G.R. No.

125678

March 18, 2002

PHILAMCARE HEALTH SYSTEMS, INC., petitioner,

vs.
COURT OF APPEALS and JULITA TRINOS, respondents.
YNARES-SANTIAGO, J.:
Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care
coverage with petitioner Philamcare Health Systems, Inc. In the standard application
form, he answered no to the following question:
Have you or any of your family members ever consulted or been treated for
high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma
or peptic ulcer? (If Yes, give details).1
The application was approved for a period of one year from March 1, 1988 to March
1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the
agreement, respondents husband was entitled to avail of hospitalization benefits,
whether ordinary or emergency, listed therein. He was also entitled to avail of "outpatient benefits" such as annual physical examinations, preventive health care and
other out-patient services.
Upon the termination of the agreement, the same was extended for another year
from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The
amount of coverage was increased to a maximum sum of P75,000.00 per disability. 2
During the period of his coverage, Ernani suffered a heart attack and was confined
at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While
her husband was in the hospital, respondent tried to claim the benefits under the
health care agreement. However, petitioner denied her claim saying that the Health
Care Agreement was void. According to petitioner, there was a concealment
regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the
time of Ernanis confinement that he was hypertensive, diabetic and asthmatic,
contrary to his answer in the application form. Thus, respondent paid the
hospitalization expenses herself, amounting to about P76,000.00.
After her husband was discharged from the MMC, he was attended by a physical
therapist at home. Later, he was admitted at the Chinese General Hospital. Due to
financial difficulties, however, respondent brought her husband home again. In the
morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent
was constrained to bring him back to the Chinese General Hospital where he died on
the same day.
On July 24, 1990, respondent instituted with the Regional Trial Court of Manila,
Branch 44, an action for damages against petitioner and its president, Dr. Benito
Reverente, which was docketed as Civil Case No. 90-53795. She asked for

reimbursement of her expenses plus moral damages and attorneys fees. After trial,
the lower court ruled against petitioners, viz:
WHEREFORE, in view of the forgoing, the Court renders judgment in favor
of the plaintiff Julita Trinos, ordering:
1. Defendants to pay and reimburse the medical and hospital coverage of
the late Ernani Trinos in the amount of P76,000.00 plus interest, until the
amount is fully paid to plaintiff who paid the same;
2. Defendants to pay the reduced amount of moral damages of P10,000.00
to plaintiff;
3. Defendants to pay the reduced amount of P10,000.00 as exemplary
damages to plaintiff;
4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.
SO ORDERED.3
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted
all awards for damages and absolved petitioner Reverente.4 Petitioners motion for
reconsideration was denied.5 Hence, petitioner brought the instant petition for
review, raising the primary argument that a health care agreement is not an
insurance contract; hence the "incontestability clause" under the Insurance
Code6 does not apply.1wphi1.nt
Petitioner argues that the agreement grants "living benefits," such as medical checkups and hospitalization which a member may immediately enjoy so long as he is
alive upon effectivity of the agreement until its expiration one-year thereafter.
Petitioner also points out that only medical and hospitalization benefits are given
under the agreement without any indemnification, unlike in an insurance contract
where the insured is indemnified for his loss. Moreover, since Health Care
Agreements are only for a period of one year, as compared to insurance contracts
which last longer,7 petitioner argues that the incontestability clause does not apply,
as the same requires an effectivity period of at least two years. Petitioner further
argues that it is not an insurance company, which is governed by the Insurance
Commission, but a Health Maintenance Organization under the authority of the
Department of Health.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. An insurance
contract exists where the following elements concur:
1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the

designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual
losses among a large group of persons bearing a similar risk; and
5. In consideration of the insurers promise, the insured pays a premium. 8
Section 3 of the Insurance Code states that any contingent or unknown event,
whether past or future, which may damnify a person having an insurable interest
against him, may be insured against. Every person has an insurable interest in the
life and health of himself. Section 10 provides:
Every person has an insurable interest in the life and health:
(1) of himself, of his spouse and of his children;
(2) of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
(3) of any person under a legal obligation to him for the payment of money,
respecting property or service, of which death or illness might delay or
prevent the performance; and
(4) of any person upon whose life any estate or interest vested in him
depends.
In the case at bar, the insurable interest of respondents husband in obtaining the
health care agreement was his own health. The health care agreement was in the
nature of non-life insurance, which is primarily a contract of indemnity. 9 Once the
member incurs hospital, medical or any other expense arising from sickness, injury
or other stipulated contingent, the health care provider must pay for the same to the
extent agreed upon under the contract.
Petitioner argues that respondents husband concealed a material fact in his
application. It appears that in the application for health coverage, petitioners
required respondents husband to sign an express authorization for any person,
organization or entity that has any record or knowledge of his health to furnish any
and all information relative to any hospitalization, consultation, treatment or any
other medical advice or examination.10 Specifically, the Health Care Agreement
signed by respondents husband states:
We hereby declare and agree that all statement and answers contained
herein and in any addendum annexed to this application are full, complete

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

is material to the risk, if the statement is obviously of the foregoing

character, since in such case the insurer is not justified in relying upon such
statement, but is obligated to make further inquiry. There is a clear
distinction between such a case and one in which the insured is
fraudulently and intentionally states to be true, as a matter of expectation
or belief, that which he then knows, to be actually untrue, or the
impossibility of which is shown by the facts within his knowledge, since in
such case the intent to deceive the insurer is obvious and amounts to
actual fraud.15(Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant
rescission of the insurance contract.16 Concealment as a defense for the health care
provider or insurer to avoid liability is an affirmative defense and the duty to
establish such defense by satisfactory and convincing evidence rests upon the
provider or insurer. In any case, with or without the authority to investigate,
petitioner is liable for claims made under the contract. Having assumed a
responsibility under the agreement, petitioner is bound to answer the same to the
extent agreed upon. In the end, the liability of the health care provider attaches
once the member is hospitalized for the disease or injury covered by the agreement
or whenever he avails of the covered benefits which he has prepaid.
Under Section 27 of the Insurance Code, "a concealment entitles the injured party to
rescind a contract of insurance." The right to rescind should be exercised previous to
the commencement of an action on the contract. 17In this case, no rescission was
made. Besides, the cancellation of health care agreements as in insurance policies
require the concurrence of the following conditions:
1. Prior notice of cancellation to insured;
2. Notice must be based on the occurrence after effective date of the policy of one
or more of the grounds mentioned;
3. Must be in writing, mailed or delivered to the insured at the address shown in the
policy;

must be liberally construed in favor of the subscriber, and if doubtful or reasonably

susceptible of two interpretations the construction conferring coverage is to be
adopted, and exclusionary clauses of doubtful import should be strictly construed
against the provider.22
Anent the incontestability of the membership of respondents husband, we quote
with approval the following findings of the trial court:
(U)nder the title Claim procedures of expenses, the defendant Philamcare
Health Systems Inc. had twelve months from the date of issuance of the
Agreement within which to contest the membership of the patient if he had
previous ailment of asthma, and six months from the issuance of the
agreement if the patient was sick of diabetes or hypertension. The periods
having expired, the defense of concealment or misrepresentation no longer
lie.23
Finally, petitioner alleges that respondent was not the legal wife of the deceased
member considering that at the time of their marriage, the deceased was previously
married to another woman who was still alive. The health care agreement is in the
nature of a contract of indemnity. Hence, payment should be made to the party who
incurred the expenses. It is not controverted that respondent paid all the hospital
and medical expenses. She is therefore entitled to reimbursement. The records
adequately prove the expenses incurred by respondent for the deceaseds
hospitalization, medication and the professional fees of the attending physicians. 24
WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed
decision of the Court of Appeals dated December 14, 1995 is AFFIRMED.
SO ORDERED.
G.R. No. 167330

PHILIPPINE HEALTH CARE PROVIDERS, INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

4. Must state the grounds relied upon provided in Section 64 of the Insurance Code
and upon request of insured, to furnish facts on which cancellation is based. 18
None of the above pre-conditions was fulfilled in this case. When the terms of
insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his
obligation.19 Being a contract of adhesion, the terms of an insurance contract are to
be construed strictly against the party which prepared the contract the
insurer.20 By reason of the exclusive control of the insurance company over the
terms and phraseology of the insurance contract, ambiguity must be strictly
interpreted against the insurer and liberally in favor of the insured, especially to
avoid forfeiture.21 This is equally applicable to Health Care Agreements. The
phraseology used in medical or hospital service contracts, such as the one at bar,

June 12, 2008

DECISION
CORONA, J.:
Is a health care agreement in the nature of an insurance contract and therefore
subject to the documentary stamp tax (DST) imposed under Section 185 of Republic
Act 8424 (Tax Code of 1997)?
This is an issue of first impression. The Court of Appeals (CA) answered it
affirmatively in its August 16, 2004 decision1 in CA-G.R. SP No. 70479. Petitioner
Philippine Health Care Providers, Inc. believes otherwise and assails the CA decision
in this petition for review under Rule 45 of the Rules of Court.

Petitioner is a domestic corporation whose primary purpose is "[t]o establish,

maintain, conduct and operate a prepaid group practice health care delivery system
or a health maintenance organization to take care of the sick and disabled persons
enrolled in the health care plan and to provide for the administrative, legal, and
financial responsibilities of the organization."2 Individuals enrolled in its health care
programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by its duly licensed physicians,
specialists and other professional technical staff participating in the group practice
health delivery system at a hospital or clinic owned, operated or accredited by it. 3
4

The pertinent part of petitioner's membership or health care agreement provides:

VII BENEFITS
Subject to paragraphs VIII [on pre-existing medical condition] and X [on
claims for reimbursement] of this Agreement, Members shall have the
following Benefits under this Agreement:
In-Patient Services. In the event that a Member contract[s] sickness or
suffers injury which requires confinement in a participating Hospital[,] the
services or benefits stated below shall be provided to the Member free of
charge, but in no case shall [petitioner] be liable to pay more than
P75,000.00 in benefits with respect to anyone sickness, injury or related
causes. If a member has exhausted such maximum benefits with respect to
a particular sickness, injury or related causes, all accounts in excess of
P75,000.00 shall be borne by the enrollee. It is[,] however, understood that
the payment by [petitioner] of the said maximum in In-Patient Benefits to
any one member shall preclude a subsequent payment of benefits to such
member in respect of an unrelated sickness, injury or related causes
happening during the remainder of his membership term.
(a) Room and Board
(b) Services of physician and/or surgeon or specialist
(c) Use of operating room and recovery room
(d) Standard Nursing Services
(e) Drugs and Medication for use in the hospital except those
which are used to dissolve blood clots in the vascular systems (i.e.,
trombolytic agents)

Condition for in-Patient Care. The provision of the services or benefits

mentioned in the immediately preceding paragraph shall be subject to the
following conditions:
(a) The Hospital Confinement must be approved by [petitioner's]
Physician, Participating Physician or [petitioner's] Medical
Coordinator in that Hospital prior to confinement.
(b) The confinement shall be in a Participating Hospital and the
accommodation shall be in accordance with the Member[']s
benefit classification.
(c) Professional services shall be provided only by the [petitioner's]
Physicians or Participating Physicians.
(d) If discharge from the Hospital has been authorized by
[petitioner's] attending Physician or Participating Physician and the
Member shall fail or refuse to do so, [petitioner] shall not be
responsible for any charges incurred after discharge has been
authorized.
Out-Patient Services. A Member is entitled free of charge to the following
services or benefits which shall be rendered or administered either in
[petitioner's] Clinic or in a Participating Hospital under the direction or
supervision of [petitioner's] Physician, Participating Physician or
[petitioner's] Medical Coordinator.
(a) Gold Plan Standard Annual Physical Examination on the
anniversary date of membership, to be done at [petitioner's]
designated hospital/clinic, to wit:
(i) Taking a medical history
(ii) Physical examination
(iii) Chest x-ray
(iv) Stool examination
(v) Complete Blood Count
(vi) Urinalysis

(f) Anesthesia and its administration

(vii) Fasting Blood Sugar (FBS)
(g) Dressings, plaster casts and other miscellaneous supplies
(viii) SGPT
(h) Laboratory tests, x-rays and other necessary diagnostic
services

(ix) Creatinine

(i) Transfusion of blood and other blood elements

(x) Uric Acid

relief of symptoms

(xi) Resting Electrocardiogram

(v) Minor surgery not requiring confinement

(xii) Pap Smear (Optional for women 40 years and above)

(b) Platinum Family Plan/Gold Family Plan and Silver Annual
Physical Examination.
The following tests are to be done as part of the Member[']s
Annual check-up program at [petitioner's] designated clinic, to wit:
1) Routine Physical Examination
2) CBC (Complete Blood Count)
* Hemoglobin * Hematocrit
* Differential * RBC/WBC
3) Chest X-ray
4) Urinalysis
5) Fecalysis
(c) Preventive Health Care, which shall include:

Emergency Care. Subject to the conditions and limitations in this

Agreement and those specified below, a Member is entitled to receive
emergency care [in case of emergency. For this purpose, all hospitals and
all attending physician(s) in the Emergency Room automatically become
accredited. In participating hospitals, the member shall be entitled to the
following services free of charge: (a) doctor's fees, (b) emergency room
fees, (c) medicines used for immediate relief and during treatment, (d)
oxygen, intravenous fluids and whole blood and human blood products, (e)
dressings, casts and sutures and (f) x-rays, laboratory and diagnostic
examinations and other medical services related to the emergency
treatment of the patient.]5 Provided, however, that in no case shall the total
amount payable by [petitioner] for said Emergency, inclusive of hospital bill
and professional fees, exceed P75,000.00.
If the Member received care in a non-participating hospital, [petitioner]
shall reimburse [him]6 80% of the hospital bill or the amount of P5,000.00[,]
whichever is lesser, and 50% of the professional fees of non-participating
physicians based on [petitioner's] schedule of fees provided that the total
amount[,] inclusive of hospital bills and professional fee shall not exceed
P5,000.00.
On January 27, 2000, respondent Commissioner of Internal Revenue sent petitioner
a formal demand letter and the corresponding assessment notices demanding the
payment of deficiency taxes, including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of P224,702,641.18. The assessment
represented the following:

(i) Periodic Monitoring of Health Problems

Value Added Tax (VAT)

DST

(ii) Family planning counseling

(iii) Consultation and advices on diet, exercise and other
healthy habits
(iv) Immunization but excluding drugs for vaccines used

1996

1997

45,767,596.23

54,738,434.03

55,746,352.19

68,450,258.73

(d) Out-Patient Care, which shall include:

(i) Consultation, including specialist evaluation

100,506,030.26

124,196,610.92

(ii) Treatment of injury or illness

(iii) Necessary x-ray and laboratory examination

The deficiency DST assessment was imposed on petitioner's health care agreement
with the members of its health care program pursuant to Section 185 of the 1997
Tax Code which provides:

(iv) Emergency medicines needed for the immediate

Section 185. Stamp tax on fidelity bonds and other insurance policies. - On
all policies of insurance or bonds or obligations of the nature of
indemnity for loss, damage, or liability made or renewed by any
person, association or company or corporation transacting the
business of accident, fidelity, employer's liability, plate, glass, steam
boiler, burglar, elevator, automatic sprinkler, or other branch of
insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of
the duties of any office or position, for the doing or not doing of anything
therein specified, and on all obligations guaranteeing the validity or legality
of any bond or other obligations issued by any province, city, municipality,
or other public body or organization, and on all obligations guaranteeing
the title to any real estate, or guaranteeing any mercantile credits, which
may be made or renewed by any such person, company or corporation,
there shall be collected a documentary stamp tax of fifty centavos (P0.50)
on each four pesos (P4.00), or fractional part thereof, of the premium
charged. (emphasis supplied)
Petitioner protested the assessment in a letter dated February 23, 2000. As
respondent did not act on the protest, petitioner filed a petition for review in the
Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST
assessments.
On April 5, 2002, the CTA rendered a decision,7 the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is
PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency
VAT amounting to P22,054,831.75 inclusive of 25% surcharge plus 20%
interest from January 20, 1997 until fully paid for the 1996 VAT deficiency
and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from
January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly,
VAT Ruling No. [231]-88 is declared void and without force and effect. The
1996 and 1997 deficiency DST assessment against petitioner is hereby
CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from
collecting the said DST deficiency tax.
SO ORDERED.8
9

Respondent appealed the CTA decision to the CA insofar as it cancelled the DST
assessment. He claimed that petitioner's health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. 10 It held that petitioner's health
care agreement was in the nature of a non-life insurance contract subject to DST:
WHEREFORE, the petition for review is GRANTED. The Decision of the Court
of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997
deficiency documentary stamp tax assessment and ordered petitioner to
desist from collecting the same is REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19
and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and
1997, respectively, plus 25% surcharge for late payment and 20% interest

per annum from January 27, 2000, pursuant to Sections 248 and 249 of the
Tax Code, until the same shall have been fully paid.
SO ORDERED.11
Petitioner moved for reconsideration but the CA denied it. Hence, this petition.
Petitioner essentially argues that its health care agreement is not a contract of
insurance but a contract for the provision on a prepaid basis of medical services,
including medical check-up, that are not based on loss or damage. Petitioner also
insists that it is not engaged in the insurance business. It is a health maintenance
organization regulated by the Department of Health, not an insurance company
under the jurisdiction of the Insurance Commission. For these reasons, petitioner
asserts that the health care agreement is not subject to DST.
We do not agree.
The DST is levied on the exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal relationships through the
execution of specific instruments.12 It is an excise upon the privilege, opportunity, or
facility offered at exchanges for the transaction of the business. 13 In particular, the
DST under Section 185 of the 1997 Tax Code is imposed on the privilege of
making or renewing any policy of insurance (except life, marine, inland
and fire insurance), bond or obligation in the nature of indemnity for loss,
damage, or liability.
Under the law, a contract of insurance is an agreement whereby one undertakes for
a consideration to indemnify another against loss, damage or liability arising from an
unknown or contingent event.14 The event insured against must be designated in the
contract and must either be unknown or contingent.15
Petitioner's health care agreement is primarily a contract of indemnity. And in the
recent case of Blue Cross Healthcare, Inc. v. Olivares,16 this Court ruled that a health
care agreement is in the nature of a non-life insurance policy.
Contrary to petitioner's claim, its health care agreement is not a contract for the
provision of medical services. Petitioner does not actually provide medical or
hospital services but merely arranges for the same17 and pays for them up to the
stipulated maximum amount of coverage. It is also incorrect to say that the health
care agreement is not based on loss or damage because, under the said agreement,
petitioner assumes the liability and indemnifies its member for hospital, medical and
related expenses (such as professional fees of physicians). The term "loss or
damage" is broad enough to cover the monetary expense or liability a member will
incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of
so-called "out-patient services" (including physical examination, x-ray and
laboratory tests, medical consultations, vaccine administration and family planning
counseling) is the contingent event which gives rise to liability on the part of the
member. In case of exposure of the member to liability, he would be entitled to
indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying
for expenses arising from the stipulated contingencies belies its claim that its
services are prepaid. The expenses to be incurred by each member cannot be
predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of
paying for the costs of the services even if they are significantly and substantially
more than what the member has "prepaid." Petitioner does not bear the costs alone
but distributes or spreads them out among a large group of persons bearing a
similar risk, that is, among all the other members of the health care program. This is
insurance.
Petitioner's health care agreement is substantially similar to that involved
in Philamcare Health Systems, Inc. v. CA.18 The health care agreement in that case
entitled the subscriber to avail of the hospitalization benefits, whether ordinary or
emergency, listed therein. It also provided for "out-patient benefits" such as annual
physical examinations, preventive health care and other out-patient services. This
Court ruled in Philamcare Health Systems, Inc.:
[T]he insurable interest of [the subscriber] in obtaining the health care
agreement was his own health. The health care agreement was in the
nature of non-life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital, medical or any other
expense arising from sickness, injury or other stipulated contingency, the
health care provider must pay for the same to the extent agreed upon
under the contract.19 (emphasis supplied)
Similarly, the insurable interest of every member of petitioner's health care program
in obtaining the health care agreement is his own health. Under the agreement,
petitioner is bound to indemnify any member who incurs hospital, medical or any
other expense arising from sickness, injury or other stipulated contingency to the
extent agreed upon under the contract.
Petitioner's contention that it is a health maintenance organization and not an
insurance company is irrelevant. Contracts between companies like petitioner and
the beneficiaries under their plans are treated as insurance contracts. 20
Moreover, DST is not a tax on the business transacted but an excise on the privilege,
opportunity, or facility offered at exchanges for the transaction of the business. 21 It
is an excise on the facilities used in the transaction of the business, separate
and apart from the business itself.22
WHEREFORE, the petition is hereby DENIED. The August 16, 2004 decision of the
Court of Appeals in CA-G.R. SP No. 70479 is AFFIRMED.
Petitioner is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency documentary stamp tax for 1996 and 1997, respectively, plus 25%
surcharge for late payment and 20% interest per annum from January 27, 2000 until
full payment thereof.
Costs against petitioner.
SO ORDERED.

