Insurance Case Digest: Cha v.

CA (1997)
Lessons Applicable: Effect of Lack of Insurable Interest (Insurance)
Laws Applicable: Sec. 17, Sec. 18, Sec. 25 of the Insurance Code

FACTS:

Spouses Nilo Cha and Stella Uy-Cha and CKS Development Corporation entered a 1 year lease contract
with a stipulation not to insure against fire the chattels, merchandise, textiles, goods and effects placed
at any stall or store or space in the leased premises without first obtaining the written consent and
approval of the lessor. But it insured against loss by fire their merchandise inside the leased premises for
P500,000 with the United Insurance Co., Inc. without the written consent of CKS
On the day the lease contract was to expire, fire broke out inside the leased premises and CKS learning
that the spouses procured an insurance wrote to United to have the proceeds be paid directly to them.
But United refused so CKS filed against Spouses Cha and United.
RTC: United to pay CKS the amount of P335,063.11 and Spouses Cha to pay P50,000 as exemplary
damages, P20,000 as attorney’s fees and costs of suit
CA: deleted exemplary damages and attorney’s fees

ISSUE: W/N the CKS has insurable interest because the spouses Cha violated the stipulation

HELD: NO. CA set aside. Awarding the proceeds to spouses Cha.

Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of
some person having an insurable interest in the property insured
A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist a
t the time the insurance takes effect and at the time the loss occurs. The basis of such requirement of
insurable interest in property insured is based on sound public policy: to prevent a person from taking
out an insurance policy on property upon which he has no insurable interest and collecting the proceeds
of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager
which is void under Section 25 of the Insurance Code.
SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person
insured has or has not any interest in the property insured, or that the policy shall be received as proof
of such interest, and every policy executed by way of gaming or wagering, is void
Section 17. The measure of an insurable interest in property is the extent to which the insured might
be damnified by loss of injury thereof
The automatic assignment of the policy to CKS under the provision of the lease contract previously
quoted is void for being contrary to law and/or public policy. The proceeds of the fire insurance policy
thus rightfully belong to the spouses. The liability of the Cha spouses to CKS for violating their lease
contract in that Cha spouses obtained a fire insurance policy over their own merchandise, without the
consent of CKS, is a separate and distinct issue which we do not resolve in this case.
Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO., INC., petitioners, vs. COURT OF
APPEALS and CKS DEVELOPMENT CORPORATION, respondents.

DECISION

PADILLA, J.:
This petition for review on certiorari under Rule 45 of the Rules of Court seeks to set aside a decision of
respondent Court of Appeals.

The undisputed facts of the case are as follows:

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with private
respondent CKS Development Corporation (hereinafter CKS), as lessor, on 5 October 1988.

2. One of the stipulations of the one (1) year lease contract states:

18. x x x. The LESSEE shall not insure against fire the chattels, merchandise, textiles, goods and effects
placed at any stall or store or space in the leased premises without first obtaining the written consent
and approval of the LESSOR. If the LESSEE obtain(s) the insurance thereof without the consent of the
LESSOR then the policy is deemed assigned and transferred to the LESSOR for its own benefit; x x x[1]

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses insured against loss by
fire their merchandise inside the leased premises for Five Hundred Thousand (P500,000.00) with the
United Insurance Co., Inc. (hereinafter United) without the written consent of private respondents CKS.

4. On the day that the lease contract was to expire, fire broke out inside the leased premises.

5. When CKS learned of the insurance earlier procured by the Cha spouses (without its consent), it wrote
the insurer (United) a demand letter asking that the proceeds of the insurance contract (between the
Cha spouses and United) be paid directly to CKS, based on its lease contract with Cha spouses.

6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha spouses and United.

7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a decision* ordering therein
defendant United to pay CKS the amount of P335,063.11 and defendant Cha spouses to pay P50,000.00
as exemplary damages, P20,000.00 as attorneys fees and costs of suit.

8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a decision** dated 11

January 1996, affirming the trial court decision, deleting however the awards for exemplary damages
and attorneys fees. A motion for reconsideration by United was denied on 29 March 1996.

In the present petition, the following errors are assigned by petitioners to the Court of Appeals:

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE STIPULATION IN THE
CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT IS NULL AND
VOID FOR BEING CONTRARY TO LAW, MORALS AND PUBLIC POLICY

II

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE CONTRACT OF LEASE ENTERED
INTO AS A CONTRACT OF ADHESION AND THEREFORE THE QUESTIONABLE PROVISION THEREIN
TRANSFERRING THE PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR OF
PETITIONER

III

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY TO

APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN CONTRAVENTION OF THE INSURANCE LAW

IV

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN INSURANCE POLICY ON

THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING WITHOUT CONSIDERATION AND FOR BEING
TOTALLY DEPENDENT ON THE WILL OF THE RESPONDENT CORPORATION.[2]

The core issue to be resolved in this case is whether or not the aforequoted paragraph 18 of the lease
contract entered into between CKS and the Cha spouses is valid insofar as it provides that any fire
insurance policy obtained by the lessee (Cha spouses) over their merchandise inside the leased premises
is deemed assigned or transferred to the lessor (CKS) if said policy is obtained without the prior written
of the latter.

It is, of course, basic in the law on contracts that the stipulations contained in a contract cannot be
contrary to law, morals, good customs, public order or public policy.[3]

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable except for the benefit of
some person having an insurable interest in the property insured.

A non-life insurance policy such as the fire insurance policy taken by petitioner-spouses over their
merchandise is primarily a contract of indemnity. Insurable interest in the property insured must exist at
the time the insurance takes effect and at the time the loss occurs.[4] The basis of such requirement of
insurable interest in property insured is based on sound public policy: to prevent a person from taking
out an insurance policy on property upon which he has no insurable interest and collecting the proceeds
of said policy in case of loss of the property. In such a case, the contract of insurance is a mere wager
which is void under Section 25 of the Insurance Code, which provides:

SECTION 25. Every stipulation in a policy of Insurance for the payment of loss, whether the person
insured has or has not any interest in the property insured, or that the policy shall be received as proof
of such interest, and every policy executed by way of gaming or wagering, is void.

In the present case, it cannot be denied that CKS has no insurable interest in the goods and merchandise
inside the leased premises under the provisions of Section 17 of the Insurance Code which provide.

Section 17. The measure of an insurable interest in property is the extent to which the insured might be
damnified by loss of injury thereof."

Therefore, respondent CKS cannot, under the Insurance Code a special law be validly a beneficiary of the
fire insurance policy taken by the petitioner-spouses over their merchandise. This insurable interest over
said merchandise remains with the insured, the Cha spouses. The automatic assignment of the policy to
CKS under the provision of the lease contract previously quoted is void for being contrary to law and/or
public policy. The proceeds of the fire insurance policy thus rightfully belong to the spouses Nilo Cha and
Stella Uy-Cha (herein co-petitioners). The insurer (United) cannot be compelled to pay the proceeds of
the fire insurance policy to a person (CKS) who has no insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their lease contract in that Cha spouses obtained a
fire insurance policy over their own merchandise, without the consent of CKS, is a separate and distinct
issue which we do not resolve in this case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET ASIDE and a new
decision is hereby entered, awarding the proceeds of the fire insurance policy to petitioners Nilo Cha and
Stella Uy-Cha.

