INSURABLE INTEREST Insurance for the payment of loss whether the person insured has or has not any
rance for the payment of loss whether the person insured has or has not any interest in
1. Spouses Cha vs. Court of Appeals
[GR 124520, 18 August 1997] First
Division, Padilla (J): 4 concur
Facts: Spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease contract with CKS
Development Corporation, as lessor, on 5 October 1988. One of the stipulations of the 1 year
lease contract states that "The LESSEE shall not insure against fire the chattels, merchandise,
textiles, goods and effects placed at any stall or store or space in the leased premises without
first obtaining the written consent and approval of the LESSOR. If the LESSEE obtain(s) the
insurance thereof without the consent of the LESSOR then the policy is deemed assigned and
transferred to the LESSOR for its own benefit" Notwithstanding the above stipulation in the
lease contract, the Cha spouses insured against loss by fire their merchandise inside the leased
premises for P500,000.00 with the United Insurance Co., Inc. without the written consent of
CKS. On the day that the lease contract was to expire, fire broke out inside the leased
premises. When CKS learned of the insurance earlier procured by the Cha spouses (without its
consent), it wrote the insurer (United) a demand letter asking that the proceeds of the
insurance contract (between the Cha spouses and United) be paid directly to CKS, based on its
lease contract with the Cha spouses. United refused to pay CKS. Hence, the latter filed a
complaint against the Cha spouses and United. On 2 June 1992, the Regional Trial Court,
Branch 6, Manila, rendered a decision ordering United to pay CKS the amount of P335,063.11
and the Cha spouses to pay P50,000. 00 as exemplary damages, P20,000.00 as attorney's fees
and costs of suit. On appeal, the Court of Appeals in CA GR CV 39328 rendered a decision
dated 11 January 1996, affirming the trial court decision, deleting however the awards for
exemplary damages and attorney's fees. A motion for reconsideration by United was denied on
29 March 1996. The spouses Cha and United filed the petition for review on certiorari.
Issue: Whether paragraph 18 of the lease contract entered into between CKS and the Cha
spouses is valid insofar as it provides that any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the leased premises is deemed assigned or
transferred to the lessor (CKS) if said policy is obtained without the prior written consent of
the latter.
Held: NO. It is basic in the law on contracts that the stipulations contained in a contract
cannot be contrary to law, morals, good customs, public order or public policy. Section 18 of
the Insurance Code provides that "No contract or policy of insurance on property shall be
enforceable except for the benefit of some person having an insurable interest in the property
insured." A non-life insurance policy such as the fire insurance policy taken by the spouses
over their merchandise is primarily a contract of indemnity. Insurable interest in the property
insured must exist at the time the insurance takes effect and at the time the loss occurs. The
basis of such requirement of insurable interest in property insured is based on sound public
policy: to prevent a person from taking out an insurance policy on property upon which he
has no insurable interest and collecting the proceeds of said policy in case of loss of the
property. In such a case, the contract of insurance is a mere wager which is void under
Section 25 of the Insurance Code, which provides that "Every stipulation in a policy of
the property insured, or that the policy shall be received as proof of such interest, and every
policy executed by way of gaming or wagering, is void." Herein, it cannot be denied that
CKS has no insurable interest in the goods and merchandise inside the leased premises under
the provisions of Section 17 of the Insurance Code which provides that "The measure of an
insurable interest in property is the extent to which the insured might be damnified by loss of
injury thereof." Therefore, CKS cannot, under the Insurance Code — a special law — be
validly a beneficiary of the fire insurance policy taken by the spouses over their merchandise.
This insurable interest over said merchandise remains with the insured, the Cha spouses. The
automatic assignment of the policy to CKS under the provision of the lease contract
previously quoted is void for being contrary to law and/or public policy. The proceeds of the
fire insurance policy thus rightfully belong to the spouses Nilo Cha and Stella Uy-Cha. The
insurer (United) cannot be compelled to pay the proceeds of the fire insurance policy to a
person (CKS) who has no insurable interest in the property insured.
2. Geagonia vs. Court of Appeals
[GR 114427, 6 February 1995]
First Division, Davide Jr. (J): 4
concur
Facts: Armando Geagonia is the owner of Norman's Mart located in the public market of San
Francisco, Agusan del Sur. On 22 December 1989, he obtained from Country Bankers
Insurance Corporation fire insurance policy No. F-14622 2 for P100,000.00. The period of the
policy was from 22 December 1989 to 22 December 1990 and covered the following: "Stock-
in-trade consisting principally of dry goods such as RTW's for men and women wear and
other usual to assured's business." Geagonia declared in the policy under the subheading
entitled CO-INSURANCE that Mercantile Insurance Co., Inc. was the co-insurer for
P50,000.00. From 1989 to 1990, Geagonia had in his inventory stocks amounting to
P392,130.50, itemized as follows: Zenco Sales, Inc., P55,698.00; F. Legaspi Gen.