G.R. No. 119599 March 20, 1997

MALAYAN INSURANCE CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS and TKC MARKETING
CORPORATION, respondents.

ROMERO, J.:
Assailed in this petition for review on certiorari is the decision of the Court of
Appeals in CA-G. R. No. 43023 1 which affirmed, with slight modification, the decision
of the Regional Trial Court of Cebu, Branch 15.
Private respondent TKC Marketing Corp. was the owner/consignee of some
3,189.171 metric tons of soya bean meal which was loaded on board the ship MV Al
Kaziemah on or about September 8, 1989 for carriage from the port of Rio del
Grande, Brazil, to the port of Manila. Said cargo was insured against the risk of loss
by petitioner Malayan Insurance Corporation for which it issued two (2) Marine Cargo
policy Nos. M/LP 97800305 amounting to P18,986,902.45 and M/LP 97800306
amounting to P1,195,005.45, both dated September 1989.
While the vessel was docked in Durban, South Africa on September 11, 1989 enroute
to Manila, the civil authorities arrested and detained it because of a lawsuit on a
question of ownership and possession. As a result, private respondent notified
petitioner on October 4, 1989 of the arrest of the vessel and made a formal claim for
the amount of US$916,886.66, representing the dollar equivalent on the policies, for
non-delivery of the cargo. Private respondent likewise sought the assistance of
petitioner on what to do with the cargo.
Petitioner replied that the arrest of the vessel by civil authority was not a peril
covered by the policies. Private respondent, accordingly, advised petitioner that it
might tranship the cargo and requested an extension of the insurance coverage until
actual transhipment, which extension was approved upon payment of additional
premium. The insurance coverage was extended under the same terms and
conditions embodied in the original policies while in the process of making
arrangements for the transhipment of the cargo from Durban to Manila, covering the
period October 4 - December 19, 1989.
However, on December 11, 1989, the cargo was sold in Durban, South Africa, for
US$154.40 per metric ton or a total of P10,304,231.75 due to its perishable nature
which could no longer stand a voyage of twenty days to Manila and another twenty
days for the discharge thereof. On January 5, 1990, private respondent forthwith
reduced its claim to US$448,806.09 (or its peso equivalent of P9,879,928.89 at the
exchange rate of P22.0138 per $1.00) representing private respondent's loss after

the proceeds of the sale were deducted from the original claim of $916,886.66 or
P20,184,159.55.

reasonable and justified, it should not operate to discharge petitioner from its
contractual liability.

Petitioner maintained its position that the arrest of the vessel by civil authorities on
a question of ownership was an excepted risk under the marine insurance policies.
This prompted private respondent to file a complaint for damages praying that aside
from its claim, it be reimbursed the amount of P128,770.88 as legal expenses and
the interest it paid for the loan it obtained to finance the shipment totalling
P942,269.30. In addition, private respondent asked for moral damages amounting to
P200,000.00, exemplary damages amounting to P200,000.00 and attorney's fees
equivalent to 30% of what will be awarded by the court.

Hence this petition, claiming that the Court of Appeals erred:

1. In ruling that the arrest of the vessel was a risk covered under the subject
insurance policies.
2. In ruling that there was constructive total loss over the cargo.
3. In ruling that petitioner was in bad faith in declining private respondent's claim.

The lower court decided in favor of private respondent and required petitioner to
pay, aside from the insurance claim, consequential and liquidated damages
amounting to P1,024,233.88, exemplary damages amounting to P100,000.00,
reimbursement in the amount equivalent to 10% of whatever is recovered as
attorney's fees as well as the costs of the suit. On private respondent's motion for
reconsideration, petitioner was also required to further pay interest at the rate of
12% per annum on all amounts due and owing to the private respondent by virtue of
the lower court decision counted from the inception of this case until the same is
paid.
On appeal, the Court of Appeals affirmed the decision of the lower court stating that
with the deletion of Clause 12 of the policies issued to private respondent, the same
became automatically covered under subsection 1.1 of Section 1 of the Institute War
Clauses. The arrests, restraints or detainments contemplated in the former clause
were those effected by political or executive acts. Losses occasioned by riot or
ordinary judicial processes were not covered therein. In other words, arrest, restraint
or detainment within the meaning of Clause 12 (or F.C. & S. Clause) rules out
detention by ordinary legal processes. Hence, arrests by civil authorities, such as
what happened in the instant case, is an excepted risk under Clause 12 of the
Institute Cargo Clause or the F.C. & S. Clause. However, with the deletion of Clause
12 of the Institute Cargo Clause and the consequent adoption or institution of the
Institute War Clauses (Cargo), the arrest and seizure by judicial processes which
were excluded under the former policy became one of the covered risks.
The appellate court added that the failure to deliver the consigned goods in the port
of destination is a loss compensable, not only under the Institute War Clause but
also under the Theft, Pilferage, and Non-delivery Clause (TNPD) of the insurance
policies, as read in relation to Section 130 of the Insurance Code and as held
in Williams v. Cole. 2
Furthermore, the appellate court contended that since the vessel was prevented at
an intermediate port from completing the voyage due to its seizure by civil
authorities, a peril insured against, the liability of petitioner continued until the
goods could have been transhipped. But due to the perishable nature of the goods,
it had to be promptly sold to minimize loss. Accordingly, the sale of the goods being

4. In giving undue reliance to the doctrine that insurance policies are strictly
construed against the insurer.
In assigning the first error, petitioner submits the following: (a) an arrest by civil
authority is not compensable since the term "arrest" refers to "political or executive
acts" and does not include a loss caused by riot or by ordinary judicial process as in
this case; (b) the deletion of the Free from capture or Seizure Clause would leave the
assured covered solely for the perils specified by the wording of the policy itself; (c)
the rationale for the exclusion of an arrest pursuant to judicial authorities is to
eliminate collusion between unscrupulous assured and civil authorities.
As to the second assigned error, petitioner submits that any loss which private
respondent may have incurred was in the nature and form of unrecovered
acquisition value brought about by a voluntary sacrifice sale and not by arrest,
detention or seizure of the ship.
As to the third issue, petitioner alleges that its act of rejecting the claim was a result
of its honest belief that the arrest of the vessel was not a compensable risk under
the policies issued. In fact, petitioner supported private respondent by
accommodating the latter's request for an extension of the insurance coverage,
notwithstanding that it was then under no legal obligation to do so.
Private respondent, on the other hand, argued that when it appealed its case to the
Court of Appeals, petitioner did not raise as an issue the award of exemplary
damages. It cannot now, for the first time, raise the same before this Court.
Likewise, petitioner cannot submit for the first time on appeal its argument that it
was wrong for the Court of Appeals to have ruled the way it did based on facts that
would need inquiry into the evidence. Even if inquiry into the facts were possible,
such was not necessary because the coverage as ruled upon by the Court of Appeals
is evident from the very terms of the policies.
It also argued that petitioner, being the sole author of the policies, "arrests" should
be strictly interpreted against it because the rule is that any ambiguity is to be
taken contra proferentum. Risk policies should be construed reasonably and in a
manner as to make effective the intentions and expectations of the parties. It added

that the policies clearly stipulate that they cover the risks of non-delivery of an
entire package and that it was petitioner itself that invited and granted the
extensions and collected premiums thereon.
The resolution of this controversy hinges on the interpretation of the "Perils" clause
of the subject policies in relation to the excluded risks or warranty specifically stated
therein.
By way of a historical background, marine insurance developed as an all-risk
coverage, using the phrase "perils of the sea" to encompass the wide and varied
range of risks that were covered. 3 The subject policies contain the "Perils" clause
which is a standard form in any marine insurance policy. Said clause reads:
Touching the adventures which the said MALAYAN INSURANCE CO.,
are content to bear, and to take upon them in this voyage; they
are of the Seas; Men-of-War, Fire, Enemies, Pirates, Rovers,
Thieves, Jettisons, Letters of Mart and Counter Mart, Suprisals,
Takings of the Sea, Arrests, Restraints and Detainments of all
Kings, Princess and Peoples, of what Nation, Condition, or quality
soever, Barratry of the Master and Mariners, and of all other Perils,
Losses, and Misfortunes, that have come to hurt, detriment, or
damage of the said goods and merchandise or any part thereof .
AND in case of any loss or misfortune it shall be lawful to the
ASSURED, their factors, servants and assigns, to sue, labour, and
travel for, in and about the defence, safeguards, and recovery of
the said goods and merchandises, and ship, & c., or any part
thereof, without prejudice to this INSURANCE; to the charges
whereof the said COMPANY, will contribute according to the rate
and quantity of the sum herein INSURED. AND it is expressly
declared and agreed that no acts of the Insurer or Insured in
recovering, saving, or preserving the Property insured shall be
considered as a Waiver, or Acceptance of Abandonment. And it is
agreed by the said COMPANY, that this writing or Policy of
INSURANCE shall be of as much Force and Effect as the surest
Writing or policy of INSURANCE made in LONDON. And so the said
MALAYAN INSURANCE COMPANY., INC., are contented, and do
hereby promise and bind themselves, their Heirs, Executors,
Goods and Chattel, to the ASSURED, his or their Executors,
Administrators, or Assigns, for the true Performance of the
Premises; confessing themselves paid the Consideration due unto
them for this INSURANCE at and after the rate arranged.
(Emphasis supplied)
The exception or limitation to the "Perils" clause and the "All other perils" clause in
the subject policies is specifically referred to as Clause 12 called the "Free from
Capture & Seizure Clause" or the F.C. & S. Clause which reads, thus:

Warranted free of capture, seizure, arrest, restraint or detainment,

and the consequences thereof or of any attempt thereat; also from
the consequences of hostilities and warlike operations, whether
there be a declaration of war or not; but this warranty shall not
exclude collision, contact with any fixed or floating object (other
than a mine or torpedo), stranding, heavy weather or fire unless
caused directly (and independently of the nature of the voyage or
service which the vessel concerned or, in the case of a collision,
any other vessel involved therein is performing) by a hostile act by
or against a belligerent power and for the purpose of this warranty
"power" includes any authorities maintaining naval, military or air
forces in association with power.
Further warranted free from the consequences of civil war,
revolution, insurrection, or civil strike arising therefrom or piracy.
Should Clause 12 be deleted, the relevant current institute war
clauses shall be deemed to form part of this insurance. (Emphasis
supplied)
However, the F. C. & S. Clause was deleted from the policies. Consequently, the
Institute War Clauses (Cargo) was deemed incorporated which, in subsection 1.1 of
Section 1, provides:
1. This insurance covers:
1.1 The risks excluded from the standard form of English Marine
Policy by the clause warranted free of capture, seizure, arrest,
restraint or detainment, and the consequences thereof of
hostilities or warlike operations, whether there be a declaration of
war or not; but this warranty shall not exclude collision, contact
with any fixed or floating object (other than a mine or torpedo),
stranding, heavy weather or fire unless caused directly (and
independently of the nature on voyage or service which the vessel
concerned or, in the case of a collision any other vessel involved
therein is performing) by a hostile act by or against a belligerent
power; and for the purpose of this warranty "power" includes any
authority maintaining naval, military or air forces in association
with a power. Further warranted free from the consequences of
civil war, revolution, rebellion, insurrection, or civil strike arising
therefrom, or piracy.
According to petitioner, the automatic incorporation of subsection 1.1 of section 1 of
the Institute War Clauses (Cargo), among others, means that any "capture, arrest,
detention, etc." pertained exclusively to warlike operations if this Court strictly
construes the heading of the said clauses. However, it also claims that the parties
intended to include arrests, etc. even if it were not the result of hostilities or warlike
operations. It further claims that on the strength of jurisprudence on the matter, the

term "arrests" would only cover those arising from political or executive acts,
concluding that whether private respondent's claim is anchored on subsection 1.1 of
Section 1 of the Institute War Clauses (Cargo) or the F.C. & S. Clause, the arrest of
the vessel by judicial authorities is an excluded risk. 4
This Court cannot agree with petitioner's assertions, particularly when it alleges that
in the "Perils" Clause, it assumed the risk of arrest caused solely by executive or
political acts of the government of the seizing state and thereby excludes "arrests"
caused by ordinary legal processes, such as in the instant case.
With the incorporation of subsection 1.1 of Section 1 of the Institute War Clauses,
however, this Court agrees with the Court of Appeals and the private respondent
that "arrest" caused by ordinary judicial process is deemed included among the
covered risks. This interpretation becomes inevitable when subsection 1.1 of Section
1 of the Institute War Clauses provided that "this insurance covers the risks excluded
from the Standard Form of English Marine Policy by the clause "Warranted free of
capture, seizure, arrest, etc. . . ." or the F.C. & S. Clause. Jurisprudentially, "arrests"
caused by ordinary judicial process is also a risk excluded from the Standard Form of
English Marine Policy by the F.C. & S. Clause.
Petitioner cannot adopt the argument that the "arrest" caused by ordinary judicial
process is not included in the covered risk simply because the F.C. & S. Clause under
the Institute War Clauses can only be operative in case of hostilities or warlike
operations on account of its heading "Institute War Clauses." This Court agrees with
the Court of Appeals when it held that ". . . . Although the F.C. & S. Clause may have
originally been inserted in marine policies to protect against risks of war, (see
generally G. Gilmore & C. Black, The Law of Admiralty Section 2-9, at 71-73 [2d Ed.
1975]), its interpretation in recent years to include seizure or detention by civil
authorities seems consistent with the general purposes of the clause, . . . ." 5 In fact,
petitioner itself averred that subsection 1.1 of Section 1 of the Institute War Clauses
included "arrest" even if it were not a result of hostilities or warlike operations. 6 In
this regard, since what was also excluded in the deleted F.C. & S. Clause was "arrest"
occasioned by ordinary judicial process, logically, such "arrest" would now become a
covered risk under subsection 1.1 of Section 1 of the Institute War Clauses,
regardless of whether or not said "arrest" by civil authorities occurred in a state of
war.
Petitioner itself seems to be confused about the application of the F.C. & S. Clause as
well as that of subsection 1.1 of Section 1 of the Institute War Clauses (Cargo). It
stated that "the F.C. & S. Clause was "originally incorporated in insurance policies to
eliminate the risks of warlike operations". It also averred that the F.C. & S. Clause
applies even if there be no war or warlike operations . . . ." 7 In the same vein, it
contended that subsection 1.1 of Section 1 of the Institute War Clauses
(Cargo) "pertained exclusively to warlike operations" and yet it also stated that "the
deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1
of Section 1 of the Institute War Clauses (Cargo) was to include "arrest, etc. even if
were not a result of hostilities or warlike operations. 8

This Court cannot help the impression that petitioner is overly straining its
interpretation of the provisions of the policy in order to avoid being liable for private
respondent's claim.
This Court finds it pointless for petitioner to maintain its position that it only insures
risks of "arrest" occasioned by executive or political acts of government which is
interpreted as not referring to those caused by ordinary legal processes as contained
in the "Perils" Clause; deletes the F.C. & S. Clause which excludes risks of arrest
occasioned by executive or political acts of the government and naturally, also those
caused by ordinary legal processes; and, thereafter incorporates subsection 1.1 of
Section 1 of the Institute War Clauses which now includes in the coverage risks of
arrest due to executive or political acts of a government but then still excludes
"arrests" occasioned by ordinary legal processes when subsection 1.1 of Section 1 of
said Clauses should also have included "arrests" previously excluded from the
coverage of the F.C. & S. Clause.
It has been held that a strained interpretation which is unnatural and forced, as to
lead to an absurd conclusion or to render the policy nonsensical, should, by all
means, be avoided. 9 Likewise, it must be borne in mind that such contracts are
invariably prepared by the companies and must be accepted by the insured in the
form in which they are written. 10 Any construction of a marine policy rendering it
void should be avoided. 11 Such policies will, therefore, be construed strictly against
the company in order to avoid a forfeiture, unless no other result is possible from the
language used. 12
If a marine insurance company desires to limit or restrict the operation of the
general provisions of its contract by special proviso, exception, or exemption, it
should express such limitation in clear and unmistakable language. 13Obviously, the
deletion of the F.C. & S. Clause and the consequent incorporation of subsection 1.1
of Section 1 of the Institute War Clauses (Cargo) gave rise to ambiguity. If the risk of
arrest occasioned by ordinary judicial process was expressly indicated as an
exception in the subject policies, there would have been no controversy with respect
to the interpretation of the subject clauses.
Be that as it may, exceptions to the general coverage are construed most strongly
against the company. 14 Even an express exception in a policy is to be construed
against the underwriters by whom the policy is framed, and for whose benefit the
exception is introduced. 15
An insurance contract should be so interpreted as to carry out the purpose for which
the parties entered into the contract which is, to insure against risks of loss or
damage to the goods. Such interpretation should result from the natural and
reasonable meaning of language in the policy. 16 Where restrictive provisions are
open to two interpretations, that which is most favorable to the insured is
adopted. 17
Indemnity and liability insurance policies are construed in accordance with the
general rule of resolving any ambiguity therein in favor of the insured, where the

10

contract or policy is prepared by the insurer. 18 A contract of insurance, being a

contract of adhesion, par excellence, any ambiguity therein should be resolved
against the insurer; in other words, it should be construed liberally in favor of the
insured and strictly against the insurer. Limitations of liability should be regarded
with extreme jealousy and must be construed in such a way as to preclude the
insurer from noncompliance with its obligations. 19
In view of the foregoing, this Court sees no need to discuss the other issues
presented.