SO ORDERED.
Geagonia v CA G.R. No. 114427 February 6, 1995
Facts:
Geagonia, owner of a store, obtained from Country Bankers fire insurance policy for P100,000.00. The 1
year policy and covered thestock trading of dry goods.
The policy noted the requirement that
"3. The insured shall give notice to the Company of any insurance or insurances already effected, or
which may subsequently be effected, covering any of the property or properties consisting of stocks in
trade, goods in process and/or inventories only hereby insured, and unless notice be given and the
particulars of such insurance or insurances be stated therein or endorsed in this policy pursuant to
Section 50 of the Insurance Code, by or on behalf of the Company before the occurrence of any loss or
damage, all benefits under this policy shall be deemed forfeited, provided however, that this condition
shall not apply when the total insurance or insurances in force at the time of the loss or damage is not
more than P200,000.00."
The petitioners’ stocks were destroyed by fire. He then filed a claim which was subsequently denied
because the petitioner’s stocks were covered by two other fire insurance policies for Php 200,000 issued
by PFIC. The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3
of the policy.
Geagonia then filed a complaint against the private respondent in the Insurance Commission for the
recovery of P100,000.00 under fire insurance policy and damages. He claimed that he knew the
existence of the other two policies. But, he said that he had no knowledge of the provision in the private
respondent's policy requiring him to inform it of the prior policies and this requirement was not
mentioned to him by the private respondent's agent.
The Insurance Commission found that the petitioner did not violate Condition 3 as he had no knowledge
of the existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing Textiles
w/c procured the PFIC policies w/o informing him or securing his consent; and that Cebu Tesing Textile,
as his creditor, had insurable interest on the stocks.
The Insurance Commission then ordered the respondent company to pay complainant the sum of
P100,000.00 with interest and attorney’s fees.
CA reversed the decision of the Insurance Commission because it found that the petitioner knew of the
existence of the two other policies issued by the PFIC.

Issues:
1. WON the petitioner had not disclosed the two insurance policies when he obtained the fire insurance
and thereby violated Condition 3 of the policy.
2. WON he is prohibited from recovering

Held: Yes. No. Petition Granted

Ratio:
1. The court agreed with the CA that the petitioner knew of the prior policies issued by the PFIC. 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.
2. Stated differently, provisions, conditions or exceptions in policies which tend to work a forfeiture of
insurance policies should be construed most strictly against those for whose benefits they are inserted,
and most favorably toward those against whom they are intended to operate.
With these principles in mind, Condition 3 of the subject policy is not totally free from ambiguity and
must 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.
Furthermore, by stating within 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. 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.

G.R. No. 114427 February 6, 1995

ARMANDO GEAGONIA, petitioner,

vs.
COURT OF APPEALS and COUNTRY BANKERS INSURANCE CORPORATION, respondents.

DAVIDE, JR., J.:

Four our review under Rule 45 of the Rules of Court is the decision1 of the Court of Appeals in CA-G.R.
SP No. 31916, entitled "Country Bankers Insurance Corporation versus Armando Geagonia," reversing
the decision of the Insurance Commission in I.C. Case No. 3340 which awarded the claim of petitioner
Armando Geagonia against private respondent Country Bankers Insurance Corporation.

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 No. F-146222
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, itemized as follows:

Zenco Sales, Inc.

P55,698.00

F. Legaspi Gen. Merchandise

86,432.50
Cebu Tesing Textiles

250,000.00

(on credit)

—————

P392,130.50

The policy contained the following condition:

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

On 27 May 1990, 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 Co., Inc. (hereinafter PFIC). 3 These policies
indicate that the insured was "Messrs. Discount Mart (Mr. Armando Geagonia, Prop.)" with a mortgage
clause reading:

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. CO-INSURANCE DECLARED: P100,000. — Phils. First CEB/F
24758.4

The basis of the private respondent's denial was the petitioner's alleged violation of Condition 3 of the
policy.

The petitioner then filed a complaint 5 against the private respondent with the Insurance Commission
(Case No. 3340) for the recovery of P100,000.00 under fire insurance policy No. F-14622 and for
attorney's fees and costs of litigation. He attached as Annex "AM"6 thereof his letter of 18 January 1991
which asked for the reconsideration of the denial. He admitted in the said letter that at the time he
obtained the private respondent's fire insurance policy he knew that the two policies issued by the PFIC
were already in existence; however, he had no knowledge of the provision in the private respondent's
policy requiring him to inform it of the prior policies; this requirement was not mentioned to him by the
private respondent's agent; and had it been mentioned, he would not have withheld such information.
He further asserted that the total of the amounts claimed under the three policies was below the actual
value of his stocks at the time of loss, which was P1,000,000.00.

In its answer,7 the private respondent specifically denied the allegations in the complaint and set up as
its principal defense the violation of Condition 3 of the policy.

In its decision of 21 June 1993,8 the Insurance Commission found that the petitioner did not violate
Condition 3 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. These
findings were based on the petitioner's testimony that he 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. The Insurance Commission then decreed:

WHEREFORE, judgment is hereby rendered ordering the respondent company to pay complainant the
sum of P100,000.00 with legal interest from the time the complaint was filed until fully satisfied plus the
amount of P10,000.00 as attorney's fees. With costs. The compulsory counterclaim of respondent is
hereby dismissed.

Its motion for the reconsideration of the decision 9 having been denied by the Insurance Commission in
its resolution of 20 August 1993, 10 the private respondent appealed to the Court of Appeals by way of a
petition for review. The petition was docketed as CA-G.R. SP No. 31916.

In its decision of 29 December 1993, 11 the Court of Appeals reversed the decision of the Insurance
Commission because it found that the petitioner knew of the existence of the two other policies issued
by the PFIC. It said:

It is apparent from the face of Fire Policy GA 28146/Fire Policy No. 28144 that 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.

In addition, 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. This is shown by Premium Invoices nos. 46632 and 46630. (Annexes M and N). 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)."

In is clear that it was the private respondent [petitioner herein] who took out the policies on the same
property subject of the insurance with petitioner. Hence, in failing to disclose the existence of these
insurances private respondent violated Condition No. 3 of Fire Policy No. 1462. . . .
Indeed private respondent's allegation of lack of knowledge of the provisions insurances is belied by his
letter to petitioner [of 18 January 1991. The body of the letter reads as follows;]

xxx xxx xxx

Please be informed that I have no knowledge of the provision requiring me to inform your office about
my
prior insurance under FGA-28146 and F-CEB-24758. Your representative did not mention about said
requirement at the time he was convincing me to insure with you. If he only die or even inquired if I had
other existing policies covering my establishment, I would have told him so. You will note that at the time
he talked to me until I decided to insure with your company the two policies aforementioned were
already in effect. Therefore I would have no reason to withhold such information and I would have
desisted to part with my hard earned peso to pay the insurance premiums [if] I know I could not recover
anything.

Sir, I am only an ordinary businessman interested in protecting my investments. The actual value of my
stocks damaged by the fire was estimated by the Police Department to be P1,000,000.00 (Please see
xerox copy of Police Report Annex "A"). My Income Statement as of December 31, 1989 or five months
before the fire, shows my merchandise inventory was already some P595,455.75. . . . These will support
my claim that the amount claimed under the three policies are much below the value of my stocks lost.

xxx xxx xxx

The letter contradicts private respondent's pretension that he did not know that there were other
insurances taken on the stock-in-trade and seriously puts in question his credibility.

His motion to reconsider the adverse decision having been denied, the petitioner filed the instant
petition. He contends therein that the Court of Appeals acted with grave abuse of discretion amounting
to lack or excess of jurisdiction:

A — . . . WHEN IT REVERSED THE FINDINGS OF FACTS OF THE INSURANCE COMMISSION, A QUASI-

JUDICIAL BODY CHARGED WITH THE DUTY OF DETERMINING INSURANCE CLAIM AND WHOSE DECISION
IS ACCORDED RESPECT AND EVEN FINALITY BY THE COURTS;

B — . . . WHEN IT CONSIDERED AS EVIDENCE MATTERS WHICH WERE NOT PRESENTED AS EVIDENCE

DURING THE HEARING OR TRIAL; AND

C — . . . WHEN IT DISMISSED THE CLAIM OF THE PETITIONER HEREIN AGAINST THE PRIVATE
RESPONDENT.

The chief issues that crop up from the first and third grounds are (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.

The second ground, which is based on the Court of Appeals' reliance on the petitioner's letter of
reconsideration of 18 January 1991, is without merit. The petitioner claims that the said letter was not
offered in evidence and thus should not have been considered in deciding the case. However, as
correctly pointed out by the Court of Appeals, a copy of this letter was attached to the petitioner's
complaint in I.C. Case No. 3440 as Annex "M" thereof and made integral part of the complaint. 12 It has
attained the status of a judicial admission and since its due execution and authenticity was not denied by
the other party, the petitioner is bound by it even if it were not introduced as an independent evidence.
13

As to the first issue, the Insurance Commission found that the petitioner had no knowledge of the
previous two policies. The Court of Appeals disagreed and found otherwise in view of the explicit
admission by the petitioner in his letter to the private respondent of 18 January 1991, which was quoted
in the challenged decision of the Court of Appeals. These divergent findings of fact constitute an
exception to the general rule that in petitions for review under Rule 45, only questions of law are
involved and findings of fact by the Court of Appeals are conclusive and binding upon this Court. 14

We agree with the Court of Appeals that the petitioner knew of the prior policies issued by the PFIC. 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.

