusion is
supported by the portion of the condition referring
to other insurance "covering any of the property or
properties consisting of stocks in trade, goods in
process and/or inventories only hereby insured,"
and the portion regarding the insured's declaration
on the subheading CO-INSURANCE that the coinsurer is Mercantile Insurance Co., Inc. in the sum of
P50,000.00.
A double insurance exists where the same person is
insured by several insurers separately in respect of
the same subject and interest. As earlier stated, the
insurable interests of a mortgagor and a mortgagee
on the mortgaged property are distinct and
separate. Since the two policies of the PFIC do not
cover the same interest as that covered by the
policy of the private respondent, no double
insurance exists. The non-disclosure then of the
former policies was NOT fatal to the petitioner's
right to recover on the private respondent's policy.
OVERINSURANCE. Condition 3 itself that such
condition shall not apply if the total insurance in
force at the time of loss does not exceed
P200,000.00, the private respondent was amenable
to assume a co-insurer's liability up to a loss not
exceeding P200,000.00. What it had in mind was to
discourage over-insurance. Indeed, the rationale
behind the incorporation of "other insurance" clause
in fire policies is to prevent over-insurance and thus
avert the perpetration of fraud.
EFFECT: When a property owner obtains
insurance policies from two or more
insurers in a total amount that exceeds the
property's value, the insured may have an
inducement to destroy the property for the
purpose of collecting the insurance. The
public as well as the insurer is interested in
preventing a situation in which a fire would
be profitable to the insured.

RULING: GRANTED. INSURANCE

DECISION REINSTATED.

COMMISSION

UNITED MERCHANTS CORP. v COUNTRY BANKERS

INSURANCE

used by the Insured or anyone acting in his behalf to

obtain any benefit under this Policyshall be
forfeited.
COMPLAINT. Filed a complaint before the RTC of
Manila w/ a cert. from the Fire Bureau

FACTS:

RTC: in favor of plaintiff

Petitioner United Merchants Corporation (UMC) is

engaged in the business of buying, selling, and
manufacturing Christmas lights. UMC leased a
warehouse at 19-B Dagot Street, San Jose
Subdivision, Barrio Manresa, Quezon City, where
UMC assembled and stored its products.

CA: reversed; fire was intentional hence, policy was

void.

UMCs General Manager Alfredo Tan insured UMCs

stocks in trade of Christmas lights against fire with
defendant Country Bankers Insurance Corporation
(CBIC) for P15,000,000.00. The Fire Insurance Policy
No. F-HO/95-576 (Insurance Policy) and Fire Invoice
No. 12959A, valid until 6 September 1996.

HELD:

UMC and CBIC executed Endorsement F/96-154 and

Fire Invoice No. 16583A to form part of the
Insurance Policy. Endorsement F/96-154 provides
that UMCs stocks in trade were insured against
additional perils, to wit: "typhoon, flood, ext. cover,
and full earthquake." The sum insured was also
increased toP50,000,000.00 effective 7 May 1996 to
10 January 1997. On 9 May 1996, CBIC issued
Endorsement F/96-157 where the name of the
assured was changed from Alfredo Tan to UMC.
FIRE. A fire gutted the warehouse rented by UMC.
CBIC designated CRM Adjustment Corporation (CRM)
to investigate and evaluate UMCs loss by reason of
the fire. CBICs reinsurer, Central Surety, likewise
requested the National Bureau of Investigation (NBI)
to conduct a parallel investigation. On 6 July 1996,
UMC, through CRM, submitted to CBIC its Sworn
Statement of Formal Claim, with proofs of its loss.
CLAIM. On 20 November 1996, UMC demanded for
at least fifty percent (50%) payment of its claim from
CBIC. On 25 February 1997, UMC received CBICs
letter, dated 10 January 1997, rejecting UMCs claim
due to breach of Condition No. 15 of the Insurance
Policy. Condition No. 15 states:
If the claim be in any respect fraudulent, or if any
false declaration be made or used in support
thereof, or if any fraudulent means or devices are

ISSUE: Whether UMC is entitled to claim from CBIC

the full coverage of its fire insurance policy.