The Facts

On December 10, 1980, respondent Philippine American Life Insurance Company

(Philamlife) entered into an agreement denominated as Creditor Group Life Policy
No. P-1920[2] with petitioner Eternal Gardens Memorial Park Corporation (Eternal).

WHEREFORE, the petition for review is DENIED and the decision of the Court of
Appeals is AFFIRMED.

Under the policy, the clients of Eternal who purchased burial lots from it on
installment basis would be insured by Philamlife. The amount of insurance coverage

SO ORDERED.

depended upon the existing balance of the purchased burial lots. The policy was to

ETERNAL GARDENS MEMORIAL G.R. No. 166245

PARK CORPORATION,
Petitioner,
Present:
CARPIO MORALES,
- versus - Acting Chairperson,
TINGA,
VELASCO, JR.,
CHICO-NAZARIO,* and
BRION, JJ.
THE PHILIPPINE AMERICAN Promulgated:
LIFE INSURANCE COMPANY,
Respondent. April 9, 2008
x-----------------------------------------------------------------------------------------x

be effective for a period of one year, renewable on a yearly basis.

DECISION
VELASCO, JR., J.:

The Case

The relevant provisions of the policy are:

ELIGIBILITY.
Any Lot Purchaser of the Assured who is at least 18 but not more
than 65 years of age, is indebted to the Assured for the unpaid
balance of his loan with the Assured, and is accepted for Life
Insurance coverage by the Company on its effective date is
eligible for insurance under the Policy.
EVIDENCE OF INSURABILITY.
No medical examination shall be required for amounts of insurance
up to P50,000.00. However, a declaration of good health shall be
required for all Lot Purchasers as part of the application. The
Company reserves the right to require further evidence of
insurability satisfactory to the Company in respect of the following:
1.
Any amount of insurance in excess of P50,000.00.
2.
Any lot purchaser who is more than 55 years of age.
LIFE INSURANCE BENEFIT.

G.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance

The Life Insurance coverage of any Lot Purchaser at any time shall
be the amount of the unpaid balance of his loan (including arrears
up to but not exceeding 2 months) as reported by the Assured to
the Company or the sum of P100,000.00, whichever is smaller.
Such benefit shall be paid to the Assured if the Lot Purchaser dies
while insured under the Policy.

application be considered as approval of the application?

EFFECTIVE DATE OF BENEFIT.

Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse
and set aside the November 26, 2004 Decision [1] of the Court of Appeals (CA) in CA-

The insurance of any eligible Lot Purchaser shall be effective on

the date he contracts a loan with the Assured. However, there
shall be no insurance if the application of the Lot Purchaser is not
approved by the Company.[3]

11

In response to Eternals demand, Philamlife denied Eternals insurance claim

Eternal was required under the policy to submit to Philamlife a list of all new lot

in a letter dated May 20, 1986,[9] a portion of which reads:

purchasers, together with a copy of the application of each purchaser, and the
amounts of the respective unpaid balances of all insured lot purchasers. In relation
to the instant petition, Eternal complied by submitting a letter dated December 29,
1982,[4] containing a list of insurable balances of its lot buyers for October 1982. One
of those included in the list as new business was a certain John Chuang. His balance
of payments was PhP 100,000. On August 2, 1984, Chuang died.

Eternal sent a letter dated August 20, 1984[5] to Philamlife, which served as an
insurance claim for Chuangs death. Attached to the claim were the following
documents: (1) Chuangs Certificate of Death; (2) Identification Certificate stating
that Chuang is a naturalized Filipino Citizen; (3) Certificate of Claimant; (4)
Certificate of Attending Physician; and (5) Assureds Certificate.

In reply, Philamlife wrote Eternal a letter on November 12, 1984, [6] requiring

The deceased was 59 years old when he entered into Contract

#9558 and 9529 with Eternal Gardens Memorial Park in October
1982 for the total maximum insurable amount of P100,000.00
each. No application for Group Insurance was submitted in our
office prior to his death on August 2, 1984.
In accordance with our Creditors Group Life Policy No. P-1920,
under Evidence of Insurability provision, a declaration of good
health shall be required for all Lot Purchasers as party of the
application. We cite further the provision on Effective Date of
Coverage under the policy which states that there shall be no
insurance if the application is not approved by the Company. Since
no application had been submitted by the Insured/Assured, prior to
his death, for our approval but was submitted instead
on November 15, 1984, after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to point out
that Eternal Gardens being the Assured was a party to the
Contract and was therefore aware of these pertinent provisions.
With regard to our acceptance of premiums, these do not connote
our approval per se of the insurance coverage but are held by us
in trust for the payor until the prerequisites for insurance coverage
shall have been met. We will however, return all the premiums
which have been paid in behalf of John Uy Chuang.

Eternal to submit the following documents relative to its insurance claim for
Chuangs death: (1) Certificate of Claimant (with form attached); (2) Assureds

Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC)

Certificate (with form attached); (3) Application for Insurance accomplished and

for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial

signed by the insured, Chuang, while still living; and (4) Statement of Account

court decided in favor of Eternal, the dispositive portion of which reads:

showing the unpaid balance of Chuang before his death.

dated November 14, 1984,[7] which was received by Philamlife on November 15,

WHEREFORE, premises considered, judgment is hereby rendered

in favor of Plaintiff ETERNAL, against Defendant PHILAMLIFE,
ordering the Defendant PHILAMLIFE, to pay the sum of
P100,000.00, representing the proceeds of the Policy of John Uy
Chuang, plus legal rate of interest, until fully paid; and, to pay the
sum of P10,000.00 as attorneys fees.

1984.

SO ORDERED.

Eternal

transmitted

the

required

documents

through

letter

After more than a year, Philamlife had not furnished Eternal with any reply

The RTC found that Eternal submitted Chuangs application for insurance

to the latters insurance claim. This prompted Eternal to demand from Philamlife the

which he accomplished before his death, as testified to by Eternals witness and

payment of the claim for PhP 100,000 onApril 25, 1986.[8]

evidenced by the letter dated December 29, 1982, stating, among others: Encl: PhilAm Life Insurance Application Forms & Cert. [10] It further ruled that due to Philamlifes

12

inaction from the submission of the requirements of the group insurance

As a general rule, this Court is not a trier of facts and will not re-examine

on December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes

factual issues raised before the CA and first level courts, considering their findings of

acceptance of the premiums during the same period, Philamlife was deemed to have

facts are conclusive and binding on this Court. However, such rule is subject to

approved Chuangs application. The RTC said that since the contract is a group life

exceptions, as enunciated in Sampayan v. Court of Appeals:

insurance, once proof of death is submitted, payment must follow.

Philamlife appealed to the CA, which ruled, thus:

WHEREFORE, the decision of the Regional Trial Court of
Makati in Civil Case No. 57810 is REVERSED and SET ASIDE, and
the complaint is DISMISSED. No costs.
SO ORDERED.[11]

The CA based its Decision on the factual finding that Chuangs application was not
enclosed in Eternals letter dated December 29, 1982. It further ruled that the non-

(1) when the findings are grounded entirely on speculation,

surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave
abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are
conflicting; (6) when in making its findings the [CA] went beyond
the issues of the case, or its findings are contrary to the
admissions of both the appellant and the appellee; (7) when the
findings [of the CA] are contrary to the trial court; (8) when
the findings are conclusions without citation of specific evidence
on which they are based; (9) when the facts set forth in the
petition as well as in the petitioners main and reply briefs are not
disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted
by the evidence on record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts not disputed by the
parties, which, if properly considered, would justify a different
conclusion.[12] (Emphasis supplied.)

accomplishment of the submitted application form violated Section 26 of the

Insurance Code. Thus, the CA concluded, there being no application form, Chuang
was not covered by Philamlifes insurance.

In the instant case, the factual findings of the RTC were reversed by the CA; thus,
this Court may review them.

Hence, we have this petition with the following grounds:

The Honorable Court of Appeals has decided a question of
substance, not therefore determined by this Honorable Court, or
has decided it in a way not in accord with law or with the
applicable jurisprudence, in holding that:
I.

The application for insurance was not duly submitted to

respondent PhilamLife before the death of John Chuang;

II.

There was no valid insurance coverage; and

III. Reversing and setting aside the Decision of the Regional

Trial Court dated May 29, 1996.

Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before his
death. In Eternals letter dated December 29, 1982, a list of insurable interests of
buyers for October 1982 was attached, including Chuang in the list of new
businesses. Eternal added it was noted at the bottom of said letter that the
corresponding Phil-Am Life Insurance Application Forms & Cert. were enclosed in the
letter that was apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance application which was signed

The Courts Ruling

by Chuang himself and executed before his death.

13

On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife

Philamlife primarily claims that Eternal did not even know where the original

received a copy of Chuangs insurance application.

insurance application of Chuang was, as shown by the testimony of Edilberto

The evidence on record supports Eternals position.

Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in
case of new coverage?

The fact of the matter is, the letter dated December 29, 1982, which Philamlife

[Mendoza:]

stamped as received, states that the insurance forms for the attached list of burial

A It is [a] standard operating procedure for the new client to fill up

two copies of this form and the original of this is submitted to
Philamlife together with the monthly remittances and the second
copy is remained or retained with the marketing department
of Eternal Gardens.

lot buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is
an admission by Philamlife against its own interest. [13] The burden of evidence has
shifted to Philamlife, which must prove that the letter did not contain Chuangs
insurance application. However, Philamlife failed to do so; thus, Philamlife is deemed
to have received Chuangs insurance application.

Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel
is merely asking for the location and does not [ask] for the number
of copy.
Atty. Arevalo:
Q Where is the original?

To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal
letter is stamped as received, the contents of the letter are correct and accounted
for.

[Mendoza:]
A As far as I remember I do not know where the original but when I
submitted with that payment together with the new clients all the
originals I see to it before I sign the transmittal letter the originals
are attached therein.[16]

Philamlifes allegation that Eternals witnesses ran out of credibility and reliability due
to inconsistencies is groundless. The trial court is in the best position to determine

In other words, the witness admitted not knowing where the original

the reliability and credibility of the witnesses, because it has the opportunity to

insurance application was, but believed that the application was transmitted to

observe firsthand the witnesses demeanor, conduct, and attitude. Findings of the

Philamlife as an attachment to a transmittal letter.

trial court on such matters are binding and conclusive on the appellate court, unless
some facts or circumstances of weight and substance have been overlooked,
misapprehended, or misinterpreted,

[14]

that, if considered, might affect the result of

the case.[15]

As to the seeming inconsistencies between the testimony of Manuel Cortez

on whether one or two insurance application forms were accomplished and the
testimony of Mendoza on who actually filled out the application form, these are
minor inconsistencies that do not affect the credibility of the witnesses. Thus, we

An examination of the testimonies of the witnesses mentioned by Philamlife,

ruled in People v. Paredes that minor inconsistencies are too trivial to affect the

however, reveals no overlooked facts of substance and value.

14

credibility of witnesses, and these may even serve to strengthen their credibility as
these negate any suspicion that the testimonies have been rehearsed.

[17]

We reiterated the above ruling in Merencillo v. People:

while the second sentence appears to require Philamlife to approve the insurance
contract before the same can become effective.

It must be remembered that an insurance contract is a contract of adhesion

Minor discrepancies or inconsistencies do not impair the

essential integrity of the prosecutions evidence as a whole or
reflect on the witnesses honesty. The test is whether the
testimonies agree on essential facts and whether the respective
versions corroborate and substantially coincide with each other so
as to make a consistent and coherent whole. [18]

which must be construed liberally in favor of the insured and strictly against the

In the present case, the number of copies of the insurance application that Chuang

Indemnity and liability insurance policies are construed in

accordance with the general rule of resolving any ambiguity
therein in favor of the insured, where the contract or policy is
prepared by the insurer. A contract of insurance, being a
contract of adhesion, par excellence, any ambiguity
therein should be resolved against the insurer; in other
words, it should be construed liberally in favor of the insured and
strictly against the insurer. Limitations of liability should be
regarded with extreme jealousy and must be construed in such a
way as to preclude the insurer from noncompliance with its
obligations.[19] (Emphasis supplied.)

executed is not at issue, neither is whether the insurance application presented by

Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternals witnesses.

However, the question arises as to whether Philamlife assumed the risk of

insurer in order to safeguard the latters interest. Thus, in Malayan Insurance

Corporation v. Court of Appeals, this Court held that:

loss without approving the application.

In the more recent case of Philamcare Health Systems, Inc. v. Court of
This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an agreement

denominated as Creditor Group Life Policy No. P-1920 dated December 10, 1980. In
the policy, it is provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be
effective on the date he contracts a loan with the Assured.
However, there shall be no insurance if the application of the Lot
Purchaser is not approved by the Company.

Appeals, we reiterated the above ruling, stating that:

When the terms of insurance contract contain limitations
on liability, courts should construe them in such a way as to
preclude the insurer from non-compliance with his obligation.
Being a contract of adhesion, the terms of an insurance contract
are to be construed strictly against the party which prepared the
contract, the insurer. By reason of the exclusive control of the
insurance company over the terms and phraseology of the
insurance contract, ambiguity must be strictly interpreted against
the insurer and liberally in favor of the insured, especially to avoid
forfeiture.[20]

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P1920 dated December 10, 1980, must be construed in favor of the insured and in

An examination of the above provision would show ambiguity between its

favor of the effectivity of the insurance contract.

two sentences. The first sentence appears to state that the insurance coverage of
the clients of Eternal already became effective upon contracting a loan with Eternal

On the other hand, the seemingly conflicting provisions must be

harmonized to mean that upon a partys purchase of a memorial lot on installment

15

from Eternal, an insurance contract covering the lot purchaser is created and the

(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP

same is effective, valid, and binding until terminated by Philamlife by disapproving

100,000 from the time of extra-judicial demand by Eternal until Philamlifes receipt of

the insurance application. The second sentence of Creditor Group Life Policy No. P-

the May 29, 1996 RTC Decision on June 17, 1996;

1920 on the Effective Date of Benefit is in the nature of a resolutory condition which

(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of

would lead to the cessation of the insurance contract. Moreover, the mere inaction

PhP 100,000 from June 17, 1996 until full payment of this award; and

of the insurer on the insurance application must not work to prejudice the insured; it

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

cannot be interpreted as a termination of the insurance contract. The termination of

the insurance contract by the insurer must be explicit and unambiguous.

As a final note, to characterize the insurer and the insured as contracting

parties on equal footing is inaccurate at best. Insurance contracts are wholly

No costs.

SO ORDERED.
G.R. No. 91666 July 20, 1990

prepared by the insurer with vast amounts of experience in the industry purposefully
used to its advantage. More often than not, insurance contracts are contracts of
adhesion containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of

WESTERN GUARANTY CORPORATION, petitioner,

vs.
HONORABLE COURT OF APPEALS, PRISCILLA E. RODRIGUEZ, and DE DIOS
TRANSPORTATION CO., INC.,respondents.
Narciso E. Ramirez for petitioner.

insurance. As such, insurance contracts are imbued with public interest that must be
considered whenever the rights and obligations of the insurer and the insured are to

Alejandro Z. Barin and Carlos C. Fernando for private respondent.

be delineated. Hence, in order to protect the interest of insurance applicants,

insurance companies must be obligated to act with haste upon insurance

FELICIANO, J.:

applications, to either deny or approve the same, or otherwise be bound to honor

the application as a valid, binding, and effective insurance contract. [21]

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CAG.R. CV No. 57810 is REVERSED and SET ASIDE. The May 29, 1996 Decision of the
Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:

(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;

At around 4:30 in the afternoon of 27 March 1982, while crossing Airport Road on a
pedestrian lane on her way to work, respondent Priscilla E. Rodriguez was struck by
a De Dios passenger bus owned by respondent De Dios Transportation Co., Inc., then
driven by one Walter Saga y Aspero The bus driver disregarded the stop signal given
by a traffic policeman to allow pedestrians to cross the road. Priscilla was thrown to
the ground, hitting her forehead. She was treated at the Protacio Emergency
Hospital and later on hospitalized at the San Juan De Dios Hospital. Her face was
permanently disfigured, causing her serious anxiety and moral distress. Respondent
bus company was insured with petitioner Western Guaranty Corporation ("Western")
under its Master Policy which provided, among other things, for protection against
third party liability, the relevant section reading as follows:
Section 1. Liability to the Public Company will, subject to the
Limits of Liability, pay all sums necessary to discharge liability of
the insured in respect of
(a) death of or bodily injury to or damage to property of any
passenger as defined herein.

16

(b) death of or bodily injury or damage to property of any THIRD

PARTY as defined herein in any accident caused by or arising out of
the use of the Schedule Vehicle, provided that the liability shall
have first been determined. In no case, however, shall the
Company's total payment under both Section I and Section 11
combined exceed the Limits of Liability set forth herein. With
respect to death of or bodily injury to any third party or passenger,
the company's payment per victim in any one accident shall not
exceed the limits indicated in the Schedule of indemnities
provided for in this policy excluding the cost of additional
medicines, and such other burial and funeral expenses that might
have been incurred. (Emphasis supplied)
Respondent Priscilla Rodriguez filed a complaint for damages before the Regional
Trial Court of Makati against De Dios Transportation Co. and Walter A. Saga
Respondent De Dios Transportation Co., in turn, filed a third-party complaint against
its insurance carrier, petitioner Western. On 6 August 1985, the trial court rendered
a decision in favor of respondent Priscilla E. Rodriguez, the dispositive portion of
which read:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and
against the defendants, ordering the latter to pay the former,
jointly and severally, and for the third-party defendant to pay to
the plaintiff, by way of contribution, indemnity or subrogation
whatever amount may be left unpaid by the defendant De Dios
Transportation Company, Inc. to the extent of not more than
P50,000.00, as follows:
a) The sum of P2,776.00 as actual damages representing doctor's
fees, hospitalization and medicines;
b) the sum of P1,500.00 by way of compensation for loss of
earning during plaintiffs incapacity to work;

Deliberating on the instant Petition for Review, we consider that petitioner Western
has failed to show any reversible error on the part of the Court of Appeals in
rendering its Decision dated 26 April 1989 and its Resolution dated 10 January 1990.
An examination of Section 1 entitled "Liability to the Public", quoted above, of the
Master Policy issued by petitioner Western shows that that Section defines the scope
of the liability of insurer Western as well as the events which generate such liability.
The scope of liability of Western is marked out in comprehensive terms: "all sums
necessary to discharge liability of the insured in respect of [the precipitating events]
" The precipitating events which generate liability on the part of the insurer, either
in favor of a passenger or a third party, are specified in the following terms: (1)
death of, or (2) bodily injury to, or (3) damage to property of, the passenger or the
third party. Where no death, no bodily injury and no damage to property resulted
from the casualty ("any accident caused by or arising out of the use of the Schedule
Vehicle"), no liability is created so far as concerns the insurer, petitioner Western.
The "Schedule of Indemnities for Death and/or Bodily Injury" attached to the Master
Policy, which petitioner Western invokes, needs to be quoted in full:
Schedule of Indemnities for Death and/or Bodily Injury:
The following schedule of indemnities should be observed in the settlement of
claims for death, bodily injuries of, professional fees and hospital charges, for
services rendered to traffic accident victims under CMVLI coverage:

DEATH INDEMNITY

P12,000.
00

PERMANENT
DISABLEMENT

c) the sum of P10,000.00 as and by way of moral damages ;

d) the sum of P10,000.00 as and by way of attorney's fees ;and

DESCRIPTION OF
DISABLEMENT

Amount

Loss of two limbs

P6,000.0
0

e) the cost of suit.