Condition 3 of the private respondent's Policy No. F-14622 is a condition which is not proscribed by law.
Its incorporation in the policy is allowed by Section 75 of the Insurance Code 15 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. 16 However, in order to constitute a violation, the other insurance must be upon same subject
matter, the same interest therein, and the same risk.17

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 same or at separate times. 18 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
property.19 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 mortgaged property. 20 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. 21

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 will also defeat the right of the mortgagee. 22 This kind of policy covers only such interest as the
mortgagee has at the issuing of the policy.23

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 to pay the premiums upon such insurance. 24 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. 25

The fire insurance policies issued by the PFIC name the petitioner as the assured and contain a mortgage
clause which reads:

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.

It must, however, be underscored that unlike the "other insurance" clauses involved in General Insurance
and Surety Corp. vs. Ng Hua 26 or in Pioneer Insurance & Surety Corp. vs. Yap, 27 which read:

The insured shall give notice to the company of any insurance or insurances already effected, or which
may subsequently be effected covering any of the property hereby insured, and unless such notice be
given and the particulars of such insurance or insurances be stated in or endorsed on this Policy by or on
behalf of the Company before the occurrence of any loss or damage, all benefits under this Policy shall
be forfeited.

or in the 1930 case of Santa Ana vs. Commercial Union Assurance

Co. 28 which provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the company to add or
insert it in the policy, without which such policy shall be null and void, and the insured will not be
entitled to indemnity in case of loss," Condition 3 in the private respondent's policy No. F-14622 does
not absolutely declare void any violation thereof. It expressly provides that the condition "shall not apply
when the total insurance or insurances in force at the time of the loss or damage is not more than
P200,000.00."

It is a cardinal rule on insurance that a policy or insurance contract 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. 29 Stated differently, provisions, conditions or exceptions in policies which tend to work
a forfeiture of insurance policies should be construed most strictly against those for whose benefits they
are inserted, and most favorably toward those against whom they are intended to operate. 30 The
reason for this is that, except for riders which may later be inserted, the insured sees the contract
already in its final form and has had no voice in the selection or arrangement of the words employed
therein. On the other hand, the language of the contract was carefully chosen and deliberated upon by
experts and legal advisers who had acted exclusively in the interest of the insurers and the technical
language employed therein is rarely understood by ordinary laymen. 31

With these principles in mind, we are of the opinion that 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.

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 co-insurer 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.

Furthermore, by stating within 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. 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.32

WHEREFORE, the instant petition is hereby GRANTED. The decision of the Court of Appeals in CA-G.R. SP
No. 31916 is SET ASIDE and the decision of the Insurance Commission in Case No. 3340 is REINSTATED.

Costs against private respondent Country Bankers Insurance Corporation.

SO ORDERED.
Insurance Case Digest: Rizal Commercial Banking Corporation v. CA (1998)
G.R.Nos. 128833 April 20, 1998
Lessons Applicable: Assignee (Insurance)

FACTS:

RCBC Binondo Branch initially granted a credit facility of P30M to Goyu & Sons, Inc. GOYU’s applied
again and through Binondo Branch key officer's Uy’s and Lao’s recommendation, RCBC’s executive
committee increased its credit facility to P50M to P90M and finally to P117M.
As security, GOYU executed 2 real estate mortgages and 2 chattel mortgages in favor of RCBC.
GOYU obtained in its name 10 insurance policy on the mortgaged properties from Malayan
Insurance Company, Inc. (MICO). In February 1992, he was issued 8 insurance policies in favor of RCBC.
April 27, 1992: One of GOYU’s factory buildings was burned so he claimed against MICO for the loss
who denied contending that the insurance policies were either attached pursuant to writs of
attachments/garnishments or that creditors are claiming to have a better right
GOYU filed a complaint for specific performance and damages at the RTC
RCBC, one of GOYU’s creditors, also filed with MICO its formal claim over the proceeds of the
insurance policies, but said claims were also denied for the same reasons that MICO denied GOYU’s
claims
RTC: Confirmed GOYU’s other creditors (Urban Bank, Alfredo Sebastian, and Philippine Trust Company)
obtained their writs of attachment covering an aggregate amount of P14,938,080.23 and ordered that 10
insurance policies be deposited with the court minus the said amount so MICO deposited
P50,505,594.60.
Another Garnishment of P8,696,838.75 was handed down
RTC: favored GOYU against MICO for the claim, RCBC for damages and to pay RCBC its loan
CA: Modified by increasing the damages in favor of GOYU
In G.R. No. 128834, RCBC seeks right to intervene in the action between Alfredo C. Sebastian (the
creditor) and GOYU (the debtor), where the subject insurance policies were attached in favor of
Sebastian
RTC and CA: endorsements do not bear the signature of any officer of GOYU concluded that the
endorsements favoring RCBC as defective.

ISSUE: W/N RCBC as mortgagee, has any right over the insurance policies taken by GOYU, the mortgagor,
in case of the occurrence of loss

HELD: YES.

mortgagor and a mortgagee have separate and distinct insurable interests in the same mortgaged
property, such that each one of them may insure the same property for his own sole benefit
although it appears that GOYU obtained the subject insurance policies naming itself as the sole payee,
the intentions of the parties as shown by their contemporaneous acts, must be given due consideration
in order to better serve the interest of justice and equity
8 endorsement documents were prepared by Alchester in favor of RCBC
MICO, a sister company of RCBC
GOYU continued to enjoy the benefits of the credit facilities extended to it by RCBC.
GOYU is at the very least estopped from assailing their operative effects.
The two courts below erred in failing to see that the promissory notes which they ruled should be
excluded for bearing dates which are after that of the fire, are mere renewals of previous ones
 RCBC has the right to claim the insurance proceeds, in substitution of the property lost in the fire.
Having assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies
insurance company to be held liable for unreasonably delaying and withholding payment of insurance
proceeds, the delay must be wanton, oppressive, or malevolent - not shown
Sebastian’s right as attaching creditor must yield to the preferential rights of RCBC over the Malayan
insurance policies as first mortgagee.

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D. LAO, petitioners, vs. COURT OF
APPEALS and GOYU & SONS, INC., respondents.

[G.R. No. 128834. April 20, 1998]

RIZAL COMMERCIAL BANKING CORPORATION, petitioners, vs. COURT OF APPEALS, ALFREDO C.

SEBASTIAN, GOYU & SONS, INC., GO SONG HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias
BETTY GO, respondents.

[G.R. No. 128866. April 20, 1998]

MALAYAN INSURANCE INC., petitioner, vs. GOYU & SONS, INC. respondent.

D EC I S I O N

MELO, J.:

The issues relevant to the herein three consolidated petitions revolve around the fire loss claims of
respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan Insurance Company, Inc. (MICO) in
connection with the mortgage contracts entered into by and between Rizal Commercial Banking
Corporation (RCBC) and GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of P74,040,518.58, plus
37% interest per annum commencing July 27, 1992. RCBC was ordered to pay actual and compensatory
damages in the amount of P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU
P1,500,000.00 as exemplary damages and P1,500,000.00 for attorneys fees. GOYUs obligation to RCBC
was fixed at P68,785,069.04 as of April 1992, without any interest, surcharges, and penalties. RCBC and
MICO appealed separately but, in view of the common facts and issues involved, their individual
petitions were consolidated.

The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo Branch. After due
evaluation, RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao,
recommended GOYUs application for approval by RCBCs executive committee. A credit facility in the
amount of P30 million was initially granted. Upon GOYUs application and Uys and Laos recommendation,
RCBCs executive committee increased GOYUs credit facility to P50 million, then to P90 million, and finally
to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate mortgages and two chattel
mortgages in favor of RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro
Manila. Under each of these four mortgage contracts, GOYU committed itself to insure the mortgaged
property with an insurance company approved by RCBC, and subsequently, to endorse and deliver the
insurance policies to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In February 1992, Alchester
Insurance Agency, Inc., the insurance agent where GOYU obtained the Malayan insurance policies, issued
nine endorsements in favor of RCBC seemingly upon instructions of GOYU (Exhibits 1-Malayan to 9-
Malayan).