In the present case, CBICs evidence did not prove

that the fire was intentionally caused by the
insured. First, the findings of CBICs witnesses,
Cabrera and Lazaro, were based on an investigation
conducted more than four months after the fire. The
testimonies of Cabrera and Lazaro, as to the boxes
doused with kerosene as told to them
by barangay officials,
are
hearsay
because
the barangay officials were not presented in court.
Cabrera and Lazaro even admitted that they did not
conduct a forensic investigation of the warehouse
28
nor did they file a case for arson. Second, the
Sworn Statement of Formal Claim submitted by
UMC, through CRM, states that the cause of the fire
was "faulty
electrical
wiring/accidental
in
nature." CBIC is bound by this evidence because in
its Answer, it admitted that it designated CRM to
evaluate UMCs loss. Third, the Certification by the
Bureau of Fire Protection states that the fire was
accidental in origin.

In the present case, arson and fraud are two

separate grounds based on two different sets of
evidence, either of which can void the insurance
claim of UMC. The absence of one does not
necessarily result in the absence of theother. Thus,
on the allegation of fraud, we affirm the findings of
the Court of Appeals.
Condition No. 15 of the Insurance Policy provides
that all the benefits under the policy shall be
forfeited, if the claim be in any respect fraudulent, or

if any false declaration be made or used in support

thereof, to wit:

policy. Mere filing of such a claim will exonerate the

insurer.

15. If the claim be in any respect fraudulent, or if any

false declaration be made or used in support
thereof, or if any fraudulent means or devices are
used by the Insured or anyone acting in his behalf to
obtain any benefit under this Policy; or if the loss or
damage be occasioned by the willful act, or with the
connivance of the Insured, all the benefits under this
Policy shall be forfeited.

Considering that all the circumstances point to the

inevitable conclusion that UMC padded its claim and
was guilty of fraud, UMC violated Condition No. 15
of the Insurance Policy. Thus, UMC forfeited
whatever benefits it may be entitled under the
Insurance Policy, including its insurance claim.

INVOICES NOT GENUINE. The invoices, however,

cannot be taken as genuine. The invoices reveal that
the stocks in trade purchased for 1996 amounts
to P20,000,000.00 which were purchased in one
month. Thus, UMC needs to prove purchases
amounting to P30,000,000.00 worth of stocks in
trade for 1995 and prior years. However, in the
Statement of Inventory it submitted to the BIR,
which is considered an entry in official
34
records, UMC stated that it had no stocks in trade
as of 31 December 1995. In its defense, UMC alleged
that it did not include as stocks in trade the raw
materials to be assembled as Christmas lights, which
it had on 31 December 1995. However, as proof of
its loss, UMC submitted invoices for raw materials,
knowing that the insurance covers only stocks in
trade.
NOTE: It has long been settled that a false and
material statement made with an intent to deceive
42
or defraud voids an insurance policy. In Yu Cua v.
43
South British Insurance Co., the claim was fourteen
times bigger than the real loss; in Go Lu v. Yorkshire
44
Insurance Co, eight times; and in Tuason v. North
45
China Insurance Co., six times. In the present case,
the claim is twenty five times the actual claim
proved. there was DELIBERATE intent to demand
from insurer payment for indemnity of goods NOT
existing at the time of the fire.
On UMCs allegation that it did not breach any
warranty, it may be argued that the discrepancies do
not, by themselves, amount to a breach of warranty.
However, the Insurance Code provides that "a
policy may declare that a violation of specified
49
provisions thereof shall avoid it." Thus, in fire
insurance policies, which contain provisions such as
Condition No. 15 of the Insurance Policy, a
fraudulent discrepancy between the actual loss and
that claimed in the proof of loss voids the insurance

RULING: PETITION DENIED.