On appeal, the Court of Appeals affirmed in toto the decision of the trial court.
Petitioner moved for the reconsideration of the appellate court's decision. In a
Resolution dated 10 January 1990, the Court of Appeals denied the motion for
reconsideration petition for lack of merit.
Petitioner Western is now before us on a Petition for Review alleging that the Court
of Appeals erred in holding petitioner liable to pay beyond the limits set forth in the
Schedule of Indemnities and in finding Western liable for loss of earnings, moral
damages and attorney's fees. Succinctly stated, it is petitioner Western's position
that it cannot be held liable for loss of earnings, moral damages and attorney's fees
because these items are not among those included in the Schedule of Indemnities
set forth in the insurance policy.

Loss of both hands, or

all fingers and

17

both thumbs

6,000.00

Loss of both feet

6,000.00

Loss of one hand and

one foot

6,000.00

Loss of sight of both

eyes

P2,550.0
0

Loss of four fingers

and thumb of one
hand

2,550.00

Loss of four fingers

2,100.00

Loss of leg at or
above knee

3,600.00

Loss of leg below

knee

2,400.00

Loss of one foot

2,400.00

Loss of toes-all of one

foot

900.00

Loss of thumb

900.00

Loss of index finger

600.00

6,000.00

Injuries resulting in
being permanently

bedridden

Loss of hand

6,000.00

Any other injury

causing permanent

total disablement

6,000.00

Loss of arm or above

elbow

4,200.00

Loss of arm between

elbow and wrist

3,000.00

18

Loss of sight of one

eye

1,800.00

Loss of hearing both

ears

3,000.00

Loss of hearing-one
ear

450.00

SURGICAL

Major
Operatio
n

1,000.0
0

EXPENSES

Medium
Operatio
n

500.00

Minor
Operatio
n

100.00

Total of Accommodation of Professional Attendance

Extended

Services
Rendered

Fees or
Charges

HOSPITAL ROOM

Maximu
m of 45
days/yea
r-

P
36.00/d
ay

ANAESTHESIOLO
GIST

Major
Operatio
n 300.00

LOGISTS' FEES

Medium
Operatio
n 150.00

Minor
Operatio
n 50.00

Laborato
ry fees,
drugs

x-rays,
etc.
300.0 0

OPERATING

Major
Operatio
n

150.00

ROOM

Medium
Operatio
n

100.00

19

Minor
Operatio
n

40.00

MEDICAL

For daily
visits of

EXPENSES

Practition
er or

20.00

Specialist

/day

Total amount
of medical

P6,000.
00;

loss of one
foot

P2,400.
00;

loss of
sight of
one eye

P1,800.
00;

It must be stressed, however, that the Schedule of Indemnities does not purport to
limit, or to enumerate exhaustively, the species of bodily injury occurrence of which
generate liability for petitioner Western. A car accident may, for instance, result
in injury to internal organs of a passenger or third party, without any accompanying
amputation or loss of an external member (e.g., a foot or an arm or an eye). But
such internal injuries are surely covered by Section I of the Master Policy, since they
certainly constitute bodily injuries.
Petitioner Western in effect contends before this Court, as it did before the Court of
Appeals, that because the Schedule of Indemnities limits the amount payable for
certain kinds of expenses "hospital room", "surgical expenses",
"anaesthesiologists' fee", "operating room" and "medical expenses" that Schedule
should be read as excluding liability for any other type of expense or damage or loss
even though actually sustained or incurred by the third party victim. We are not
persuaded by Western's contention.

expenses
must not
exceed

(for single
period of

confinement
)

loss of
both feet

400.0
01

It will be seen that the above quoted Schedule of Indemnities establishes monetary
limits which Western may invoke in case of occurrence of the particular kinds of
physical injury there listed, e.g.:

Firstly, the Schedule of Indemnities does not purport to restrict the kinds of damages
that may be awarded against Western once liability has arisen. Section 1, quoted
above, does refer to certain "Limits of Liability" which in the case of the third party
liability section of the Master Policy, is apparently P50,000.00 per person per
accident. Within this over-all quantitative limit, all kinds of damages allowable by
law" actual or compensatory damages"; "moral damages'; "nominal damages";
"temperate or moderate damages"; "liquidated damages"; and "exemplary
damages" 2 may be awarded by a competent court against the insurer once
liability is shown to have arisen, and the essential requisites or conditions for grant
of each species of damages are present. It appears to us self-evident that the
Schedule of Indemnities was not intended to be an enumeration, much less a closed
enumeration, of the specific kinds of damages which may be awarded under the
Master Policy Western has issued. Accordingly, we agree with the Court of Appeals
that:
... we cannot agree with the movant that the schedule was meant
to be an exclusive enumeration of the nature of the damages for
which it would be liable under its policy. As we see it, the schedule
was merely meant to set limits to the amounts the movant would

20

be liable for in cases of claims for death, bodily injuries of,

professional services and hospital charges, for services rendered
to traffic accident victims,' and not necessarily exclude claims
against the insurance policy for other kinds of damages, such as
those in question.
Secondly, the reading urged by Western of the Schedule of Indemnities comes too
close to working fraud upon both the insured and the third party beneficiary of
Section 1, quoted above. For Western's reading would drastically and without
warning limit the otherwise unlimited (save for the over-all quantitative limit of
liability of P50,000.00 per person per accident) and comprehensive scope of liability
assumed by the insurer Western under Section 1: "all sums necessary to discharge
liability of the insured in respect of [bodily injury to a third party]". This result- which
is not essentially different from taking away with the left hand what had been given
with the right hand we must avoid as obviously repugnant to public policy. If what
Western now urges is what Western intended to achieve by its Schedule of
Indemnities, it was incumbent upon Western to use language far more specific and
precise than that used in fact by Western, so that the insured, and potential
purchasers of its Master Policy, and the Office of the Insurance Commissioner, may
be properly informed and act accordingly.
Petitioner Western would have us construe the Schedule of Indemnities as
comprising contractual limitations of liability which, as already noted, is
comprehensively defined in Section 1 Liability to the Public" of the Master
Policy. It is wellsettled, however, that contractual limitations of liability found in
insurance contracts should be regarded by courts with a jaundiced eye and extreme
care and should be so construed as to preclude the insurer from evading compliance
with its just obligations. 3
Finally, an insurance contract is a contract of adhesion. The rule is well entrenched
in our jurisprudence that the terms of such contract are to be construed strictly
against the party which prepared the contract, which in this case happens to be
petitioner Western. 4
ACCORDINGLY, the Court Resolved to DENY the Petition for Review for lack of merit
Costs against petitioner.
G.R. No. L-4611

December 17, 1955

QUA CHEE GAN, plaintiff-appellee,

vs.
LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent,
WARNER, BARNES AND CO., LTD., defendant-appellant.
Delgado, Flores & Macapagal for appellant.
Andres Aguilar, Zacarias Gutierrez Lora, Gregorio Sabater and Perkins, Ponce Enrile
& Contreras for appellee.

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of
First Instance of said province, seeking to recover the proceeds of certain fire
insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co.,
Ltd., upon certain bodegas and merchandise of the insured that were burned on June
21, 1940. The records of the original case were destroyed during the liberation of
the region, and were reconstituted in 1946. After a trial that lasted several years, the
Court of First Instance rendered a decision in favor of the plaintiff, the dispositive
part whereof reads as follows:
Wherefore, judgment is rendered for the plaintiff and against the defendant
condemning the latter to pay the former
(a) Under the first cause of action, the sum of P146,394.48;
(b) Under the second cause of action, the sum of P150,000;
(c) Under the third cause of action, the sum of P5,000;
(d) Under the fourth cause of action, the sum of P15,000; and
(e) Under the fifth cause of action, the sum of P40,000;
all of which shall bear interest at the rate of 8% per annum in accordance with
Section 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with
costs against the defendant.
The complaint in intervention of the Philippine National Bank is dismissed without
costs. (Record on Appeal, 166-167.)
From the decision, the defendant Insurance Company appealed directly to this Court.
The record shows that before the last war, plaintiff-appellee owned four warehouses
or bodegas (designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay,
used for the storage of stocks of copra and of hemp, baled and loose, in which the
appellee dealth extensively. They had been, with their contents, insured with the
defendant Company since 1937, and the lose made payable to the Philippine
National Bank as mortgage of the hemp and crops, to the extent of its interest. On
June, 1940, the insurance stood as follows:
Policy No.

Property Insured

2637164 (Exhibit "LL")

Bodega No. 1 (Building)

Bodega No. 2 (Building)

2637165 (Exhibit "JJ")

Bodega No. 3 (Building)

Bodega No. 4 (Building)
Hemp Press moved by steam engine

REYES, J. B. L., J.:

2637345 (Exhibit "X")

Merchandise contents (copra and empty sacks of Bodega N

21

2637346 (Exhibit "Y")

Merchandise contents (hemp) of Bodega No. 3

2637067 (Exhibit "GG")

Merchandise contents (loose hemp) of Bodega No. 4

Total
Fire of undetermined origin that broke out in the early morning of July 21, 1940, and
lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4,
with the merchandise stored theren. Plaintiff-appellee informed the insurer by
telegram on the same date; and on the next day, the fire adjusters engaged by
appellant insurance company arrived and proceeded to examine and photograph the
premises, pored over the books of the insured and conducted an extensive
investigation. The plaintiff having submitted the corresponding fire claims, totalling
P398,562.81 (but reduced to the full amount of the insurance, P370,000), the
Insurance Company resisted payment, claiming violation of warranties and
conditions, filing of fraudulent claims, and that the fire had been deliberately caused
by the insured or by other persons in connivance with him.
With counsel for the insurance company acting as private prosecutor, Que Chee
Gan, with his brother, Qua Chee Pao, and some employees of his, were indicted and
tried in 1940 for the crime of arson, it being claimed that they had set fire to the
destroyed warehouses to collect the insurance. They were, however, acquitted by
the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil
suit to collect the insurance money proceeded to its trial and termination in the
Court below, with the result noted at the start of this opinion. The Philippine National
Bank's complaint in intervention was dismissed because the appellee had managed
to pay his indebtedness to the Bank during the pendecy of the suit, and despite the
fire losses.
In its first assignment of error, the insurance company alleges that the trial Court
should have held that the policies were avoided for breach of warranty, specifically
the one appearing on a rider pasted (with other similar riders) on the face of the
policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in
1939, and the pertinent portions read as follows:
Memo. of Warranty. The undernoted Appliances for the extinction of fire
being kept on the premises insured hereby, and it being declared and
understood that there is an ample and constant water supply with sufficient
pressure available at all seasons for the same, it is hereby warranted that
the said appliances shall be maintained in efficient working order during the
currency of this policy, by reason whereof a discount of 2 1/2 per cent is
allowed on the premium chargeable under this policy.
Hydrants in the compound, not less in number than one for each 150 feet
of external wall measurement of building, protected, with not less than 100
feet of hose piping and nozzles for every two hydrants kept under cover in
convenient places, the hydrants being supplied with water pressure by a
pumping engine, or from some other source, capable of discharging at the
rate of not less than 200 gallons of water per minute into the upper story of
the highest building protected, and a trained brigade of not less than 20
men to work the same.'

It is argued that since the bodegas insured had an external wall perimeter of 500
meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the
compound, and that he actually had only two (2), with a further pair nearby,
belonging to the municipality of Tabaco.
We are in agreement with the trial Court that the appellant is barred by waiver (or
rather estoppel) to claim violation of the so-called fire hydrants warranty, for the
reason that knowing fully all that the number of hydrants demanded therein never
existed from the very beginning, the appellant neverthless issued the policies in
question subject to such warranty, and received the corresponding premiums. It
would be perilously close to conniving at fraud upon the insured to allow appellant to
claims now as void ab initio the policies that it had issued to the plaintiff without
warning of their fatal defect, of which it was informed, and after it had misled the
defendant into believing that the policies were effective.
The insurance company was aware, even before the policies were issued, that in the
premises insured there were only two fire hydrants installed by Qua Chee Gan and
two others nearby, owned by the municipality of TAbaco, contrary to the
requirements of the warranty in question. Such fact appears from positive testimony
for the insured that appellant's agents inspected the premises; and the simple
denials of appellant's representative (Jamiczon) can not overcome that proof. That
such inspection was made is moreover rendered probable by its being a prerequisite
for the fixing of the discount on the premium to which the insured was entitled,
since the discount depended on the number of hydrants, and the fire fighting
equipment available (See "Scale of Allowances" to which the policies were expressly
made subject). The law, supported by a long line of cases, is expressed by American
Jurisprudence (Vol. 29, pp. 611-612) to be as follows:
It is usually held that where the insurer, at the time of the issuance of a
policy of insurance, has knowledge of existing facts which, if insisted on,
would invalidate the contract from its very inception, such knowledge
constitutes a waiver of conditions in the contract inconsistent with the
facts, and the insurer is stopped thereafter from asserting the breach of
such conditions. The law is charitable enough to assume, in the absence of
any showing to the contrary, that an insurance company intends to
executed a valid contract in return for the premium received; and when the
policy contains a condition which renders it voidable at its inception, and
this result is known to the insurer, it will be presumed to have intended to
waive the conditions and to execute a binding contract, rather than to have
deceived the insured into thinking he is insured when in fact he is not, and
to have taken his money without consideration. (29 Am. Jur., Insurance,
section 807, at pp. 611-612.)
The reason for the rule is not difficult to find.
The plain, human justice of this doctrine is perfectly apparent. To allow a
company to accept one's money for a policy of insurance which it then
knows to be void and of no effect, though it knows as it must, that the
assured believes it to be valid and binding, is so contrary to the dictates of
honesty and fair dealing, and so closely related to positive fraud, as to the
abhorent to fairminded men. It would be to allow the company to treat the
policy as valid long enough to get the preium on it, and leave it at liberty to
repudiate it the next moment. This cannot be deemed to be the real
intention of the parties. To hold that a literal construction of the policy
expressed the true intention of the company would be to indict it, for

22

fraudulent purposes and designs which we cannot believe it to be guilty of

(Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544).
The inequitableness of the conduct observed by the insurance company in this case
is heightened by the fact that after the insured had incurred the expense of
installing the two hydrants, the company collected the premiums and issued him a
policy so worded that it gave the insured a discount much smaller than that he was
normaly entitledto. According to the "Scale of Allowances," a policy subject to a
warranty of the existence of one fire hydrant for every 150 feet of external wall
entitled the insured to a discount of 7 1/2 per cent of the premium; while the
existence of "hydrants, in compund" (regardless of number) reduced the allowance
on the premium to a mere 2 1/2 per cent. This schedule was logical, since a greater
number of hydrants and fire fighting appliances reduced the risk of loss. But the
appellant company, in the particular case now before us, so worded the policies that
while exacting the greater number of fire hydrants and appliances, it kept the
premium discount at the minimum of 2 1/2 per cent, thereby giving the insurance
company a double benefit. No reason is shown why appellant's premises, that had
been insured with appellant for several years past, suddenly should be regarded in
1939 as so hazardous as to be accorded a treatment beyond the limits of appellant's
own scale of allowances. Such abnormal treatment of the insured strongly points at
an abuse of the insurance company's selection of the words and terms of the
contract, over which it had absolute control.
These considerations lead us to regard the parol evidence rule, invoked by the
appellant as not applicable to the present case. It is not a question here whether or
not the parties may vary a written contract by oral evidence; but whether testimony
is receivable so that a party may be, by reason of inequitable conduct shown,
estopped from enforcing forfeitures in its favor, in order to forestall fraud or
imposition on the insured.
Receipt of Premiums or Assessments afte Cause for Forfeiture Other than
Nonpayment. It is a well settled rule of law that an insurer which with
knowledge of facts entitling it to treat a policy as no longer in force,
receives and accepts a preium on the policy, estopped to take advantage of
the forfeiture. It cannot treat the policy as void for the purpose of defense
to an action to recover for a loss thereafter occurring and at the same time
treat it as valid for the purpose of earning and collecting further premiums."
(29 Am. Jur., 653, p. 657.)
It would be unconscionable to permit a company to issue a policy under
circumstances which it knew rendered the policy void and then to accept
and retain premiums under such a void policy. Neither law nor good morals
would justify such conduct and the doctrine of equitable estoppel is
peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa.
Super Ct. 457.)
Moreover, taking into account the well known rule that ambiguities or obscurities
must be strictly interpreted aganst the prty that caused them, 1the "memo of
warranty" invoked by appellant bars the latter from questioning the existence of the
appliances called for in the insured premises, since its initial expression, "the
undernoted appliances for the extinction of fire being kept on the premises insured
hereby, . . . it is hereby warranted . . .", admists of interpretation as an admission of
the existence of such appliances which appellant cannot now contradict, should the
parol evidence rule apply.