On April 27, 1992, one of GOYUs factory buildings in Valenzuela was gutted by fire. Consequently, GOYU
submitted its claim for indemnity on account of the loss insured against. MICO denied the claim on the
ground that the insurance policies were either attached pursuant to writs of attachments/garnishments
issued by various courts or that the insurance proceeds were also claimed by other creditors of GOYU
alleging better rights to the proceeds than the insured. GOYU filed a complaint for specific performance
and damages which was docketed at the Regional Trial Court of the National Capital Judicial Region
(Manila, Branch 3) as Civil Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866.

RCBC, one of GOYUs creditors, also filed with MICO its formal claim over the proceeds of the insurance
policies, but said claims were also denied for the same reasons that MICO denied GOYUs claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the Regional Trial Court of
Manila (Branch 3), confirmed that GOYUs other creditors, namely, Urban Bank, Alfredo Sebastian, and
Philippine Trust Company obtained their respective writs of attachments from various courts, covering
an aggregate amount of P14,938,080.23, and ordered that the proceeds of the ten insurance policies be
deposited with the said court minus the aforementioned P14,938,080.23. Accordingly, on January 7,
1994, MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC.

In the meantime, another notice of garnishment was handed down by another Manila RTC sala (Branch
28) for the amount of P8,696,838.75 (Exhibit 22-Malayan).

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU, disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, Malayan
Insurance Company, Inc. and Rizal Commercial Banking Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the total amount of P74,040,518.58 less the amount of
P50,000,000.00 which is deposited with this Court;

b. To pay the plaintiff damages by way of interest for the duration of the delay since July 27, 1992 (ninety
days after defendant insurers receipt of the required proof of loss and notice of loss) at the rate of twice
the ceiling prescribed by the Monetary Board, on the following amounts:

1) P50,000,000.00 from July 27, 1992 up to the time said amount was deposited with this Court on
January 7, 1994;
2) P24,040,518.58 from July 27, 1992 up to the time when the writs of attachments were received by
defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the following amounts:

1) P1,000,000.00 as exemplary damages;

2) P1,000,000.00 as, and for, attorneys fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the plaintiff to pay its loan obligations with
defendant RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon at the rate
stipulated in the respective promissory notes (without surcharges and penalties) per computation, pp.
14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is hereby ordered to release
immediately to the plaintiff the amount of P50,000,000.00 deposited with the Court by defendant
Malayan, together with all the interests earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was unsatisfied with the
amounts awarded in its favor. MICO and RCBC disputed the trial courts findings of liability on their part.
The Court of Appeals partly granted GOYUs appeal, but sustained the findings of the trial court with
respect to MICO and RCBCs liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the total amount of P74,040,518.58 less the amount of
P50,505,594.60 (per O.R. No. 3649285) plus deposited in court and damages by way of interest
commencing July 27, 1992 until the time Goyu receives the said amount at the rate of thirty-seven (37%)
percent per annum which is twice the ceiling prescribed by the Monetary Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING CORPORATION:

a) To pay the plaintiff actual and compensatory damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL COMMERCIAL BANKING CORPORATION, UY
CHUN BING AND ELI D. LAO:
a) To pay the plaintiff jointly and severally the following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorneys fees.

4. And on RCBCs Counterclaim, ordering the plaintiff Goyu & Sons, Inc. to pay its loan obligation with
RCBC in the amount of P68,785,069.04 as of April 27, 1992 without any interest, surcharges and
penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby ordered to immediately release to
Goyu & Sons, Inc. the amount of P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan
Insurance Co., Inc., together with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively, seeking review and
consequent reversal of the above dispositions of the Court of Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-48376, which case, by
virtue of the Court of Appeals resolution dated August 7, 1996, was consolidated with C.A. G.R. No. CV-
46162 (subject of herein G.R. No. 128833). At issue in said petition is RCBCs right to intervene in the
action between Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where the subject insurance
policies were attached in favor of Sebastian.

After a careful review of the material facts as found by the two courts below in relation to the pertinent
and applicable laws, we find merit in the submissions of RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related issues which are now
submitted in the petitions before us. This Court, however, discerns one primary and central issue, and
this is, whether or not RCBC, as mortgagee, has any right over the insurance policies taken by GOYU, the
mortgagor, in case of the occurrence of loss.

As earlier mentioned, accordant with the credit facilities extended by RCBC to GOYU, the latter executed
several mortgage contracts in favor of RCBC. It was expressly stipulated in these mortgage contracts that
GOYU shall insure the mortgaged property with any of the insurance companies acceptable to RCBC.
GOYU indeed insured the mortgaged property with MICO, an insurance company acceptable to RCBC.
Based on their stipulations in the mortgage contracts, GOYU was supposed to endorse these insurance
policies in favor of, and deliver them, to RCBC. Alchester Insurance Agency, Inc., MICOs underwriter from
whom GOYU obtained the subject insurance policies, prepared the nine endorsements (see Exh. 1-
Malayan to 9-Malayan; also Exh. 51-RCBC to 59-RCBC), copies of which were delivered to GOYU, RCBC,
and MICO. However, because these endorsements do not bear the signature of any officer of GOYU, the
trial court, as well as the Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separate and distinct insurable interests in the same
mortgaged property, such that each one of them may insure the same property for his own sole benefit.
There is no question that GOYU could insure the mortgaged property for its own exclusive benefit. In the
present case, although it appears that GOYU obtained the subject insurance policies naming itself as the
sole payee, the intentions of the parties as shown by their contemporaneous acts, must be given due
consideration in order to better serve the interest of justice and equity.

It is to be noted that nine endorsement documents were prepared by Alchester in favor of RCBC. The
Court is in a quandary how Alchester could arrive at the idea of endorsing any specific insurance policy in
favor of any particular beneficiary or payee other than the insured had not such named payee or
beneficiary been specifically disclosed by the insured itself. It is also significant that GOYU voluntarily and
purposely took the insurance policies from MICO, a sister company of RCBC, and not just from any other
insurance company. Alchester would not have found out that the subject pieces of property were
mortgaged to RCBC had not such information been voluntarily disclosed by GOYU itself. Had it not been
for GOYU, Alchester would not have known of GOYUs intention of obtaining insurance coverage in
compliance with its undertaking in the mortgage contracts with RCBC, and verily, Alchester would not
have endorsed the policies to RCBC had it not been so directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is constrained to rule in favor
of mortgagor RCBC. The basis and purpose of the doctrine was explained in Philippine National Bank vs.
Court of Appeals (94 SCRA 357 [1979]), to wit:

The doctrine of estoppel is based upon the grounds of public policy, fair dealing, good faith and justice,
and its purpose is to forbid one to speak against his own act, representations, or commitments to the
injury of one to whom they were directed and who reasonably relied thereon. The doctrine of estoppel
springs from equitable principles and the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It has been applied by this Court
wherever and whenever special circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a certain Mr. Yam, she
prepared in quadruplicate on February 11, 1992 the nine endorsement documents for GOYUs nine
insurance policies in favor of RCBC. The original copies of each of these nine endorsement documents
were sent to GOYU, and the others were sent to RCBC and MICO, while the fourth copies were retained
for Alchesters file (tsn, February 23, pp. 7-8). GOYU has not denied having received from Alchester the
originals of these endorsements.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was only pursuant to the
stipulation in the mortgage contracts. We find such reliance to be justified under the circumstances of
the case. GOYU failed to seasonably repudiate the authority of the person or persons who prepared such
endorsements. Over and above this, GOYU continued, in the meantime, to enjoy the benefits of the
credit facilities extended to it by RCBC. After the occurrence of the loss insured against, it was too late
for GOYU to disown the endorsements for any imagined or contrived lack of authority of Alchester to
prepare and issue said endorsements. If there had not been actually an implied ratification of said
endorsements by virtue of GOYUs inaction in this case, GOYU is at the very least estopped from assailing
their operative effects. To permit GOYU to capitalize on its non-confirmation of these endorsements
while it continued to enjoy the benefits of the credit facilities of RCBC which believed in good faith that
there was due endorsement pursuant to their mortgage contracts, is to countenance grave
contravention of public policy, fair dealing, good faith, and justice. Such an unjust situation, the Court
cannot sanction. Under the peculiar circumstances obtaining in this case, the Court is bound to recognize
RCBCs right to the proceeds of the insurance policies if not for the actual endorsement of the policies, at
least on the basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides that the proceeds of
insurance shall exclusively apply to the interest of the person in whose name or for whose benefit it is
made. The peculiarity of the circumstances obtaining in the instant case presents a justification to take
exception to the strict application of said provision, it having been sufficiently established that it was the
intention of the parties to designate RCBC as the party for whose benefit the insurance policies were
taken out. Consider thus the following:

1. It is undisputed that the insured pieces of property were the subject of mortgage contracts entered
into between RCBC and GOYU in consideration of and for securing GOYUs credit facilities from RCBC. The
mortgage contracts contained common provisions whereby GOYU, as mortgagor, undertook to have the
mortgaged property properly covered against any loss by an insurance company acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property from MICO, no less
than a sister company of RCBC and definitely an acceptable insurance company to RCBC.

3. Endorsement documents were prepared by MICOs underwriter, Alchester Insurance Agency, Inc., and
copies thereof were sent to GOYU, MICO, and RCBC. GOYU did not assail, until of late, the validity of said
endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the credit facilities extended
by RCBC which was conditioned upon the endorsement of the insurance policies to be taken by GOYU to
cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the endorsement documents
prepared by Alchester, GOYU, despite the absence of its written conformity thereto, obviously
considered said endorsement to be sufficient compliance with its obligation under the mortgage
contracts since RCBC accordingly continued to extend the benefits of its credit facilities and GOYU
continued to benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as the
beneficiary of the various insurance policies obtained by GOYU. The intention of the parties will have to
be given full force and effect in this particular case. The insurance proceeds may, therefore, be
exclusively applied to RCBC, which under the factual circumstances of the case, is truly the person or
entity for whose benefit the policies were clearly intended.

Moreover, the laws evident intention to protect the interests of the mortgagee upon the mortgaged
property is expressed in Article 2127 of the Civil Code which states:

ART. 2127. The mortgage extends to the natural accessions, to the improvements, growing fruits, and the
rents or income not yet received when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations established by law,
whether the estate remains in the possession of the mortgagor, or it passes into the hands of a third
person.
Significantly, the Court notes that out of the 10 insurance policies subject of this case, only 8 of them
appear to have been subject of the endorsements prepared and delivered by Alchester for and upon
instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number : F-114-07795 None

Issue Date : March 18, 1992

Expiry Date : April 5, 1993

Amount : P9,646,224.92

b. Policy Number : ACIA/F-174-07660 Exhibit 1-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P4,307,217.54

c. Policy Number : ACIA/F-114-07661 Exhibit 2-Malayan

Issue Date : January 18, 1992

Expiry Date : February 15, 1993

Amount : P6,603,586.43

d. Policy Number : ACIA/F-114-07662 Exhibit 3-Malayan

Issue Date : January 18, 1992

Expiry Date : (not legible)

Amount : P6,603,586.43

e. Policy Number : ACIA/F-114-07663 Exhibit 4-Malayan

Issue Date : January 18, 1992

Expiry Date : February 9, 1993

Amount : P9,457,972.76

f. Policy Number : ACIA/F-114-07623 Exhibit 7-Malayan

Issue Date : January 13, 1992

Expiry Date : January 13, 1993

Amount : P24,750,000.00

g. Policy Number : ACIA/F-174-07223 Exhibit 6-Malayan

Issue Date : May 29, 1991

Expiry Date : June 27, 1992

Amount : P6,000,000.00

h. Policy Number : CI/F-128-03341 None

Issue Date : May 3, 1991

Expiry Date : May 3, 1992

Amount : P10,000,000.00

i. Policy Number : F-114-07402 Exhibit 8-Malayan

Issue Date : September 16, 1991

Expiry Date : October 19, 1992

Amount : P32,252,125.20
j. Policy Number : F-114-07525 Exhibit 9-Malayan

Issue Date : November 20, 1991

Expiry Date : December 5, 1992

Amount : P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was admitted by MICOs
witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise, the record shows no endorsement for
Policy Number CI/F-128-03341 [(h) above]. Also, one of the endorsement documents, Exhibit 5-Malayan,
refers to a certain insurance policy number ACIA-F-07066, which is not among the insurance policies
involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to P89,974,488.36. Being
exclusively payable to RCBC by reason of the endorsement by Alchester to RCBC, which we already ruled
to have the force and effect of an endorsement by GOYU itself, these 8 policies can not be attached by
GOYUs other creditors up to the extent of the GOYUs outstanding obligation in RCBCs favor. Section 53 of
the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be applied
exclusively to the proper interest of the person for whose benefit it was made. In this case, to the extent
of GOYUs obligation with RCBC, the interest of GOYU in the subject policies had been transferred to
RCBC effective as of the time of the endorsement. These policies may no longer be attached by the other
creditors of GOYU, like Alfredo Sebastian in the present G.R. No. 128834, which may nonetheless
forthwith be dismissed for being moot and academic in view of the results reached herein. Only the two
other policies amounting to P19,646,224.92 may be validly attached, garnished, and levied upon by
GOYUs other creditors. To the extent of GOYUs outstanding obligation with RCBC, all the rest of the other
insurance policies above-listed which were endorsed to RCBC, are, therefore, to be released from
attachment, garnishment, and levy by the other creditors of GOYU.

This brings us to the next relevant issue to be resolved, which is, the extent of GOYUs outstanding
obligation with RCBC which the proceeds of the 8 insurance policies will discharge and liquidate, or put
differently, the actual amount of GOYUs liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that GOYUS total obligation
to RCBC was only P68,785,060.04 as of April 27, 1992, thus sanctioning the trial courts exclusion of
Promissory Note No. 421-92 (renewal of Promissory Note No. 908-91) and Promissory Note No. 420-92
(renewal of Promissory Note No. 952-91) on the ground that their execution is highly questionable for
not only are these dated after the fire, but also because the signatures of either GOYU or any its
representative are conspicuously absent. Accordingly, the Court of Appeals speculated thusly:

Hence, this Court is inclined to conclude that said promissory notes were pre-signed by plaintiff in blank
terms, as averred by plaintiff, in contemplation of the speedy grant of future loans, for the same practice
of procedure has always been adopted in its previous dealings with the bank.
(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not necessarily mean that the
documents are spurious, for it is presumed that the ordinary course of business had been followed
(Metropolitan Bank and Trust Company vs. Quilts and All, Inc., 222 SCRA 486 [1993]). The obligor and not
the holder of the negotiable instrument has the burden of proof of showing that he no longer owes the
obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210 SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of the loan amounting to
P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by GOYU as indicated in the testimony of Go Song
Hiap when he answered the queries of the trial court:

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC, you received all the amounts stated
therein?

A: Yes, sir, I received the amount.

COURT

He is asking if he received all the amounts stated in Exhibits 1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the amount I asked which is correct, Your Honor.

COURT

Q: You mean to say the amounts indicated in Exhibits 1 to 29-RCBC is correct?