The alleged violation of the warranty of 100 feet of fire hose for every two hydrants,
must be equally rejected, since the appellant's argument thereon is based on the
assumption that the insured was bound to maintain no less than eleven hydrants
(one per 150 feet of wall), which requirement appellant is estopped from enforcing.
The supposed breach of the wter pressure condition is made to rest on the
testimony of witness Serra, that the water supply could fill a 5-gallon can in 3
seconds; appellant thereupon inferring that the maximum quantity obtainable from
the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a
minute. The transcript shows, however, that Serra repeatedly refused and professed
inability to estimate the rate of discharge of the water, and only gave the "5-gallon
per 3-second" rate because the insistence of appellant's counsel forced the witness
to hazard a guess. Obviously, the testimony is worthless and insufficient to establish
the violation claimed, specially since the burden of its proof lay on appellant.
As to maintenance of a trained fire brigade of 20 men, the record is preponderant
that the same was organized, and drilled, from time to give, altho not maintained as
a permanently separate unit, which the warranty did not require. Anyway, it would
be unreasonable to expect the insured to maintain for his compound alone a fire
fighting force that many municipalities in the Islands do not even possess. There is
no merit in appellant's claim that subordinate membership of the business manager
(Co Cuan) in the fire brigade, while its direction was entrusted to a minor employee
unders the testimony improbable. A business manager is not necessarily adept at
fire fighting, the qualities required being different for both activities.
Under the second assignment of error, appellant insurance company avers, that the
insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ),
against the storage of gasoline, since appellee admitted that there were 36 cans
(latas) of gasoline in the building designed as "Bodega No. 2" that was a separate
structure not affected by the fire. It is well to note that gasoline is not specifically
mentioned among the prohibited articles listed in the so-called "hemp warranty."
The cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or
mineral and/or their liquid products having a flash point below 300o Fahrenheit", and
is decidedly ambiguous and uncertain; for in ordinary parlance, "Oils" mean
"lubricants" and not gasoline or kerosene. And how many insured, it may well be
wondered, are in a position to understand or determine "flash point below 003o
Fahrenheit. Here, again, by reason of the exclusive control of the insurance company
over the terms and phraseology of the contract, the ambiguity must be held strictly
against the insurer and liberraly in favor of the insured, specially to avoid a forfeiture
(44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180).
Insurance is, in its nature, complex and difficult for the layman to
understand. Policies are prepared by experts who know and can anticipate
the hearing and possible complications of every contingency. So long as
insurance companies insist upon the use of ambiguous, intricate and
technical provisions, which conceal rather than frankly disclose, their own
intentions, the courts must, in fairness to those who purchase insurance,
construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L.
Ins. Co., 91 Wash. 324, LRA 1917A, 1237.)
An insurer should not be allowed, by the use of obscure phrases and
exceptions, to defeat the very purpose for which the policy was procured
(Moore vs. Aetna Life Insurance Co., LRA 1915D, 264).
We see no reason why the prohibition of keeping gasoline in the premises could not
be expressed clearly and unmistakably, in the language and terms that the general

23

public can readily understand, without resort to obscure esoteric expression (now
derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs.
British American Assurance Co. (17 Phil. 555, 561):
If the company intended to rely upon a condition of that character, it ought
to have been plainly expressed in the policy.
This rigid application of the rule on ambiguities has become necessary in view of
current business practices. The courts cannot ignore that nowadays monopolies,
cartels and concentrations of capital, endowed with overwhelming economic power,
manage to impose upon parties dealing with them cunningly prepared "agreements"
that the weaker party may not change one whit, his participation in the "agreement"
being reduced to the alternative to take it or leave it" labelled since Raymond
Baloilles" contracts by adherence" (con tracts d'adhesion), in contrast to these
entered into by parties bargaining on an equal footing, such contracts (of which
policies of insurance and international bills of lading are prime examples) obviously
call for greater strictness and vigilance on the part of courts of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their
becoming traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme Court
of Spain, 13 Dec. 1934, 27 February 1942).
Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia
alguna oscuridad, habra de ser tenido en cuenta que al seguro es,
practicamente un contrato de los llamados de adhesion y por consiguiente
en caso de duda sobre la significacion de las clausulas generales de una
poliza redactada por las compafijas sin la intervencion alguna de sus
clientes se ha de adoptar de acuerdo con el articulo 1268 del Codigo
Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es
imputable a la empresa aseguradora, que debia haberse explicado mas
claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934)
The contract of insurance is one of perfect good faith (uferrimal fidei) not for the
insured alone, but equally so for the insurer; in fact, it is mere so for the latter, since
its dominant bargaining position carries with it stricter responsibility.
Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2
was only incidental to his business, being no more than a customary 2 day's supply
for the five or six motor vehicles used for transporting of the stored merchandise (t.
s. n., pp. 1447-1448). "It is well settled that the keeping of inflammable oils on the
premises though prohibited by the policy does not void it if such keeping is
incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555,
560); and "according to the weight of authority, even though there are printed
prohibitions against keeping certain articles on the insured premises the policy will
not be avoided by a violation of these prohibitions, if the prohibited articles are
necessary or in customary use in carrying on the trade or business conducted on the
premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should
also be noted that the "Hemp Warranty" forbade storage only "in the building to
which this insurance applies and/or in any building communicating therewith", and it
is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega
No. 2" which was not burned and where the gasoline was found, stood isolated from
the other insured bodegas.
The charge that the insured failed or refused to submit to the examiners of the
insurer the books, vouchers, etc. demanded by them was found unsubstantiated by

the trial Court, and no reason has been shown to alter this finding. The insured gave
the insurance examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and
the examiner even kept and photographed some of the examined books in his
possession. What does appear to have been rejected by the insured was the
demand that he should submit "a list of all books, vouchers, receipts and other
records" (Age 4, Exhibit 9-c); but the refusal of the insured in this instance was well
justified, since the demand for a list of all the vouchers (which were not in use by
the insured) and receipts was positively unreasonable, considering that such listing
was superfluous because the insurer was not denied access to the records, that the
volume of Qua Chee Gan's business ran into millions, and that the demand was
made just after the fire when everything was in turmoil. That the representatives of
the insurance company were able to secure all the date they needed is proved by
the fact that the adjuster Alexander Stewart was able to prepare his own balance
sheet (Exhibit L of the criminal case) that did not differ from that submitted by the
insured (Exhibit J) except for the valuation of the merchandise, as expressly found by
the Court in the criminal case for arson. (Decision, Exhibit WW).
How valuations may differ honestly, without fraud being involved, was strikingly
illustrated in the decision of the arson case (Exhibit WW) acquiting Qua Choc Gan,
appellee in the present proceedings. The decision states (Exhibit WW, p. 11):
Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan
en Tabaco asi como su existencia de copra y abaca en las bodega al tiempo
del incendio durante el periodo comprendido desde el 1.o de enero al 21 de
junio de 1940 y ha encontrado que Qua Choc Gan ha sufrico una perdida de
P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este
conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que
le ha entregado el mismo acusado Que Choc Gan en relacion con sus libros
y lo ha encontrado correcto a excepcion de los precios de abaca y copra
que alli aparecen que no estan de acuerdo con los precios en el mercado.
Esta comprobacion aparece en el balance mercado exhibit J que fue
preparado por el mismo testigo.
In view of the discrepancy in the valuations between the insured and the adjuster
Stewart for the insurer, the Court referred the controversy to a government auditor,
Apolonio Ramos; but the latter reached a different result from the other two. Not
only that, but Ramos reported two different valuations that could be reached
according to the methods employed (Exhibit WW, p. 35):
La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos
buenos para promovar el comercio y la finanza, pero en el caso presente ha
resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado
del examen hecho por los contadores Stewart y Ramos, pues el juzgado no
alcanza a ver como habiendo examinado las mismas partidas y los mismos
libros dichos contadores hayan de llegara dos conclusiones que difieron
sustancialmente entre si. En otras palabras, no solamente la comprobacion
hecha por Stewart difiere de la comprobacion hecha por Ramos sino que,
segun este ultimo, su comprobacion ha dado lugar a dos resultados
diferentes dependiendo del metodo que se emplea.
Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained.
The insurer attempted to bolster its case with alleged photographs of certain pages
of the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26A and 26-B) and allegedly showing abnormal purchases of hemp and copra from
June 11 to June 20, 1940. The Court below remained unconvinced of the authenticity

24

of those photographs, and rejected them, because they were not mentioned not
introduced in the criminal case; and considering the evident importance of said
exhibits in establishing the motive of the insured in committing the arson charged,
and the absence of adequate explanation for their omission in the criminal case, we
cannot say that their rejection in the civil case constituted reversible error.
The next two defenses pleaded by the insurer, that the insured connived at the
loss and that the fraudulently inflated the quantity of the insured stock in the burnt
bodegas, are closely related to each other. Both defenses are predicted on the
assumption that the insured was in financial difficulties and set the fire to defraud
the insurance company, presumably in order to pay off the Philippine National Bank,
to which most of the insured hemp and copra was pledged. Both defenses are fatally
undermined by the established fact that, notwithstanding the insurer's refusal to pay
the value of the policies the extensive resources of the insured (Exhibit WW) enabled
him to pay off the National Bank in a short time; and if he was able to do so, no
motive appears for attempt to defraud the insurer. While the acquittal of the insured
in the arson case is not res judicata on the present civil action, the insurer's
evidence, to judge from the decision in the criminal case, is practically identical in
both cases and must lead to the same result, since the proof to establish the
defense of connivance at the fire in order to defraud the insurer "cannot be
materially less convincing than that required in order to convict the insured of the
crime of arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536).
As to the defense that the burned bodegas could not possibly have contained the
quantities of copra and hemp stated in the fire claims, the insurer's case rests
almost exclusively on the estimates, inferences and conclusionsAs to the defense
that the burned bodegas could not possibly have contained the quantities of copra
and hemp stated in the fire claims, the insurer's case rests almost exclusively on the
estimates, inferences and conclusions of its adjuster investigator, Alexander D.
Stewart, who examined the premises during and after the fire. His testimony,
however, was based on inferences from the photographs and traces found after the
fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and
specially of the then Chief of the Loan Department of the National Bank's Legaspi
branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who actually saw the
contents of the bodegas shortly before the fire, while inspecting them for the
mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these
witnesses, and the appellant insurer has failed to substantiate its charges aganst
their character. In fact, the insurer's repeated accusations that these witnesses were
later "suspended for fraudulent transactions" without giving any details, is a plain
attempt to create prejudice against them, without the least support in fact.
Stewart himself, in testifying that it is impossible to determine from the remains the
quantity of hemp burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on
the refusal of the Court below to accept its inferences from the remains shown in the
photographs of the burned premises. It appears, likewise, that the adjuster's
calculations of the maximum contents of the destroyed warehouses rested on the
assumption that all the copra and hemp were in sacks, and on the result of his
experiments to determine the space occupied by definite amounts of sacked copra.
The error in the estimates thus arrived at proceeds from the fact that a large amount
of the insured's stock were in loose form, occupying less space than when kept in
sacks; and from Stewart's obvious failure to give due allowance for the compression
of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight
of the overlying stock, as shown by engineer Bolinas. It is probable that the errors
were due to inexperience (Stewart himself admitted that this was the first copra fire
he had investigated); but it is clear that such errors render valueles Stewart's
computations. These were in fact twice passed upon and twice rejected by different

judges (in the criminal and civil cases) and their concordant opinion is practically
conclusive.
The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court
below, since the opinions stated therein were based on ex parte investigations made
at the back of the insured; and the appellant did not present at the trial the original
testimony and documents from which the conclusions in the report were
drawn.lawphi1.net
Appellant insurance company also contends that the claims filed by the insured
contained false and fraudulent statements that avoided the insurance policy. But the
trial Court found that the discrepancies were a result of the insured's erroneous
interpretation of the provisions of the insurance policies and claim forms, caused by
his imperfect knowledge of English, and that the misstatements were innocently
made and without intent to defraud. Our review of the lengthy record fails to
disclose reasons for rejecting these conclusions of the Court below. For example, the
occurrence of previous fires in the premises insured in 1939, altho omitted in the
claims, Exhibits EE and FF, were nevertheless revealed by the insured in his claims
Exhibits Q (filed simultaneously with them), KK and WW. Considering that all these
claims were submitted to the smae agent, and that this same agent had paid the
loss caused by the 1939 fire, we find no error in the trial Court's acceptance of the
insured's explanation that the omission in Exhibits EE and FF was due to
inadvertance, for the insured could hardly expect under such circumstances, that
the 1939 would pass unnoticed by the insurance agents. Similarly, the 20 per cent
overclaim on 70 per cent of the hemo stock, was explained by the insured as caused
by his belief that he was entitled to include in the claim his expected profit on the 70
per cent of the hemp, because the same was already contracted for and sold to
other parties before the fire occurred. Compared with other cases of over-valuation
recorded in our judicial annals, the 20 per cent excess in the case of the insured is
not by itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British
Ins. Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger than
the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times
(800 per cent); in Tuason vs. North China Ins. Co., 47 Phil. 14, six (6) times (600 per
cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while
the goods insured were inventoried at O13,113. Certainly, the insured's overclaim of
20 per cent in the case at bar, duly explained by him to the Court a quo, appears
puny by comparison, and can not be regarded as "more than misstatement, more
than inadvertence of mistake, more than a mere error in opinion, more than a slight
exaggeration" (Tan It vs. Sun Insurance Office, ante) that would entitle the insurer to
avoid the policy. It is well to note that the overchange of 20 per cent was claimed
only on a part (70 per cent) of the hemp stock; had the insured acted with
fraudulent intent, nothing prevented him from increasing the value of all of his
copra, hemp and buildings in the same proportion. This also applies to the alleged
fraudulent claim for burned empty sacks, that was likewise explained to our
satisfaction and that of the trial Court. The rule is that to avoid a policy, the false
swearing must be wilful and with intent to defraud (29 Am. Jur., pp. 849-851) which
was not the cause. Of course, the lack of fraudulent intent would not authorize the
collection of the expected profit under the terms of the polices, and the trial Court
correctly deducte the same from its award.
We find no reversible error in the judgment appealed from, wherefore the smae is
hereby affirmed. Costs against the appellant. So ordered.
G.R. No. 132607 May 5, 1999

25

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE
COMPANY, INC., respondents.

Petitioner CSEW was also insured by Prudential for third party liability under a
Shiprepairer's Legal Liability Insurance Policy. The policy was for P10 million only,
under the limited liability clause, to wit:
7. Limit of Liability

PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court seeking a reversal of the decision of the Court of Appeal 1 which affirmed the
decision of the trial court of origin finding the petitioner herein, Cebu Shipyard and
Engineering Works, Inc. (CSEW) negligent and liable for damages to the private
respondent, William Lines, Inc., and to the insurer, Prudential Guarantee Assurance
Company, Inc.
The antecedent facts that matter are as follows:
Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation
engaged in the business of dry-docking and repairing of marine vessels while the
private respondent, Prudential Guarantee and Assurance, Inc. (Prudential), also a
domestic corporation is in the non-life insurance business.
William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V
Manila City, a luxury passenger-cargo vessel, which caught fire and sank on
February 16, 1991. At the time of the unfortunate occurrence sued upon, subject
vessel was insured with Prudential for P45,000,000.00 pesos for hull and machinery.
The Hull Policy included an "Additional Perils (INCHMAREE)" Clause covering loss of
or damage to the vessel through the negligence of, among others, ship repairmen.
The Policy provided as follows:
Subject to the conditions of this Policy, this insurance also covers
loss of or damage to Vessel directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such
Charterers and/or Repairers are not an Assured hereunder.

The limit of liability under this insurance, in respect of any one

accident or series of accidents, arising out of one occurrence, shall
be [P10 million], including liability for costs and expense which are
either:
(a) incurred with the written consent of the underwriters hereon,
or
(b) awarded against the Assured. 3
On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the
Cebu Shipyard in Lapulapu City for annual dry-docking and repair.
On February 6, 1991, an arrival conference was held between representatives of
William Lines, Inc. and CSEW to discuss the work to be undertaken on the M/V Manila
City.
The contracts, denominated as Work Orders, were signed thereafter, with the
following stipulations:
10. The Contractor shall replace at its own work and at its own
cost any work or material which can be shown to be defective and
which is communicated in writing within one (1) month of
redelivery of the vessel or if the vessel was not in the Contractor's
Possession, the withdrawal of the Contractor's workmen, or at its
option to pay a sum equal to the cost of such replacement at its
own works. These conditions shall apply to any such replacements.
11. Save as provided in Clause 10, the Contractor shall not be
under any liability to the Customer either in contract or for delict
or quasi-delict or otherwise except for negligence and such liability
shall itself be subject to the following overriding limitations and
exceptions, namely:

xxx xxx xxx

provided such loss or damage has not resulted from want of due
diligence by the Assured, the Owners or Managers of the Vessel, of
any of them Masters, Officers, Crew or Pilots are not to be
considered Owners within the meaning of this Clause should they
hold shares in the Vessel. 2

(a) The total liability of the Contractor to the

Customer (over and above the liability to replace
under Clause 10) or of any sub-contractor shall
be limited in respect of any defect or event (and
a series of accidents arising out of the same
defect or event shall constitute one defect or

26

event) to the sum of Pesos Philippine Currency

One Million only.

representing loss of income of M/V MANILA CITY, with interest at

the legal rate until full payment is made.

(b) In no circumstance whatsoever shall the

liability of the Contractor or any Sub-Contractor
include any sum in respect of loss of profit or
loss of use of the vessel or damages
consequential on such loss of use

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven

Million (P11 million) as payment, in addition to what it received
from the insurance company to fully cover the injury or loss, in
order to replace the M/V MANILA CITY, with interest at the legal
rate until full payment is made;

xxx xxx xxx

20. The insurance on the vessel should be maintained by the
customer and/or owner of the vessel during the period the
contract is in effect. 4

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred
Twenty-Seven Thousand Thirty-nine (P927,039.00) Pesos for the
loss of fuel and lub (sic) oil on board the vessel when she was
completely gutted by fire at defendant, Cebu Shipyard's quay, with
interest at the legal rate until full payment is made;

While the M/V Manila City was undergoing dry-docking and repairs within the
premises of CSEW, the master, officers and crew of M/V Manila City stayed in the
vessel using their cabins as living quarters. Other employees hired by William Lines
to do repairs and maintenance work on the vessel were also present during the drydocking.

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million
Fifty-four Thousand Six Hundred Seventy-seven Pesos and Ninetyfive centavos (P3,054.677.95) as payment for the spare parts and
materials used in the M/V MANILA CITY during dry-docking with
interest at the legal rate until full payment is made;

On February 16, 1991, after subject vessel was transferred to the docking quay, it
caught fire and sank, resulting to its eventual total loss.

6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred
Thousand (P500,000 00) Pesos in moral damages;

On February 21, 1991, William Lines, Inc. filed a complaint for damages against
CSEW, alleging that the fire which broke out in M/V Manila City was caused by
CSEW's negligence and lack of care.

7. To pay unto plaintiff, William Lines, Inc. the amount of Ten

Million (P10,000.000.00) Pesos in attorney's fees; and to pay the
costs of this suit.

On July 15, 1991 was filed an Amended Complaint impleading Prudential as coplaintiff, after the latter had paid William Lines, Inc. the value of the hull and
machinery insurance on the M/V Manila City. As a result of such payment Prudential
was subrogated to the claim of P45 million, representing the value of the said
insurance it paid.
On June 10, 1994, the trial court a quo came out with a judgment against CSEW,
disposing as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs
and against the defendant, ordering the latter.
1. To pay unto plaintiff Prudential Guarantee and Assurance Inc.,
the subrogee, the amount of Forty-five Million (P45 million) Pesos,
with interest at the legal rate until full payment is made.
2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six
Million Seven Hundred Fifteen Thousand (P56,715,000.00) Pesos

CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals.
During the pendency of the appeal, CSEW and William Lines presented a "Joint
Motion for Partial Dismissal" with prejudice, on the basis of the amicable settlement
inked between Cebu Shipyard and William Lines only.
On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case
insofar as CSEW and William Lines were concerned.
On September 3, 1997, the Court of Appeals affirmed the appealed decision of the
trial court, ruling thus:
WHEREFORE, the judgment of the lower court ordering the
defendant, Cebu Shipyard and Engineering Works, Inc. to pay the
plaintiff Prudential Guarantee and Assurance, Inc., the subrogee,
the sum of P45 Million, with interest at the legal rate until full
payment is made, as contained in the decision of Civil Case No.
CEB-9935 is hereby AFFIRMED.

27

With the denial of its motion for reconsideration by the Court of Appeal's Resolution
dated February 13, 1998, CSEW found its way to this court via the present petition,
contending that:
I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
HOLDING THAT CSEW HAD "MANAGEMENT AND SUPERVISORY
CONTROL" OF THE M/V MANILA CITY AT THE TIME THE FIRE BROKE
OUT.
II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN
APPLYING THE DOCTRINE OFRES IPSA LOQUITUR AGAINST CSEW.
III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT
AND THEREBY LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS
BASED FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.
IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
RULING CSEW'S EXPERT EVIDENCE AS INADMISSIBLE OR OF NO
PROBATIVE VALUE.
V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN
RULING THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION
AGAINST ITS OWN INSURED.
VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF
SUBROGATION AND THAT CSEW WAS NEGLIGENT IN THE
PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR
CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING CSEW'S
LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P 1 MILLION IS NOT
VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS
HONORABLE COURT.

rig the steel plates, after which they had their lunch break. The
rigging was resumed at 1:00 p.m.
While in the process of rigging the second steel plate, the JNB
workers noticed smoke coming from the passageway along the
crew cabins. When one of the workers, Mr. Casas, proceeded to the
passageway to ascertain the origin of the smoke, he noticed that
smoke was gathering on the ceiling of the passageway but did not
see any fire as the crew cabins on either side of the passageway
were locked. He immediately sought out the proprietor of JNB, Mr.
Buenavista, and the Safety officer CSEW, Mr. Aves, who sounded
the fire alarm. CSEW's fire brigade immediately responded as well
as the other fire fighting units in Metro Cebu. However, there were
no WLI representative, officer or crew to guide the firemen inside
the vessel.
Despite the combined efforts of the firemen of the Lapulapu City
Fire Department, Mandaue Fire Cordova Fire Department,
Emergency Rescue Unit Foundation, and fire brigade of CSEW, the
fire was not controlled until 2:00 a.m., of the following day,
February 17, 1991.
On the early morning of February 17, 1991, gusty winds rekindled
the flames on the vessel and fire again broke out. Then the huge
amounts of water pumped into the vessel, coupled with the strong
current, caused the vessel to tilt until it capsized and sank.
When M/V Manila City capsized, steel and angle bars were noticed
to have been newly welded along the port side of the hull of the
vessel, at the level of the crew cabins. William Lines did not
previously apply for a permit to do hotworks on the said portion of
the ship as it should have done pursuant to its work order with
CSEW. 5

Petitioner's version of the events that led to the fire runs as follows:
On February 13, 1991, the CSEW completed the drydocking of M/V
Manila City at its grave dock. It was then transferred to the
docking quay of CSEW where the remaining repair to be done was
the replating of the top of Water Ballast Tank No. 12 (Tank Top No.
12) which was subcontracted by CSEW to JNB General Services.
Tank Top No. 12 was at the rear section of the vessel, on level with
the flooring of the crew cabins located on the vessel's second
deck.
At around seven o'clock in the morning of February 16, 1991, the
JNB workers trimmed and cleaned the tank framing which involved
minor hotworks (welding/cutting works). The said work was
completed at about 10:00 a.m. The JNB workers then proceeded to

Respondent Prudential, on the other hand, theorized that the fire broke out in the
following manner:
At around eleven o'clock in the morning of February 16, 1991, the
Chief Mate of M/V Manila City was inspecting the various works
being done by CSEW on the vessel, when he saw that some
workers of CSEW were cropping out steel plates Tank Top No. 12
using acetylene, oxygen and welding torch. He also observed that
the rubber insulation wire coming out of the air-conditioning unit
was already burning, prompting him to scold the workers.
At 2:45 in the afternoon of the same day, witnesses saw smoke
coming from Tank No. 12. The vessel's reeferman reported such
occurence to the Chief Mate who immediately assembled the crew

28

members to put out the fire. When it was too hot for them to stay
on board and seeing that the fire cannot be controlled, the vessel's
crew were forced to withdraw from CSEW's docking quay.
In the morning of February 17, 1991, M/V Manila City sank. As the
vessel was insured with Prudential Guarantee, William Lines filed a
claim for constructive loss, and after a thorough investigation of
the surrounding circumstances of the tragedy, Prudential
Guaranteed found the said insurance claim to be meritorious and
issued a check in favor of William Lines in the amount of P 45
million pesos representing the total value of M/V Manila City's hull
and machinery insurance. 6
The petition is unmeritorious.
Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for
damages for the respondents, William Lines, Inc., and Prudential for the loss of M/V
Manila City. It is petitioner's submission that the finding of negligence by the Court of
Appeals is not supported by the evidence on record, and contrary to what the Court
of Appeals found, petitioner did not have management and control over M/V Manila
City. Although it was brought to the premises of CSEW for annual repair, William
Lines, Inc. retained control over the vessel as the ship captain remained in command
and the ship's crew were still present. While it imposed certain rules and regulations
on William Lines, it was in the exercise of due diligence and not an indication of
CSEW's exclusive control over subject vessel. Thus, CSEW maintains that it did not
have exclusive control over the M/V Manila City and the trial court and the Court of
Appeals erred in applying the doctrine of res ipsa loquitur.
Time and again, this Court had occasion to reiterate the well-established rule that
factual findings by the Court of Appeals are conclusive on the parties and are not
reviewable by this Court. They are entitled to great weight and respect, even finality,
especially when, as in this case, the Court of Appeals affirmed the factual findings
arrived at by the trial court. 7 When supported by sufficient evidence, findings of fact
by the Court of Appeals affirming those of the trial court, are not to be disturbed on
appeal. The rationale behind this doctrine is that review of the findings of fact of the
Court of Appeals is not a function that the Supreme Court normally undertakes. 8
Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed
that the fire which caused the total loss of subject M/V Manila City was due to the
negligence of the employees and workers of CSEW. Both courts found that the M/V
Manila City was under the custody and control of petitioner CSEW, when the ill-fated
vessel caught fire. The decisions of both the lower court and the Court of Appeals
set forth clearly the evidence sustaining their finding of actionable negligence on the
part of CSEW. This factual finding is conclusive on the parties. The court discerns no
basis for disturbing such finding firmly anchored on enough evidence. As held in the
case ofRoblett Industrial Construction Corporation vs. Court of Appeals, "in the
absence of any showing that the trial court failed to appreciate facts and
circumstances of weight and substance that would have altered its conclusion, no

compelling reason exists for the Court to impinge upon matters more appropriately
within its province. 9
Furthermore, in petitions for review on certiorari, only questions of law may be put
into issue. Questions of fact cannot be entertained. The finding of negligence by the
Court of Appeals is a question which this Court cannot look into as it would entail
going into factual matters on which the finding of negligence was based. Such an
approach cannot be allowed by this Court in the absence of clear showing that the
case falls under any of the exceptions 10 to the well-established principle.
The finding by the trial court and the Court of Appeals that M/V Manila City caught
fire and sank by reason of the negligence of the workers of CSEW, when the said
vessel was under the exclusive custody and control of CSEW is accordingly upheld.
Under the circumstances of the case, the doctrine of res ipsa loquitur applies. For
the doctrine of res ipsa loquitur to apply to a given situation, the following conditions
must concur (1) the accident was of a kind which does not ordinarily occur unless
someone is negligent; and (2) that the instrumentality or agency which caused the
injury was under the exclusive control of the person charged with negligence.
The facts and evidence on record reveal the concurrence of said conditions in the
case under scrutiny. First, the fire that occurred and consumed M/V Manila City
would not have happened in the ordinary course of things if reasonable care and
diligence had been exercised. In other words, some negligence must have
occurred. Second, the agency charged with negligence, as found by the trial court
and the Court of Appeals and as shown by the records, is the herein petitioner, Cebu
Shipyard and Engineering Works, Inc., which had control over subject vessel when it
was docketed for annual repairs. So also, as found by the regional trial court, "other
responsible causes, including the conduct of the plaintiff, and third persons, are
sufficiently eliminated by the evidence. 11
What is more, in the present case the trial court found direct evidence to prove that
the workers and/or employees of CSEW were remiss in their duty of exercising due
diligence in the care of subject vessel. The direct evidence substantiates the
conclusion that CSEW was really negligent. Thus, even without applying the doctrine
of res ipsa loquitur, in light of the direct evidence on record, the ineluctable
conclusion is that the petitioner, Cebu Shipyard and Engineering Works, Inc., was
negligent and consequently liable for damages to the respondent, William Lines, Inc.
Neither is there tenability in the contention of petitioner that the Court of Appeals
erroneously ruled on the inadmissibility of the expert testimonies it (petitioner)
introduced on the probable cause and origin of the fire. Petitioner maintains that the
Court of Appeals erred in disregarding the testimonies of the fire experts, Messrs.
David Grey and Gregory Michael Southeard, who testified on the probable origin of
the fire in M/V Manila City. Petitioner avers that since the said fire experts were one
in their opinion that the fire did not originate in the area of Tank Top No. 12 where
the JNB workers were doing hotworks but on the crew accommodation cabins on the
portside No. 2 deck, the trial court and the Court of Appeals should have given
weight to such finding based on the testimonies of fire experts; petitioner argues.

29

But courts are not bound by the testimonies of expert witnesses. Although they may
have probative value, reception in evidence of expert testimonies is within the
discretion of the court. Section 49, Rule 130 of the Revised Rules of Court, provides:
Sec. 49. Opinion of expert witness. The opinion of a witness on
a matter requiring special knowledge, skill, experience or training
which he is shown to possess, may be received in evidence.
The word "may" signifies that the use of opinion of an expert witness as
evidence is a prerogative of the courts. It is never mandatory for judges to
give substantial weight to expert testimonies. If from the facts and
evidence on record, a conclusion is readily ascertainable, there is no need
for the judge to resort to expert opinion evidence. In the case under
consideration, the testimonies of the fire experts were not the only
available evidence on the probable cause and origin of the fire. There were
witnesses who were actually on board the vessel when the fire occurred.
Between the testimonies of the fire experts who merely based their findings
and opinions on interviews and the testimonies of those present during the
fire, the latter are of more probative value. Verily, the trial court and the
Court of Appeals did not err in giving more weight to said testimonies.
On the issue of subrogation, petitioner contends that Prudential is not entitled to be
subrogated to the rights of William Lines, Inc., theorizing that (1) the fire which
gutted M/V Manila City was an excluded risk and (2) it is a co-assured under the
Marine Hull Insurance Policy.
It is petitioner's submission that the loss of M/V Manila City or damage thereto is
expressly excluded from the coverage of the insurance because the same resulted
from "want of due diligence by the Assured, Owners or Managers" which is not
included in the risks insured against. Again, this theory of petitioner is bereft of any
factual or legal basis. It proceeds from a wrong premise that the fire which gutted
subject vessel was caused by the negligence of the employees of William Lines, Inc.
To repeat, the issue of who between the parties was negligent has already been
resolved against Cebu Shipyard and Engineering Works, Inc. Upon proof of payment
by Prudential to William Lines, Inc. the former was subrogated to the right of the
latter to indemnification from CSEW. As aptly ruled by the Court of Appeals, the law
on the manner is succinct and clear, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or
loss arising out of the wrong or breach of contract complained of
the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the
contract. If the amount paid by the insurance company does not
fully cover the injury or loss the aggrieved party shall be entitled
to recover the deficiency from the person causing the loss or
injury. 12

Thus, when Prudential, after due verification of the merit and validity of the
insurance claim of William Lines, Inc., paid the latter the total amount covered by its
insurance policy, it was subrogated to the right of the latter to recover the insured
loss from the liable party, CSEW.
Petitioner theorizes further that there can be no right of subrogation as it is deemed
a co-assured under the subject insurance policy. To buttress its stance that it is a coassured, petitioner placed reliance on Clause 20 of the Work Order which states:
20 The insurance on the vessel should be maintained by the
customer and/or owner of the vessel during the period the
contract is in effect. 13
According to petitioner, under the aforecited clause, William Lines, Inc.,
agreed to assume the risk of loss of the vessel while under dry-dock or
repair and to such extent, it is benefited and effectively constituted as a coassured under the policy.
This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work Order
in question is clear in the sense that it requires William Lines to maintain insurance
on the vessel during the period of dry-docking or repair. Concededly, such a
stipulation works to the benefit of CSEW as the ship repairer. However, the fact that
CSEW benefits from the said stipulation does not automatically make it as a coassured of William Lines. The intention of the parties to make each other a coassured under an insurance policy is to be gleaned principally from the insurance
contract or policy itself and not from any other contract or agreement because the
insurance policy denominates the assured and the beneficiaries of the insurance.
The hull and machinery insurance procured by William Lines, Inc. from Prudential
named only "William Lines, Inc." as the assured. There was no manifestation of any
intention of William Lines, Inc. to constitute CSEW as a co-assured under subject
policy. It is axiomatic that when the terms of a contract are clear its stipulations
control. 14 Thus, when the insurance policy involved named only William Lines, Inc.
as the assured thereunder, the claim of CSEW that it is a co-assured is unfounded.
Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is
provided that:
Subject to the conditions of this Policy, this insurance also covers
loss of or damage to vessel directly caused by the following:
xxx xxx xxx
Negligence of Charterers and/or Repairers, provided such
Charterers and/or Repairers are not an Assured
hereunder 15 (emphasis supplied).

30

As correctly pointed out by respondent Prudential, if CSEW were deemed a coassured under the policy, it would nullify any claim of William Lines, Inc. from
Prudential for any loss or damage caused by the negligence of CSEW. Certainly, no
shipowner would agree to make a shiprepairer a co-assured under such insurance
policy; otherwise, any claim for loss or damage under the policy would be
invalidated. Such result could not have been intended by William Lines, Inc.
Finally, CSEW argues that even assuming that it was negligent and therefore liable
to William Lines Inc., by stipulation in the Contract or Work Order its liability is
limited to One Million (P1,000,000.00) Pesos only, and Prudential a mere subrogee of
William Lines, Inc., should only be entitled to collect the sum stipulated in the said
contract.

SO ORDERED.
G.R. No. 115278 May 23, 1995
FORTUNE INSURANCE AND SURETY CO., INC., petitioner,
vs.
COURT OF APPEALS and PRODUCERS BANK OF THE
PHILIPPINES, respondents.

DAVIDE, JR., J.:

Although in this jurisdiction, contracts of adhesion have been consistently upheld as
valid per se; as binding as an ordinary contract, the Court recognizes instances
when reliance on such contracts cannot be favored especially where the facts and
circumstances warrant that subject stipulations be disregarded. 16 Thus, in ruling on
the validity and applicability of the stipulation limiting the liability of CSEW for
negligence to One Million (P1,000,000.00) Pesos only, the facts and
circumstances vis-a-vis the nature of the provision sought to be enforced should be
considered, bearing in mind the principles of equity and fair play.
It is worthy to note that M/V Manila City was insured with Prudential for Forty Five
Million (P45,000,000.00) Pesos. To determine the validity and sustainability of the
claim of William Lines, Inc., for a total loss, Prudential conducted its own inquiry.
Upon thorough investigation by its hull surveyor, M/V Manila City was found to be
beyond economical salvage and repair. 17 The evaluation of the average adjuster
also reported a constructive total loss. 18 The said claim of William Lines, Inc., was
then found to be valid and compensable such that Prudential paid the latter the total
value of its insurance claim. Furthermore, it was ascertained that the replacement
cost of the vessel (the price of a vessel similar to M/V Manila City), amounts to Fifty
Million (P 50,000,000.00) Pesos. 19
Considering the aforestated circumstances, let alone the fact that negligence on the
part of petitioner has been sufficiently proven, it would indeed be unfair and
inequitable to limit the liability of petitioner to One Million Pesos only. As aptly held
by the trial court, "it is rather unconscionable if not overstrained." To allow CSEW to
limit its liability to One Million Pesos notwithstanding the fact that the total loss
suffered by the assured and paid for by Prudential amounted to Forty Five Million
(P45,000,000.00) Pesos would sanction the exercise of a degree of diligence short of
what is ordinarily required because, then, it would not be difficult for petitioner to
escape liability by the simple expedient of paying an amount very much lower than
the actual damage or loss suffered by William Lines, Inc.
WHEREFORE, for want of merit, the petition is hereby DENIED and the decision,
dated September 3, 1997, and Resolution, dated February 13, 1998, of the Court of
Appeals AFFIRMED. No pronouncement as to costs.1wphi1.nt

The fundamental legal issue raised in this petition for review on certiorari is whether
the petitioner is liable under the Money, Security, and Payroll Robbery policy it
issued to the private respondent or whether recovery thereunder is precluded under
the general exceptions clause thereof. Both the trial court and the Court of Appeals
held that there should be recovery. The petitioner contends otherwise.
This case began with the filing with the Regional Trial Court (RTC) of Makati, Metro
Manila, by private respondent Producers Bank of the Philippines (hereinafter
Producers) against petitioner Fortune Insurance and Surety Co., Inc. (hereinafter
Fortune) of a complaint for recovery of the sum of P725,000.00 under the policy
issued by Fortune. The sum was allegedly lost during a robbery of Producer's
armored vehicle while it was in transit to transfer the money from its Pasay City
Branch to its head office in Makati. The case was docketed as Civil Case No. 1817
and assigned to Branch 146 thereof.
After joinder of issues, the parties asked the trial court to render judgment based on
the following stipulation of facts:
1. The plaintiff was insured by the defendants
and an insurance policy was issued, the
duplicate original of which is hereto attached as
Exhibit "A";
2. An armored car of the plaintiff, while in the
process of transferring cash in the sum of
P725,000.00 under the custody of its teller,
Maribeth Alampay, from its Pasay Branch to its
Head Office at 8737 Paseo de Roxas, Makati,
Metro Manila on June 29, 1987, was robbed of
the said cash. The robbery took place while the
armored car was traveling along Taft Avenue in
Pasay City;

31

3. The said armored car was driven by Benjamin

Magalong Y de Vera, escorted by Security Guard
Saturnino Atiga Y Rosete. Driver Magalong was
assigned by PRC Management Systems with the
plaintiff by virtue of an Agreement executed on
August 7, 1983, a duplicate original copy of
which is hereto attached as Exhibit "B";

(b) any loss caused by any

dishonest, fraudulent or
criminal act of the insured or
any officer, employee, partner,
director, trustee or authorized
representative of the Insured
whether acting alone or in
conjunction with others. . . .