A: Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds of the 29 promissory
notes as hereinabove quoted, GOYU also offered and admitted to RCBC that its obligation be fixed at
P116,301,992.60 as shown in its letter dated March 9, 1993, which pertinently reads:
We wish to inform you, therefore that we are ready and willing to pay the current past due account of
this company in the amount of P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and
18, p. 13 of your affidavits of Third Party Claims in the Urban case at Makati, Metro Manila and in the
Zamboanga case at Zamboanga city, respectively, less the total of P8,851,519.71 paid from the Seaboard
and Equitable insurance companies and other legitimate deductions. We accept and confirm this amount
of P116,301,992.60 as stated as true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the excluded promissory notes
are dated after the fire. It failed to consider that said notes had for their origin transactions
consummated prior to the fire. Thus, careful attention must be paid to the fact that Promissory Notes
No. 420-92 and 421-92 are mere renewals of Promissory Notes No. 908-91 and 952-91, loans already
availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they ruled should be
excluded for bearing dates which are after that of the fire, are mere renewals of previous ones. The
proceeds of the loan represented by these promissory notes were admittedly received by GOYU. There is
ample factual and legal basis for giving GOYUs judicial admission of liability in the amount of
P116,301,992.60 full force and effect

It should, however, be quickly added that whatever amount RCBC may have recovered from the other
insurers of the mortgaged property will, nonetheless, have to be applied as payment against GOYUs
obligation. But, contrary to the lower courts findings, payments effected by GOYU prior to January 21,
1993 should no longer be deducted. Such payments had obviously been duly considered by GOYU, in its
aforequoted letter dated March 9, 1993, wherein it admitted that its past due account totaled
P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90 as of January 21, 1993,
to wit:

Total Obligation as admitted by GOYU as of January 21, 1993: P116,301,992.60

Broken down as follows

Principal[1] Interest

Regular 80,535,946.32

FDU 7,548,025.17

____________ _____________

Total: 108,083,971.49 8,218,021.11[2]

LESS:

1) Proceeds from
Seaboard Eastern

Insurance Company: 6,095,145.81

2) Proceeds from

Equitable Insurance

Company: 2,756,373.00

3) Payment from

foreign department

negotiation: 203,584.89

9,055,104.70[3]

NET AMOUNT as of January 21, 1993: P 107,246,887.90

The need for the payment of interest due upon the principal amount of the obligation, which is the cost
of money to RCBC, the primary end and the ultimate reason for RCBCs existence and being, was duly
recognized by the trial court when it ruled favorably on RCBCs counterclaim, ordering GOYU to pay its
loan obligation with RCBC in the amount of P68,785,069.04, as of April 27,1992, with interest thereon at
the rate stipulated in the respective promissory notes (without surcharges and penalties) per
computation, pp. 14-A, 14-B, 14-C (Record, p. 479). Inexplicably, the Court of Appeals, without even
laying down the factual or legal justification for its ruling, modified the trial courts ruling and ordered
GOYU to pay the principal amount of P68,785,069.04 without any interest, surcharges and penalties
(Rollo, p. 200).

It is to be noted in this regard that even the trial court hedgingly and with much uncertainty deleted the
payment of additional interest, penalties, and charges, in this manner:

Regarding defendant RCBCs commitment not to charge additional interest, penalties and surcharges, the
same does not require that it be embodied in a document or some form of writing to be binding and
enforceable. The principle is well known that generally a verbal agreement or contract is no less binding
and effective than a written one. And the existence of such a verbal agreement has been amply
established by the evidence in this case. In any event, regardless of the existence of such verbal
agreement, it would still be unjust and inequitable for defendant RCBC to charge the plaintiff with
surcharges and penalties considering the latters pitiful situation. (Emphasis supplied.)

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate and distinct from that
of surcharges and penalties. What may justify a court in not allowing the creditor to charge surcharges
and penalties despite express stipulation therefor in a valid agreement, may not equally justify non-
payment of interest. The charging of interest for loans forms a very essential and fundamental element
of the banking business, which may truly be considered to be at the very core of its existence or being. It
is inconceivable for a bank to grant loans for which it will not charge any interest at all. We fail to find
justification for the Court of Appeals outright deletion of the payment of interest as agreed upon in the
respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of thumb laid down by
this Court in Eastern Shipping Lines, Inc. vs. Court of Appeals (234 SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts
is breached, the contravenor can be held liable for damages. The provisions under Title XVIII on Damages
of the Civil Code govern in determining the measure of recoverable damages.

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

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

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

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

(pp. 95-97.)

There being written stipulations as to the rate of interest owing on each specific promissory note as
summarized and tabulated by the trial court in its decision (pp.470 and 471, Record) such agreed interest
rates must be followed. This is very clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYUs pitiful situation must
be taken into account. We do not agree, however, that payment of any amount as surcharges and
penalties should altogether be deleted. Even assuming that RCBC, through its responsible officers, herein
petitioners Eli Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU immediately
after the occurrence of the fire, we cannot accept the lower courts finding that RCBC had thereby ipso
facto effectively waived collection of any additional interests, surcharges, and penalties from GOYU.
Assurances of assistance are one thing, but waiver of additional interests, surcharges, and penalties is
another.

Surcharges and penalties agreed to be paid by the debtor in case of default partake of the nature of
liquidated damages, covered by Section 4, Chapter 3, Title XVIII of the Civil Code. Article 2227 thereof
provides:

ART. 2227. Liquidated damages, whether intended as a indemnity or penalty, shall be equitably reduced
if they are iniquitous and unconscionable.

In exercising this vested power to determine what is iniquitous and unconscionable, the Court must
consider the circumstances of each case. It should be stressed that the Court will not make any sweeping
ruling that surcharges and penalties imposed by banks for non-payment of the loans extended by them
are generally iniquitous and unconscionable. What may be iniquitous and unconscionable in one case,
may be totally just and equitable in another. This provision of law will have to be applied to the
established facts of any given case. Given the circumstances under which GOYU found itself after the
occurrence of the fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus the
penalty charges of 36%, to be definitely iniquitous and unconscionable. The Court tempers these rates to
2% and 3%, respectively. Furthermore, in the light of GOYUs offer to pay the amount of P116,301,992.60
to RCBC as March 1993 (See: Exhibit BB), which RCBC refused, we find it more in keeping with justice and
equity for RCBC not to charge additional interest, surcharges, and penalties from that time onward.

Given the factual milieu spread hereover, we rule that it was error to hold MICO liable in damages for
denying or withholding the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the insurance policies, RCBC
has the right to claim the insurance proceeds, in substitution of the property lost in the fire. Having
assigned its rights, GOYU lost its standing as the beneficiary of the said insurance policies.

Secondly, for an insurance company to be held liable for unreasonably delaying and withholding
payment of insurance proceeds, the delay must be wanton, oppressive, or malevolent (Zenith Insurance
Corporation vs. CA, 185 SCRA 403 [1990]). It is generally agreed, however, that an insurer may in good
faith and honesty entertain a difference of opinion as to its liability. Accordingly, the statutory penalty for
vexatious refusal of an insurer to pay a claim should not be inflicted unless the evidence and
circumstances show that such refusal was willful and without reasonable cause as the facts appear to a
reasonable and prudent man (Buffalo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211;
Phoenix Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St Rep 307; Kusnetsky vs. Security Ins. Co., 313
Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that MICO wantonly and in bad faith
delayed the release of the proceeds. The problem in the determination of who is the actual beneficiary
of the insurance policies, aggravated by the claim of various creditors who wanted to partake of the
insurance proceeds, not to mention the importance of the endorsement to RCBC, to our mind, and as
now borne out by the outcome herein, justified MICO in withholding payment to GOYU.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC cannot avail itself of
two simultaneous remedies in enforcing the claim of an unpaid creditor, one for specific performance
and the other for foreclosure. In doing so, said the appellate court, the second action is deemed barred,
RCBC having split a single cause of action (Rollo, pp. 195-199). The Court of Appeals was too
accommodating in giving due consideration to this argument of GOYU, for the foreclosure suit is still
pending appeal before the same Court of Appeals in CA G.R CV No. 46247, the case having been elevated
by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the Court of Appeals pre-
empted the resolution of said foreclosure case which is not before it. This is plain reversible error if not
grave abuse of discretion.

As held in Pea vs. Court of Appeals (245 SCRA 691[1995]):

It should have been enough, nonetheless, for the appellate court to merely set aside the questioned
orders of the trial court for having been issued by the latter with grave abuse of discretion. In likewise
enjoining permanently herein petitioner from entering in and interfering with the use or occupation and
enjoyment of petitioners (now private respondent) residential house and compound, the appellate court
in effect, precipitately resolved with finality the case for injunction that was yet to be heard on the
merits by the lower court. Elevated to the appellate court, it might be stressed, were mere incidents of
the principal case still pending with the trial court. In Municipality of Bian, Laguna vs. Court of Appeals,
219 SCRA 69, we ruled that the Court of Appeals would have no jurisdiction in a certiorari proceeding
involving an incident in a case to rule on the merits of the main case itself which was not on appeal
before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga Regional Trial Court,
since it has been determined that RCBC has the right to the insurance proceeds, the subject matter of
intervention is rendered moot and academic. Respondent Sebastian must, however, yield to the
preferential right of RCBC over the MICO insurance policies. It is basic and fundamental that the first
mortgagee has superior rights over junior mortgagees or attaching creditors (Alpha Insurance & Surety
Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance Co. of Canada vs. Gonzales Diaz, 52 Phil. 271
[1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution of December 16, 1996
and April 3, 1997 in CA-G.R. CV No. 46162 are hereby REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case No. 93-65442 before Branch 3 of
the Manila Regional Trial Court for lack of merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal Commercial Banking Corporation the
proceeds of the insurance policies in the amount of P51,862,390.94 (per report of adjuster Toplis &
Harding (Far East), Inc., Exhibits 2 and 2-1), less the amount of P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60 including the interests earned to
Rizal Commercial Banking Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal Commercial Banking Corporation in the
principal amount of P107,246,887.90, with interest at the respective rates stipulated in each promissory
note from January 21, 1993 until finality of this judgment, and surcharges at 2% and penalties at 3% from
January 21, 1993 to March 9, 1993, minus payments made by Malayan Insurance Company, Inc. and the
proceeds of the amount deposited with the trial court and its earned interest. The total amount due
RCBC at the time of the finality of this judgment shall earn interest at the legal rate of 12% in lieu of all
other stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent Court in CA-GR CV 48376 is
DISMISSED for being moot and academic in view of the results herein arrived at. Respondent Sebastians
right as attaching creditor must yield to the preferential rights of Rizal Commercial Banking Corporation
over the Malayan insurance policies as first mortgagee.

SO ORDERED.

Insurance Case Digest: Gaisano Cagayan, Inc. v. Insurance Company of North America (2006)
Lessons Applicable: Existing Interest (Insurance)
Laws Applicable: Article 1504,Article 1263, Article 2207 of the Civil Code, Section 13 of Insurance Code

FACTS:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. while Levi Strauss
(Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co
IMC and LSPI separately obtained from Insurance Company of North America fire insurance policies for
their book debt endorsements related to their ready-made clothing materials which have been sold or
delivered to various customers and dealers of the Insured anywhere in the Philippines which are unpaid
45 days after the time of the loss
February 25, 1991: Gaisano Superstore Complex in Cagayan de Oro City, owned by Gaisano Cagayan,
Inc., containing the ready-made clothing materials sold and delivered by IMC and LSPI was consumed by
fire.
February 4, 1992: Insurance Company of North America filed a complaint for damages against Gaisano
Cagayan, Inc. alleges that IMC and LSPI filed their claims under their respective fire insurance policies
which it paid thus it was subrogated to their rights
Gaisano Cagayan, Inc: not be held liable because it was destroyed due to fortuities event or force
majeure
RTC: IMC and LSPI retained ownership of the delivered goods until fully paid, it must bear the loss (res
perit domino)
CA: Reversed - sales invoices is an exception under Article 1504 (1) of the Civil Code to res perit
domino

ISSUE: W/N Insurance Company of North America can claim against Gaisano Cagayan for the debt that
was isnured

HELD: YES. petition is partly GRANTED. order to pay P535,613 is DELETED

insurance policy is clear that the subject of the insurance is the book debts and NOT goods sold and
delivered to the customers and dealers of the insured
ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance
of the contract and the ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from
the time of such delivery;
IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full
payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's
interest is not determined by concept of title, but whether insured has substantial economic interest in
the property
Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real
or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated
peril might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an
insurable interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on
existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.
Anyone has an insurable interest in property who derives a benefit from its existence or would suffer
loss from its destruction.
it is sufficient that the insured is so situated with reference to the property that he would be liable
to loss should it be injured or destroyed by the peril against which it is insured
an insurable interest in property does not necessarily imply a property interest in, or a lien upon, or
possession of, the subject
matter of the insurance, and neither the title nor a beneficial interest is requisite to the existence of
such an interest
insurance in this case is not for loss of goods by fire but for petitioner's accounts with IMC and LSPI
that remained unpaid 45 days after the fire - obligation is pecuniary in nature
obligor should be held exempt from liability when the loss occurs thru a fortuitous event only holds
true when the obligation consists in the delivery of a determinate thing and there is no stipulation
holding him liable even in case of fortuitous event
Article 1263 of the Civil Code in an obligation to deliver a generic thing, the loss or destruction of
anything of the same kind does not extinguish the obligation (Genus nunquan perit)
The subrogation receipt, by itself, is sufficient to establish not only the relationship of respondent as
insurer and IMC as the insured, but also the amount paid to settle the insurance claim
Art. 2207. 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.
As to LSPI, no subrogation receipt was offered in evidence.
Failure to substantiate the claim of subrogation is fatal to petitioner's case for recovery of the
amount of P535,613

G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision1 dated October 11, 2000 of the
Court of Appeals (CA) in CA-G.R. CV No. 61848 which set aside the Decision dated August 31, 1998 of the
Regional Trial Court, Branch 138, Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action
for damages of Insurance Company of North America (respondent) against Gaisano Cagayan, Inc.
(petitioner); and the CA Resolution dated April 11, 2001 which denied petitioner's motion for
reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi Strauss (Phils.) Inc.
(LSPI) is the local distributor of products bearing trademarks owned by Levi Strauss & Co.. IMC and LSPI
separately obtained from respondent fire insurance policies with book debt endorsements. The
insurance policies provide for coverage on "book debts in connection with ready-made clothing
materials which have been sold or delivered to various customers and dealers of the Insured anywhere
in the Philippines."2 The policies defined book debts as the "unpaid account still appearing in the Book
of Account of the Insured 45 days after the time of the loss covered under this Policy."3 The policies also
provide for the following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in respect of the merchandise
sold and delivered by the Insured which are outstanding at the date of loss for a period in excess of six
(6) months from the date of the covering invoice or actual delivery of the merchandise whichever shall
first occur.

2. Warranted that the Insured shall submit to the Company within twelve (12) days after the close of
every calendar month all amount shown in their books of accounts as unpaid and thus become
receivable item from their customers and dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February 25, 1991, the Gaisano
Superstore Complex in Cagayan de Oro City, owned by petitioner, was consumed by fire. Included in the
items lost or destroyed in the fire were stocks of ready-made clothing materials sold and delivered by
IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner. It alleges that IMC and
LSPI filed with respondent their claims under their respective fire insurance policies with book debt
endorsements; that as of February 25, 1991, the unpaid accounts of petitioner on the sale and delivery
of ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it was P535,613.00; that
respondent paid the claims of IMC and LSPI and, by virtue thereof, respondent was subrogated to their
rights against petitioner; that respondent made several demands for payment upon petitioner but these
went unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it could not be held liable
because the property covered by the insurance policies were destroyed due to fortuities event or force
majeure; that respondent's right of subrogation has no basis inasmuch as there was no breach of
contract committed by it since the loss was due to fire which it could not prevent or foresee; that IMC
and LSPI never communicated to it that they insured their properties; that it never consented to paying
the claim of the insured.6

At the pre-trial conference the parties failed to arrive at an amicable settlement.7 Thus, trial on the
merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's complaint.8 It held that the
fire was purely accidental; that the cause of the fire was not attributable to the negligence of the
petitioner; that it has not been established that petitioner is the debtor of IMC and LSPI; that since the
sales invoices state that "it is further agreed that merely for purpose of securing the payment of
purchase price, the above-described merchandise remains the property of the vendor until the purchase
price is fully paid", IMC and LSPI retained ownership of the delivered goods and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered its decision setting
aside the decision of the RTC. The dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET ASIDE and a new one
is entered ordering defendant-appellee Gaisano Cagayan, Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the plaintiff-appellant to the insured
Inter Capitol Marketing Corporation, plus legal interest from the time of demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-appellant to the insured Levi
Strauss Phil., Inc., plus legal interest from the time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of the nature, quantity
and cost of the thing sold; that loss of the goods in the fire must be borne by petitioner since the proviso
contained in the sales invoices is an exception under Article 1504 (1) of the Civil Code, to the general rule
that if the thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the time the
loss under the principle of res perit domino; that petitioner's obligation to IMC and LSPI is not the
delivery of the lost goods but the payment of its unpaid account and as such the obligation to pay is not
extinguished, even if the fire is considered a fortuitous event; that by subrogation, the insurer has the
right to go against petitioner; that, being a fire insurance with book debt endorsements, what was
insured was the vendor's interest as a creditor.11