4. The Security Guard Atiga was assigned by

Unicorn Security Services, Inc. with the plaintiff
by virtue of a contract of Security Service
executed on October 25, 1982, a duplicate
original copy of which is hereto attached as
Exhibit "C";
5. After an investigation conducted by the Pasay
police authorities, the driver Magalong and
guard Atiga were charged, together with
Edelmer Bantigue Y Eulalio, Reynaldo Aquino
and John Doe, with violation of P.D. 532 (AntiHighway Robbery Law) before the Fiscal of Pasay
City. A copy of the complaint is hereto attached
as Exhibit "D";

8. The plaintiff opposes the contention of the

defendant and contends that Atiga and
Magalong are not its "officer, employee, . . .
trustee or authorized representative . . . at the
time of the robbery. 1
On 26 April 1990, the trial court rendered its decision in favor of Producers. The
dispositive portion thereof reads as follows:
WHEREFORE, premises considered, the Court finds for plaintiff and
against defendant, and
(a) orders defendant to pay
plaintiff the net amount of
P540,000.00 as liability under
Policy No. 0207 (as mitigated
by the P40,000.00 special
clause deduction and by the
recovered sum of
P145,000.00), with interest
thereon at the legal rate, until
fully paid;

6. The Fiscal of Pasay City then filed an

information charging the aforesaid persons with
the said crime before Branch 112 of the Regional
Trial Court of Pasay City. A copy of the said
information is hereto attached as Exhibit "E."
The case is still being tried as of this date;
7. Demands were made by the plaintiff upon the
defendant to pay the amount of the loss of
P725,000.00, but the latter refused to pay as the
loss is excluded from the coverage of the
insurance policy, attached hereto as Exhibit "A,"
specifically under page 1 thereof, "General
Exceptions" Section (b), which is marked as
Exhibit "A-1," and which reads as follows:
GENERAL EXCEPTIONS
The company shall not be liable under this policy
in report of
xxx xxx xxx

(b) orders defendant to pay

plaintiff the sum of P30,000.00
as and for attorney's fees; and
(c) orders defendant to pay
costs of suit.
All other claims and counterclaims are accordingly dismissed
forthwith.
SO ORDERED.

The trial court ruled that Magalong and Atiga were not employees or representatives
of Producers. It Said:

32

The Court is satisfied that plaintiff may not be said to have

selected and engaged Magalong and Atiga, their services as
armored car driver and as security guard having been merely
offered by PRC Management and by Unicorn Security and which
latter firms assigned them to plaintiff. The wages and salaries of
both Magalong and Atiga are presumably paid by their respective
firms, which alone wields the power to dismiss them. Magalong
and Atiga are assigned to plaintiff in fulfillment of agreements to
provide driving services and property protection as such in a
context which does not impress the Court as translating into
plaintiff's power to control the conduct of any assigned driver or
security guard, beyond perhaps entitling plaintiff to request are
replacement for such driver guard. The finding is accordingly
compelled that neither Magalong nor Atiga were plaintiff's
"employees" in avoidance of defendant's liability under the policy,
particularly the general exceptions therein embodied.
Neither is the Court prepared to accept the proposition that driver
Magalong and guard Atiga were the "authorized representatives"
of plaintiff. They were merely an assigned armored car driver and
security guard, respectively, for the June 29, 1987 money transfer
from plaintiff's Pasay Branch to its Makati Head Office. Quite
plainly it was teller Maribeth Alampay who had "custody" of the
P725,000.00 cash being transferred along a specified money
route, and hence plaintiff's then designated "messenger" adverted
to in the policy. 3
Fortune appealed this decision to the Court of Appeals which docketed the case as
CA-G.R. CV No. 32946. In its decision 4 promulgated on 3 May 1994, it affirmed in
toto the appealed decision.
The Court of Appeals agreed with the conclusion of the trial court that Magalong and
Atiga were neither employees nor authorized representatives of Producers and
ratiocinated as follows:
A policy or contract of insurance is to be construed liberally in
favor of the insured and strictly against the insurance company
(New Life Enterprises vs. Court of Appeals, 207 SCRA 669; Sun
Insurance Office, Ltd. vs. Court of Appeals, 211 SCRA 554).
Contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties
themselves have used. If such terms are clear and unambiguous,
they must be taken and understood in their plain, ordinary and
popular sense (New Life Enterprises Case, supra, p. 676; Sun
Insurance Office, Ltd. vs. Court of Appeals, 195 SCRA 193).
The language used by defendant-appellant in the above quoted
stipulation is plain, ordinary and simple. No other interpretation is

necessary. The word "employee" must be taken to mean in the

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

33

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

contracting where the person supplying workers to an employer
does not have substantial capital or investment in the form of
tools, equipment, machineries, work premises, among others, and
the workers recruited and placed by such persons are performing
activities which are directly related to the principal business of
such employer. In such cases, the person or intermediary shall be
considered merely as an agent of the employer who shall be
responsible to the workers in the same manner and extent as if
the latter were directly employed by him.
Fortune thus contends that Magalong and Atiga were employees of Producers,
following the ruling in International Timber Corp. vs. NLRC 7 that a finding that a
contractor is a "labor-only" contractor is equivalent to a finding that there is an
employer-employee relationship between the owner of the project and the
employees of the "labor-only" contractor.
On the other hand, Producers contends that Magalong and Atiga were not its
employees since it had nothing to do with their selection and engagement, the
payment of their wages, their dismissal, and the control of their conduct. Producers
argued that the rule in International Timber Corp. is not applicable to all cases but
only when it becomes necessary to prevent any violation or circumvention of the
Labor Code, a social legislation whose provisions may set aside contracts entered
into by parties in order to give protection to the working man.
Producers further asseverates that what should be applied is the rule in American
President Lines vs. Clave, 8 to wit:
In determining the existence of employer-employee relationship,
the following elements are generally considered, namely: (1) the
selection and engagement of the employee; (2) the payment of
wages; (3) the power of dismissal; and (4) the power to control the
employee's conduct.
Since under Producers' contract with PRC Management Systems it is the latter which
assigned Magalong as the driver of Producers' armored car and was responsible for
his faithful discharge of his duties and responsibilities, and since Producers paid the
monthly compensation of P1,400.00 per driver to PRC Management Systems and not
to Magalong, it is clear that Magalong was not Producers' employee. As to Atiga,
Producers relies on the provision of its contract with Unicorn Security Services which
provides that the guards of the latter "are in no sense employees of the CLIENT."
There is merit in this petition.

Sec. 174. Casualty insurance is insurance covering loss or liability

arising from accident or mishap, excluding certain types of loss
which by law or custom are considered as falling exclusively within
the scope of insurance such as fire or marine. It includes, but is
not limited to, employer's liability insurance, public liability
insurance, motor vehicle liability insurance, plate glass
insurance, burglary and theft insurance, personal accident and
health insurance as written by non-life insurance companies, and
other substantially similar kinds of insurance. (emphases supplied)
Except with respect to compulsory motor vehicle liability insurance, the Insurance
Code contains no other provisions applicable to casualty insurance or to robbery
insurance in particular. These contracts are, therefore, governed by the general
provisions applicable to all types of insurance. Outside of these, the rights and
obligations of the parties must be determined by the terms of their contract, taking
into consideration its purpose and always in accordance with the general principles
of insurance law. 9
It has been aptly observed that in burglary, robbery, and theft insurance, "the
opportunity to defraud the insurer the moral hazard is so great that insurers
have found it necessary to fill up their policies with countless restrictions, many
designed to reduce this hazard. Seldom does the insurer assume the risk of all
losses due to the hazards insured against." 10 Persons frequently excluded under
such provisions are those in the insured's service and employment. 11 The purpose
of the exception is to guard against liability should the theft be committed by one
having unrestricted access to the property. 12 In such cases, the terms specifying the
excluded classes are to be given their meaning as understood in common
speech. 13 The terms "service" and "employment" are generally associated with the
idea of selection, control, and compensation. 14
A contract of insurance is a contract of adhesion, thus any ambiguity therein should
be resolved against the insurer,15 or it should be construed liberally in favor of the
insured and strictly against the insurer. 16 Limitations of liability should be regarded
with extreme jealousy and must be construed
in such a way, as to preclude the insurer from non-compliance with its
obligation. 17 It goes without saying then that if the terms of the contract are clear
and unambiguous, there is no room for construction and such terms cannot be
enlarged or diminished by judicial construction. 18
An insurance contract is a contract of indemnity upon the terms and conditions
specified therein. 19 It is settled that the terms of the policy constitute the measure
of the insurer's liability. 20 In the absence of statutory prohibition to the contrary,
insurance companies have the same rights as individuals to limit their liability and to
impose whatever conditions they deem best upon their obligations not inconsistent
with public policy.

It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Section 174 of the
Insurance Code provides:

34

With the foregoing principles in mind, it may now be asked whether Magalong and
Atiga qualify as employees or authorized representatives of Producers under
paragraph (b) of the general exceptions clause of the policy which, for easy
reference, is again quoted:
GENERAL EXCEPTIONS
The company shall not be liable under this policy in respect of
xxx xxx xxx
(b) any loss caused by any dishonest, fraudulent
or criminal act of the insured or any
officer, employee, partner, director, trustee or
authorized representative of the Insured whether
acting alone or in conjunction with others. . . .
(emphases supplied)
There is marked disagreement between the parties on the correct meaning of the
terms "employee" and "authorized representatives."
It is clear to us that insofar as Fortune is concerned, it was its intention to exclude
and exempt from protection and coverage losses arising from dishonest, fraudulent,
or criminal acts of persons granted or having unrestricted access to Producers'
money or payroll. When it used then the term "employee," it must have had in mind
any person who qualifies as such as generally and universally understood, or
jurisprudentially established in the light of the four standards in the determination of
the employer-employee relationship, 21 or as statutorily declared even in a limited
sense as in the case of Article 106 of the Labor Code which considers the employees
under a "labor-only" contract as employees of the party employing them and not of
the party who supplied them to the employer. 22
Fortune claims that Producers' contracts with PRC Management Systems and
Unicorn Security Services are "labor-only" contracts.

Producers, however, insists that by the express terms thereof, it is not the
employer of Magalong. Notwithstanding such express assumption of PRC
Management Systems and Unicorn Security Services that the drivers and
the security guards each shall supply to Producers are not the latter's
employees, it may, in fact, be that it is because the contracts are, indeed,
"labor-only" contracts. Whether they are is, in the light of the criteria
provided for in Article 106 of the Labor Code, a question of fact. Since the
parties opted to submit the case for judgment on the basis of their
stipulation of facts which are strictly limited to the insurance policy, the
contracts with PRC Management Systems and Unicorn Security Services,
the complaint for violation of P.D. No. 532, and the information therefor filed
by the City Fiscal of Pasay City, there is a paucity of evidence as to whether
the contracts between Producers and PRC Management Systems and
Unicorn Security Services are "labor-only" contracts.
But even granting for the sake of argument that these contracts were not "laboronly" contracts, and PRC Management Systems and Unicorn Security Services were
truly independent contractors, we are satisfied that Magalong and Atiga were, in
respect of the transfer of Producer's money from its Pasay City branch to its head
office in Makati, its "authorized representatives" who served as such with its teller
Maribeth Alampay. Howsoever viewed, Producers entrusted the three with the
specific duty to safely transfer the money to its head office, with Alampay to be
responsible for its custody in transit; Magalong to drive the armored vehicle which
would carry the money; and Atiga to provide the needed security for the money, the
vehicle, and his two other companions. In short, for these particular tasks, the three
acted as agents of Producers. A "representative" is defined as one who represents or
stands in the place of another; one who represents others or another in a special
capacity, as an agent, and is interchangeable with "agent." 23
In view of the foregoing, Fortune is exempt from liability under the general
exceptions clause of the insurance policy.
WHEREFORE , the instant petition is hereby GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 32946 dated 3 May 1994 as well as that of Branch 146 of
the Regional Trial Court of Makati in Civil Case No. 1817 are REVERSED and SET
ASIDE. The complaint in Civil Case No. 1817 is DISMISSED.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 94071 March 31, 1992
NEW LIFE ENTERPRISES and JULIAN SY, petitioners,
vs.
HON. COURT OF APPEALS, EQUITABLE INSURANCE CORPORATION,
RELIANCE SURETY AND INSURANCE CO., INC. and WESTERN GUARANTY
CORPORATION, respondents.

35

REGALADO, J.:
This appeal by certiorari seeks the nullification of the decision 1 of respondent Court
of Appeals in CA-G.R. CV No. 13866 which reversed the decision of the Regional Trial
Court, Branch LVII at Lucena City, jointly deciding Civil Cases Nos. 6-84, 7-84 and 884 thereof and consequently ordered the dismissal of the aforesaid actions filed by
herein petitioners.
The undisputed background of this case as found by the court a quo and adopted by
respondent court, being sustained by the evidence on record, we hereby reproduce
the same with approval. 2
The antecedents of this case show that Julian Sy and Jose Sy Bang
have formed a business partnership in the City of Lucena. Under
the business name of New Life Enterprises, the partnership
engaged in the sale of construction
materials at its place of business, a two storey building situated at
Iyam, Lucena City. The facts show that Julian Sy insured the stocks
in trade of New Life Enterpriseswith Western Guaranty
Corporation, Reliance Surety and Insurance. Co., Inc., and
Equitable Insurance Corporation.
On May 15, 1981, Western Guaranty Corporation
issued Fire Insurance Policy No. 37201 in the amount
of P350,000.00. This policy was renewed on May, 13, 1982.
On July 30,1981, Reliance Surety and Insurance Co., Inc. issued
Fire Insurance Policy No. 69135 inthe amount of P300,000.00
(Renewed under Renewal Certificate No. 41997) An additional
insurancewas issued by the same company on
November 12, 1981 under Fire Insurance Policy No. 71547 in the
amount of P700,000.00.
On February 8, 1982, Equitable Insurance
Corporation issued Fire Insurance Policy No. 39328 in the amount
of P200,000.00.
Thus when the building occupied by the New Life Enterprises
was gutted by fire at about 2:00
o'clock inthe morning of October 19, 1982, the stocks in the
trade inside said building were insured against
firein the total amount of P1,550,000.00.
According to the certification issued by the
Headquarters,Philippine Constabulary /Integrated National Police,
Camp Crame, the cause of fire was
electrical innature. According to the plaintiffs,
the building and the stocks inside were burned.
After the fire, JulianSy went to the agent of
Reliance Insurance whom he asked to accompany him to the
office of thecompany so that he can file
his claim. He averred that in support of his claim, he

submitted the fireclearance, the insurance policies and inventory

of stocks. He further testified that the three insurance companies
are sister companies, and as a matter of fact when he was
following-up his claim with Equitable Insurance, the
Claims Manager told him to go first to Reliance
Insurance and if said company agrees to pay, they would also pay.
The same treatment was given him by the other insurance
companies. Ultimately, the three insurance companies denied
plaintiffs' claim for payment.
In its letter of denial dated March 9, 1983, (Exhibit "C" No. 884) Western Guaranty Corporationthrough Claims Manager Bernar
d S. Razon told the plaintiff that his claim "is
denied for breach of policyconditions." Reliance Insurance purveye
d the same message in its letter dated November 23,
1982and signed by Executive Vice-President Mary Dee
Co (Exhibit "C" No. 7-84) which said that "plaintiff's
claim is denied for breach of policy conditions."
The letter of denial received by the
plaintiff fromEquitable Insurance Corporation (Exhibit "C" No. 6-84)
was of the same tenor, as said letter dated February 22, 1983, and
signed by Vice-President
Elma R. Bondad, said "we find that certain
policyconditions were violated, therefore, we regret,
we have to deny your claim, as it is hereby denied in its entirety."
In relation to the case against Reliance
Surety and Insurance Company, a certain Atty. Serafin
D.Dator, acting in behalf of the
plaintiff, sent a letter dated February 13, 1983 (Exhibit "G-l" No 784) toExecutive Vice-President Mary Dee Co asking that he
be informed as to the specific policy conditions allegedly
violated by the plaintiff. In her reply-letter dated March
30, 1983, Executive Vice-PresidentMary Dee Co informed Atty.
Dator that Julian Sy violated Policy Condition No.
"3" which requires theinsured
to give notice of any insurance or insurances already effected
covering the stocks in trade. 3
Because of the denial of their claims for payment by the three (3) insurance
companies, petitioner filed separate
civil actions against the former before the Regional Trial
Court of Lucena City, which cases were consolidated for trial,
and thereafter the court below rendered its decision on December 19, l986 with the
following disposition:
WHEREFORE, judgment in the above-entitled cases is rendered in
the following manner, viz:
1. In Civil Case No. 6-84, judgment is rendered for the
plaintiff New Life Enterprises and against the defendant Equitable
Insurance Corporation ordering the latter to pay the former the
sum of TwoHundred Thousand (P200,000.00) Pesos and
considering that payment of the claim of the insured hasbeen unre
asonably denied, pursuant to Sec. 244 of the Insurance Code, defe

36

ndant is further ordered topay the plaintiff attorney's fees in the

amount of Twenty Thousand (P20,000.00)
Pesos. All sums ofmoney to be paid by virtue
hereof shall bear interest at 12% per annum (pursuant
to Sec. 244 of theInsurance Code) from
February 14, 1983, (91st day from November 16,
1982, when Sworn Statementof Fire Claim
was received from the insured) until they are fully paid;
2. In Civil Case No. 784, judgment is rendered for the plaintiff Julian Sy and against
the defendantReliance Surety and Insurance Co.,
Inc., ordering the latter to pay the former the sum
ofP1,000,000.00 (P300,000.00 under Policy
No. 69135 and P700,000.00 under Policy No. 71547)
andconsidering that payment of the claim of the
insured has been unreasonably denied, pursuant to
Sec.244 of the Insurance Code, defendant is further ordered
to pay the plaintiff the amount of P100,000.00 as attorney's fees.
All sums of money to be paid by virtue hereof shall
bear interest at 12% per annum (pursuant to Sec.
244 of the Insurance Code) from February 14, 1983,
(91st day from November 16,
1982 when SwornStatement of Fire Claim was received from the
insured) until they are fully paid;
3. In Civil Case No. 8-84, judgment is rendered for
the plaintiff New Life Enterprises and against thedefendant Wester
n Guaranty Corporation ordering
the latter to pay the sum of P350,000.00
to theConsolidated Bank and Trust Corporation,
Lucena Branch, Lucena City, as stipulated on the
face ofPolicy No. 37201, and considering that payment of the
aforementioned sum of money has been
unreasonably denied, pursuant to Sec. 244 of the Insurance Code,
defendant is further ordered to pay the
plaintiff attorney's fees in the amount of P35,000.00.
All sums of money to be paid by virtue hereof shall bear interest at
12% per annum (pursuant to Sec. 244 of the Insurance
Code) from February 5, 1982, (91st day from 1st week of
November 1983 when insured filed formal claim for full indemnity
according to adjuster Vetremar Dela Merced) until they are fully
paid. 4
As aforestated, respondent Court of Appeals reversed said judgment of the trial
court, hence this petition the cruxwherein is whether or not Conditions Nos. 3
and 27 of the insurance contracts were violated by petitioners thereby resulting in
their forfeiture of all the benefits thereunder.
Condition No. 3 of said insurance policies, otherwise known as
the "Other Insurance Clause," is uniformly contained in all the aforestated
insurance contracts of herein petitioners, as follows:

3. The insured shall give notice to the Company

of any insurance or insurances already effected, orwhich
may subsequently be effected, covering any of the property or
properties consisting of stocks intrade, goods in process
and/or inventories only hereby insured, and unless
such notice be given andthe particulars of such
insurance or insurances be stated therein or endorsed on this
policy pursuant to Section 50 of the Insurance
Code, by or on behalf of the Company
before the occurrence of any lossor 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 loss or damagenot more than
P200,000.00. 5
Petitioners admit that the respective insurance policies
issued by private respondents did not state or endorse thereon
the other insurance coverage obtained or subsequently effected on the same stocks
in trade for the loss of which compensation is claimed by petitioners. 6 The policy
issued by respondent Western Guaranty Corporation(Western) did not
declare respondent Reliance Surety and Insurance Co., Inc. (Reliance) and
respondent Equitable Insurance Corporation (Equitable) as coinsurers on the same stocks,
while Reliance's Policies covering the same stocksdid not
likewise declare Western and Equitable as such co-insurers. It is
further admitted by petitioners that Equitable'spolicy stated "nil" in the space
thereon requiring indication of any co-insurance although there were three (3)
policies subsisting on the same stocks in trade at the time of the loss, namely, that
of Western in the amount of P350,000.00 andtwo (2) policies of Reliance in the total
amount of P1,000,000.00. 7
In other words, the coverage by other insurance or co-insurance effected
or subsequently arranged by petitioners were neither stated nor endorsed in the
policies of the three (3) private respondents, warranting forfeiture of all benefits
thereunder if we are to follow the express stipulation in the aforequoted Policy
Condition No. 3.
Petitioners contend that they are not to be blamed for the omissions,
alleging that insurance agent Leon Alvarez (for Western) and Yap Kam Chuan (for
Reliance and Equitable) knew about the existence of the additional
insurancecoverage and that they were not informed about the requirement that
such other or additional insurance should bestated in the
policy, as they have not even read policies. 8 These contentions cannot pass judicial
muster.
The terms of the contract are clear and unambiguous.
The insured is specifically required to disclose to the insurer any other insurance and
its particulars which he may have effected on the
same subject matter. The knowledge of such insurance
by the insurer's agents, even assuming the acquisition thereof by the former,
is not the "notice" that would estop the insurers from denying the claim. Besides,
the so-called theory of imputed knowledge, that is, knowledge of the agent is
knowledge of the principal, aside from being
of dubious applicability here has likewisebeen roundly
refuted by respondent court whose factual findings we find acceptable.

37

Thus, it points out that while petitioner Julian Sy

claimed that he had informed insurance agent Alvarez regarding the co-insurance on
the property, he contradicted
himself by inexplicably claiming that he had not read the terms of the policies; that
Yap Dam Chuan could not likewise have obtained such
knowledge for the same reason, aside from the fact that
the insurance with Western was obtained before those of
Reliance and Equitable; and that the conclusionof
the trial court that Reliance and Equitable are "sister
companies" is an unfounded conjecture drawn from the mere fact that Yap Kam
Chuan was an agent for both companies which also had the
same insurance claims adjuster.Availment of the
services of the same agents and adjusters by different companies is a
common practice in theinsurance business and such facts
do not warrant the speculative conclusion of the trial court.
Furthermore, when the words and language of documents are clear and plain
or readily understandable by an ordinary reader thereof, there is absolutely no room
for interpretation or construction anymore. 9 Courts are not allowed to make
contracts for the parties; rather, they will intervene
only when the terms of the policy are ambiguous, equivocal,
or uncertain. 10 The parties must abide by the
terms of the contract because such terms constitute the
measureof the insurer's liability and compliance therewith is a
condition precedent to the insured's right of recovery from the insurer.11
While it is a cardinal principle of insurance law that a policy or contract
of insurance is to be construed liberally
infavor of the insured and strictly against the insurer
company, yet contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which
the parties themselves have used. If suchterms are clear and
unambiguous, they must be taken and understood in their plain, ordinary and
popular sense. 12Moreover, obligations arising from contracts have the force of law
between the contracting parties and should be compliedwith in good faith. 13
Petitioners should be aware of the fact that a party is not relieved of the duty to
exercise the ordinary care and prudence that would be exacted in relation to other
contracts. The conformity of the insured to the terms of the
policy is implied from his failure to express any disagreement with
what is provided for. 14 It may be true that themajority rule, as cited
by petitioners, is that injured persons may accept policies without reading them, and
that this is not negligence per se. 15 But, this is not without any exception. It is and
was incumbent upon petitioner Sy to read the insurance contracts, and this can be
reasonably expected of him considering that he has been a businessman since
1965 16 and the contract concerns indemnity in case of loss in hismoneymaking trade of which important
consideration he could not have been unaware as it was pre-in case of loss in his
money-making trade of which important consideration he could not have been
unaware as it was precisely the reason for his procuring the same.
We reiterate our pronouncement in Pioneer Insurance and Surety Corporation vs.
Yap: 17

...
And considering the terms of the policy which required the insured
to declare other insurances, thestatement in question must be dee
med to be a statement (warranty) binding on both insurer and
insured, that there were no other insurance on the property. . . .
The annotation then, must be deemed
to be a warranty that the property was not insured by any other
policy. Violation thereof entitled the insurer to rescind (Sec. 69,
Insurance Act). Such misrepresentation is fatal in the light of
our views in Santa Ana vs. Commercial Union Assurance Company,
Ltd., 55 Phil. 329. The materiality of non-disclosure of other
insurance policies is not open to doubt.
xxx xxx xxx
The obvious purpose of the aforesaid requirement in the policy
is to prevent over-insurance and thus avert the perpetration of
fraud. The public, as well as the insurer, is interested in preventing
the situation in which a fire would be profitable to
the insured. According to Justice Story: "The insured has
no right to complain, for he assents to comply
with all the stipulations on his side, in order to entitlehimself to the
benefit of the contract, which, upon reason or principle, he
has no right to ask the court to dispense with the
performance of his own part of the agreement, and yet to
bind the other party to
obligations, which, but for those stipulations, would not have been
entered into."
Subsequently, in the case of Pacific Banking Corporation vs. Court of Appeals, et
al., 18 we held:
It is not disputed that the insured failed to reveal before the
loss three other insurances. As found by the Court
of Appeals, by reason of said unrevealed insurances, the
insured had been guilty of a
falsedeclaration; a clear misrepresentation and a vital one
because where the insured had been asked to reveal
but did not, that was deception. Otherwise stated, had the
insurer known that there were many co-insurances, it could
have hesitated or plainly desisted from
entering into such contract.
Hence, theinsured was guilty of clear fraud (Rollo, p. 25).
Petitioner's contention that the allegation of fraud is but
a mere inference or suspicion is untenable. In fact,
concrete evidence of fraud or false declaration by
the insured was furnished by the petitioner itself when the facts
alleged in the policy under clauses "Co-Insurances Declared" and
"Other InsuranceClause" are materially different from the actual
number of co-insurances taken over
the subjectproperty. Consequently, "the whole foundation of the
contract fails, the

38

risk does not attach and thepolicy never becomes a contract

between the parties." Representations of facts are the
foundation ofthe contract and if the foundation does not
exist, the superstructure does
not arise. Falsehood in suchrepresentations is not shown to vary
or add to the contract, or to terminate a contract which has
oncebeen made, but to show that no contract has ever
existed (Tolentino, Commercial Laws of thePhilippines, p.
991, Vol. II, 8th Ed.,) A void or inexistent contract is one which has
no force and effectfrom the very beginning, as if it had
never been entered into, and which cannot be
validated either bytime or by ratification
(Tongoy vs. C.A., 123 SCRA 99 (1983); Avila v. C.A., 145 SCRA,
1986).
As the insurance policy against fire expressly required that notice
should be given by the insured ofother insurance upon the same
property, the total absence of such notice nullifies the policy.
To further warrant and justify the forfeiture of the
benefits under the insurance contracts involved, we need
merely toturn to Policy Condition No. 15 thereof, which reads in part:
15. . . . if any false declaration be made or used
in support thereof, . . . all benefits under this Policy shall be
forfeited . . . . 19
Additionally, insofar as the liability of respondent
Reliance is concerned, it is not denied that the complaint for recovery was filed in
court by petitioners only on January 31, 1984, or after more than one (1) year had
elapsedfrom petitioners' receipt of the insurers' letter of
denial on November 29, 1982. Policy Condition No. 27 of their insurance contract
with Reliance provides:
27. Action or suit
clause. If a claim be made and rejected and an action or suit be
not commenced
either in the Insurance Commission or any court of competent juris
diction of notice of such
rejection, orin case of arbitration taking place
as provided herein, within twelve (12) months after due
notice of theaward made by the arbitrator or arbitrators
or umpire, then the claim shall for all purposes be
deemed tohave been abandoned and shall not thereafter be
recoverable hereunder. 20
On this point, the trial court ruled:
. . . However, because of the peculiar circumstances
of this case, we hesitate
in concluding thatplaintiff's right to ventilate his claim in court has
been barred by reason of the time constraint providedin the insura
nce contract. It is evident that after the plaintiff had received
the letter of denial, he stillfound it necessary to be informed of the

specific causes or reasons for

the denial of his claim, reasonfor which his lawyer, Atty. Dator
deemed it wise to send a
letter of inquiry to the defendant which wasanswered by
defendant's Executive Vice-President in a letter
dated March 30, 1983, . . . . Assuming,gratuitously, that the letter
of Executive Vice-President Mary Dee Co dated March 30, 1983,
was received by plaintiff on the same date, the period of limitation
should start to run only from said date in the spirit of fair play and
equity. . . . 21
We have perforce to reject this theory of the court below for being contrary to what
we have heretofore declared:
It is important to note the principle laid down
by this Court in the case of Ang vs. Fulton Fire Insurance Co. (2
SCRA 945 [1961]) to wit:
The condition contained in an insurance policy th
at claims must be presented within one year
after rejection is not merely a procedural require
ment but an important matter essential to a
prompt settlement of claims against insurance
companies as it
demandsthat insurance suits be brought by
the insured while the evidence as to the
origin andcause of destruction have not yet
disappeared.
In enunciating the above-cited principle, this Court had definitely
settled the rationale for the
necessityof bringing suits against the Insurer
within one year from the rejection of the claim. The contention
ofthe respondents that the one-year prescriptive period does
not start to run until the petition forreconsideration had been resol
ved by the insurer, runs counter to the declared purpose
for requiringthat an action or suit be filed in the Insurance
Commission or in a court of competent
jurisdiction fromthe denial of the claim. To uphold respondents'
contention would contradict and defeat the very principle which
this Court had laid down. Moreover,
it can easily be used by insured persons as a scheme or device to
waste time
until any evidence which may be considered against them is
destroyed.
xxx xxx xxx
While in the Eagle Star case (96 Phil. 701),
this Court uses the phrase "final rejection", the
samecannot be taken to mean the rejection of a petition
for reconsideration as insisted by respondents.
Such was clearly not the meaning contemplated by this Court. The
insurance policy in said caseprovides that the insured should file

39

his claim first, with the carrier and then with the insurer.
The "finalrejection" being referred to in said case is the rejection
by the insurance company. 22
Furthermore, assuming arguendo that petitioners felt the
legitimate need to be clarified as to the policy condition violated, there was a
considerable lapse of time from their receipt of the insurer's clarificatory letter dated
March 30, 1983, up to the time the complaint was filed in court on
January 31, 1984. The one-year prescriptive period was yet
to expire on November 29, 1983, or about eight (8) months from the
receipt of the clarificatory letter, but petitioners let the
period lapse without bringing their action in court.
We accordingly find no "peculiar circumstances" sufficient to
relax the enforcement of the one-year prescriptive period and
we, therefore, hold that petitioners' claim was definitely filed out of time.
WHEREFORE, finding no cogent reason to disturb the judgment
of respondent Court of Appeals, the same is herebyAFFIRMED.
SO ORDERED.
G.R. No. L-16138

April 29, 1961

DIOSDADO C. TY. plaintiff-appellant,

vs.
PHILIPPINE SURETY & INSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16142

April 29, 1961.

DIOSDADO C. TY, plaintiff-appellant,

vs.
RELIANCE SURETY & INSURANCE CO., INC., defendant-appellee.
x---------------------------------------------------------x
G.R. No. L-16143

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
FAR EASTERN SURETY & INSURANCE CO., INC., defendant-appellee.

DIOSDADO C. TY, plaintiff-appellant,

vs.
FIRST NATIONAL SURETY & ASSURANCE CO., INC., defendant-appellee.

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

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

DIOSDADO C. TY, plaintiff-appellant,

vs.
CAPITAL INSURANCE & SURETY CO., INC., defendant-appellee.

G.R. No. L-16139

April 29, 1961.

G.R. No. L-16144

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
ASSOCIATED INSURANCE & SURETY CO., INC., defendant-appellee.

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

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

DIOSDADO C. TY, plaintiff-appellant,

vs.
CAPITAL INSURANCE & SURETY CO., INC., defendant-appellee.

G.R. No. L-16140

April 29, 1961

DIOSDADO C. TY, plaintiff-appellant,

vs.
UNITED INSURANCE CO., INC., defendant-appellee.

G.R. No. L-16145

April 29, 1961

V. B. Gesunundo for plaintiff-appellant.

M. Perez Cardenas for defendant-appellee.
LABRADOR, J.:

x---------------------------------------------------------x
G.R. No. L-16141

April 29, 1961.

Appeal from a judgment of the Court of First Instance of Manila, Hon. Gregorio S.
Narvasa, presiding, dismissing the actions filed in the above-entitled cases.

40

The facts found by the trial court, which are not disputed in this appeal, are as
follows:

PARTIAL DISABILITY
LOSS OF:

At different times within a period of two months prior to December 24,

1953, the plaintiff herein Diosdado C. Ty, employed as operator mechanic
foreman in the Broadway Cotton Factory, in Grace Park, Caloocan, Rizal, at
a monthly salary of P185.00, insured himself in 18 local insurance
companies, among which being the eight above named defendants, which
issued to him personal accident policies, upon payment of the premium of
P8.12 for each policy. Plaintiff's beneficiary was his employer, Broadway
Cotton Factory, which paid the insurance premiums.
On December 24, 1953, a fire broke out which totally destroyed the
Broadway Cotton Factory. Fighting his way out of the factory, plaintiff was
injured on the left hand by a heavy object. He was brought to the Manila
Central University hospital, and after receiving first aid there, he went to
the National Orthopedic Hospital for treatment of his injuries which were as
follows:
1. Fracture, simple, proximal phalanx index finger, left;

xxx

xxx

xxx

Either hand ............................................................................ P650.00

xxx

xxx

xxx

... The loss of a hand shall mean the loss by amputation through the bones
of the wrist....
Defendants rejected plaintiff's claim for indemnity for the reason that there
being no severance of amputation of the left hand, the disability suffered
by him was not covered by his policy. Hence, plaintiff sued the defendants
in the Municipal Court of this City, and from the decision of said Court
dismissing his complaints, plaintiff appealed to this Court. (Decision of the
Court of First Instance of Manila, pp. 223-226, Records).

2. Fracture, compound, comminuted, proximal phalanx, middle finger, left

and 2nd phalanx, simple;

In view of its finding, the court absolved the defendants from the complaints. Hence
this appeal.

3. Fracture, compound, comminute phalanx, 4th finger, left;

The main contention of appellant in these cases is that in order that he may recover
on the insurance policies issued him for the loss of his left hand, it is not necessary
that there should be an amputation thereof, but that it is sufficient if the injuries
prevent him from performing his work or labor necessary in the pursuance of his
occupation or business. Authorities are cited to the effect that "total disability" in
relation to one's occupation means that the condition of the insurance is such that
common prudence requires him to desist from transacting his business or renders
him incapable of working. (46 C.J.S., 970). It is also argued that obscure words or
stipulations should be interpreted against the person who caused the obscurity, and
the ones which caused the obscurity in the cases at bar are the defendant insurance
companies.

4. Fracture, simple, middle phalanx, middle finger, left;

5. Lacerated wound, sutured, volar aspect, small finger, left;
6. Fracture, simple, chip, head, 1st phalanx, 5th digit, left. He underwent
medical treatment in the Orthopedic Hospital from December 26, 1953 to
February 8, 1954. The above-described physical injuries have caused
temporary total disability of plaintiff's left hand. Plaintiff filed the
corresponding notice of accident and notice of claim with all of the
abovenamed defendants to recover indemnity under Part II of the policy,
which is similarly worded in all of the policies, and which reads pertinently
as follows:
INDEMNITY FOR TOTAL OR PARTIAL DISABILITY
If the Insured sustains any Bodily Injury which is effected solely through
violent, external, visible and accidental means, and which shall not prove
fatal but shall result, independently of all other causes and within sixty (60)
days from the occurrence thereof, in Total or Partial Disability of the
Insured, the Company shall pay, subject to the exceptions as provided for
hereinafter, the amount set opposite such injury:

While we sympathize with the plaintiff or his employer, for whose benefit the policies
were issued, we can not go beyond the clear and express conditions of the insurance
policies, all of which define partial disability as loss of either hand
by amputation through the bones of the wrist." There was no such amputation in the
case at bar. All that was found by the trial court, which is not disputed on appeal,
was that the physical injuries "caused temporary total disability of plaintiff's left
hand." Note that the disability of plaintiff's hand was merely temporary, having been
caused by fracture of the index, the middle and the fourth fingers of the left hand.
We might add that the agreement contained in the insurance policies is the law
between the parties. As the terms of the policies are clear, express and specific that
only amputation of the left hand should be considered as a loss thereof, an

41

interpretation that would include the mere fracture or other temporary disability not
covered by the policies would certainly be unwarranted.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the
plaintiff-appellant.

42