Petitioner filed a motion for reconsideration12 but it was denied by the CA in its Resolution dated April
11, 2001.13

Hence, the present petition for review on certiorari anchored on the following Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE INSTANT CASE WAS ONE
OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT GOODS IN THE
INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC SUBROGATION UNDER
ART. 2207 OF THE CIVIL CODE IN FAVOR OF RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case cannot be deemed to be
over credit since an insurance "on credit" belies not only the nature of fire insurance but the express
terms of the policies; that it was not credit that was insured since respondent paid on the occasion of
the loss of the insured goods to fire and not because of the non-payment by petitioner of any obligation;
that, even if the insurance is deemed as one over credit, there was no loss as the accounts were not yet
due since no prior demands were made by IMC and LSPI against petitioner for payment of the debt and
such demands came from respondent only after it had already paid IMC and LSPI under the fire
insurance policies.15

As to the second error, petitioner avers that despite delivery of the goods, petitioner-buyer IMC and LSPI
assumed the risk of loss when they secured fire insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in favor of respondent as no
valid insurance could be maintained thereon by IMC and LSPI since all risk had transferred to petitioner
upon delivery of the goods; that petitioner was not privy to the insurance contract or the payment
between respondent and its insured nor was its consent or approval ever secured; that this lack of privity
forecloses any real interest on the part of respondent in the obligation to pay, limiting its interest to
keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made clothing materials was
transferred upon delivery to petitioner, IMC and LSPI have insurable interest over said goods as creditors
who stand to suffer direct pecuniary loss from its destruction by fire; that petitioner is liable for loss of
the ready-made clothing materials since it failed to overcome the presumption of liability under Article
126516 of the Civil Code; that the fire was caused through petitioner's negligence in failing to provide
stringent measures of caution, care and maintenance on its property because electric wires do not
usually short circuit unless there are defects in their installation or when there is lack of proper
maintenance and supervision of the property; that petitioner is guilty of gross and evident bad faith in
refusing to pay respondent's valid claim and should be liable to respondent for contracted lawyer's fees,
litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases brought before it from the
CA is limited to reviewing questions of law which involves no examination of the probative value of the
evidence presented by the litigants or any of them.18 The Supreme Court is not a trier of facts; it is not
its function to analyze or weigh evidence all over again.19 Accordingly, findings of fact of the appellate
court are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual issues may be resolved
by this Court, such as: (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 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
petitioner's 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 CA manifestly overlooked certain relevant facts not disputed by the parties, which, if properly
considered, would justify a different conclusion.21 Exceptions (4), (5), (7), and (11) apply to the present
petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner claims that the CA
erred in construing a fire insurance policy on book debts as one covering the unpaid accounts of IMC and
LSPI since such insurance applies to loss of the ready-made clothing materials sold and delivered to
petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily understood, there is no room for
construction.22 In this case, the questioned insurance policies provide coverage for "book debts in
connection with ready-made clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines."23 ; and defined book debts as the "unpaid
account still appearing in the Book of Account of the Insured 45 days after the time of the loss covered
under this Policy."24 Nowhere is it provided in the questioned insurance policies that the subject of the
insurance is the goods sold and delivered to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not justify an attempt to
read into it any alleged intention of the parties, the terms are to be understood literally just as they
appear on the face of the contract.25 Thus, what were insured against were the accounts of IMC and
LSPI with petitioner which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved ownership of the goods by
stipulating in the sales invoices that "[i]t is further agreed that merely for purpose of securing the
payment of the purchase price the above described merchandise remains the property of the vendor
until the purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the ownership therein is
transferred to the buyer, but when the ownership therein is transferred to the buyer the goods are at the
buyer's risk whether actual delivery has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer, in pursuance of
the contract and the ownership in the goods has been retained by the seller merely to secure
performance by the buyer of his obligations under the contract, the goods are at the buyer's risk from
the time of such delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its debt, the risk of loss is
borne by the buyer.27 Accordingly, petitioner bears the risk of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an insurable interest until full
payment of the value of the delivered goods. Unlike the civil law concept of res perit domino, where
ownership is the basis for consideration of who bears the risk of loss, in property insurance, one's
interest is not determined by concept of title, but whether insured has substantial economic interest in
the property.28
Section 13 of our Insurance Code defines insurable interest as "every interest in property, whether real
or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated
peril might directly damnify the insured." Parenthetically, under Section 14 of the same Code, an
insurable interest in property may consist in: (a) an existing interest; (b) an inchoate interest founded on
existing interest; or (c) an expectancy, coupled with an existing interest in that out of which the
expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property interest in, or a lien
upon, or possession of, the subject matter of the insurance, and neither the title nor a beneficial interest
is requisite to the existence of such an interest, it is sufficient that the insured is so situated with
reference to the property that he would be liable to loss should it be injured or destroyed by the peril
against which it is insured.29 Anyone has an insurable interest in property who derives a benefit from its
existence or would suffer loss from its destruction.30 Indeed, a vendor or seller retains an insurable
interest in the property sold so long as he has any interest therein, in other words, so long as he would
suffer by its destruction, as where he has a vendor's lien.31 In this case, the insurable interest of IMC and
LSPI pertain to the unpaid accounts appearing in their Books of Account 45 days after the time of the
loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event under Article 117432 of
the Civil Code is misplaced. As held earlier, petitioner bears the loss under Article 1504 (1) of the Civil
Code.

Moreover, it must be stressed that the insurance in this case is not for loss of goods by fire but for
petitioner's accounts with IMC and LSPI that remained unpaid 45 days after the fire. Accordingly,
petitioner's obligation is for the payment of money. As correctly stated by the CA, where the obligation
consists in the payment of money, the failure of the debtor to make the payment even by reason of a
fortuitous event shall not relieve him of his liability.33 The rationale for this is that the rule that an
obligor should be held exempt from liability when the loss occurs thru a fortuitous event only holds true
when the obligation consists in the delivery of a determinate thing and there is no stipulation holding
him liable even in case of fortuitous event. It does not apply when the obligation is pecuniary in
nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing, the loss or destruction
of anything of the same kind does not extinguish the obligation." If the obligation is generic in the sense
that the object thereof is designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of anything of the same
kind even without the debtor's fault and before he has incurred in delay will not have the effect of
extinguishing the obligation.35 This rule is based on the principle that the genus of a thing can never
perish. Genus nunquan perit.36 An obligation to pay money is generic; therefore, it is not excused by
fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters immaterial to this case.
What is relevant here is whether it has been established that petitioner has outstanding accounts with
IMC and LSPI.
With respect to IMC, the respondent has adequately established its claim. Exhibits "C" to "C-22"38 show
that petitioner has an outstanding account with IMC in the amount of P2,119,205.00. Exhibit "E"39 is the
check voucher evidencing payment to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in
favor of respondent upon receipt of the insurance proceeds. All these documents have been properly
identified, presented and marked as exhibits in court. The subrogation receipt, by itself, is sufficient to
establish not only the relationship of respondent as insurer and IMC as the insured, but also the amount
paid to settle the insurance claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim.41 Respondent's action against petitioner is squarely
sanctioned by Article 2207 of the Civil Code which provides:

Art. 2207. 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. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of action. No evidentiary
weight can be given to Exhibit "F Levi Strauss",42 a letter dated April 23, 1991 from petitioner's General
Manager, Stephen S. Gaisano, Jr., since it is not an admission of petitioner's unpaid account with LSPI. It
only confirms the loss of Levi's products in the amount of P535,613.00 in the fire that razed petitioner's
building on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no subrogation receipt was
offered in evidence. Thus, there is no evidence that respondent has been subrogated to any right which
LSPI may have against petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.

WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October 11, 2000 and
Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV No. 61848 are AFFIRMED with the
MODIFICATION that the order to pay the amount of P535,613.00 to respondent is DELETED for lack of
factual basis.

No pronouncement as to costs.

SO ORDERED.