Merchandise, 86,432.50; and Cebu Tesing Textiles, 250,000.00 (on credit); totalling
P392,130.50. The policy contained the following condition, that "the insured shall give notice
to the Company of any insurance or insurances already effected, or which may subsequently
be effected, covering any of the property or properties consisting of stocks in trade, goods in
process and/or inventories only hereby insured, and unless notice be given and the particulars
of such insurance or insurances be stated therein or endorsed in this policy pursuant to Section
50 of the Insurance Code, by or on behalf of the Company before the occurrence of any loss
or damage, all benefits under this policy shall be deemed forfeited, provided however, that this
condition shall not apply when the total insurance or insurances in force at the time of the loss
or damage is not more than P200,000.00." On 27 May 1990, fire of accidental origin broke
out at around 7:30 p.m. at the public market of San Francisco, Agusan del Sur. Geagonia's
insured stocks- in-trade were completely destroyed prompting him to file with Country
Bankers a claim under the policy. On 28 December 1990, Country Bankers denied the claim
because it found that at the time of the loss
Geagonia's stocks-in-trade were likewise covered by fire insurance policies GA-28146 and
GA-28144, for P100,000.00 each, issued by the Cebu Branch of the Philippines First
Insurance Co., Inc. (PFIC) . These policies indicate that the insured was "Messrs. Discount
Mart (Mr. Armando Geagonia, Prop.)" with a mortgage clause reading ""MORTGAGEE:
Loss, if any, shall be payable to Messrs. Cebu Tesing Textiles, Cebu City as their interest may
appear subject to the terms of this policy. CO-INSURANCE DECLARED: P100,000. —
Phils. First CEB/F-24758" The basis of Country Bankers' denial was Geagonia's alleged
violation of Condition 3 of the policy. Geagonia then filed a complaint against Country
Bankers with the Insurance Commission (Case 3340) for the recovery of P100,000.00 under
fire insurance policy F-14622 and for attorney's fees and costs of litigation. He attached his
letter of 18 January 1991 which asked for the reconsideration of the denial. He admitted in the
said letter that at the time he obtained Country Bankers's fire insurance policy he knew that the
two policies issued by the PFIC were already in existence; however, he had no knowledge of
the provision in Country Bankers' policy requiring him to inform it of the prior policies; this
requirement was not mentioned to him by Country Bankers' agent; and had it been so
mentioned, he would not have withheld such information. He further asserted that the total of
the amounts claimed under the three policies was below the actual value of his stocks at the
time of loss, which was P1,000,000.00. In its decision of 21 June 1993, the Insurance
Commission found that Geagonia did not violate Condition 3 as he had no knowledge of the
existence of the two fire insurance policies obtained from the PFIC; that it was Cebu Tesing
Textiles which procured the PFIC policies without informing him or securing his consent; and
that Cebu Tesing Textile, as his creditor, had insurable interest on the stocks. These findings
were based on Geagonia's testimony that he came to know of the PFIC policies only when he
filed his claim with Country Bankers and that Cebu Tesing Textile obtained them and paid for
their premiums without informing him thereof. The Insurance Commission ordered Country
Bankers to pay Geagibua the sum of P100,000.00 with legal interest from the time the
complaint was filed until fully satisfied plus the amount of P10,000.00 as attorney's fees. With
costs. Its motion for the reconsideration of the decision having been denied by the Insurance
Commission in its resolution of 20 August 1993, Country Bankers appealed to the Court of
Appeals by way of a petition for review (CA-GR SP 31916). In its decision of 29 December
1993, the Court of Appeals reversed the decision of the Insurance Commission because it
found that Geagonia knew of the existence of the two other policies issued by the PFIC. His
motion to reconsider the adverse decision having been denied, Geagonia filed the petition for
review on certiorari.
Issue [1]: Whether the non-disclosure of other insurance policies violate condition 3 of the
policy, so as to deny Geagonia from recovering on the policy.
Held [1]: Condition 3 of Country Bankers's Policy F-14622 is a condition which is not
proscribed by law. Its incorporation in the policy is allowed by Section 75 of the Insurance
Code, Such a condition is a provision which invariably appears in fire insurance policies and
is intended to prevent an increase in the moral hazard. It is commonly known as the additional
or "other insurance" clause and has been upheld as valid and as a warranty that no other
insurance exists. Its violation would thus avoid the policy. However, in order to constitute a
violation, the other insurance must be upon the same subject matter, the same interest therein,
and the same risk. The fire insurance policies issued by the PFIC name Geagonia as the
assured and contain a mortgage clause which reads: "Loss, if any, shall be payable to
MESSRS. TESING TEXTILES, Cebu City as their interest may appear subject to the terms of
the policy." This is clearly a simple loss payable clause, not a standard mortgage clause. The
Court concludes that (a) the prohibition in Condition 3 of the subject policy applies only to
double insurance, and (b) the nullity of the policy shall only be to the extent exceeding
P200,000.00 of the total policies obtained. The first conclusion is supported by the portion of
the condition referring to other insurance "covering any of the property or properties
consisting of stocks in trade, goods in process and/or inventories only hereby insured," and the
portion regarding the insured's declaration on the subheading CO-INSURANCE that the co-
insurer is Mercantile Insurance Co., Inc. in the sum of P50,000.00. A double insurance exists
where the same person is insured by several insurers separately in respect of the same subject
and interest. Since the insurable interests of a mortgagor and a mortgagee on the mortgaged
property are distinct and separate; the two policies of the PFIC do not cover the same interest
as that covered by the policy of Country Bankers, no double insurance exists. The non-
disclosure then of the former policies was not fatal to Geagonia's right to recover on Country
Bankers' policy.
Issue [2]: Whether the violation of Condition 3 of the policy renders the policy void.
Held [2]: Unlike the "other insurance" clauses involved in General Insurance and Surety
Corp. vs. Ng Hua, 106 Phil. 1117 [1960], or in Pioneer Insurance & Surety Corp. vs. Yap, 61
SCRA 426 [1974] which reads "The insured shall give notice to the company of any insurance
or insurances already effected, or which may subsequently be effected covering any of the
property hereby insured, and unless such notice be given and the particulars of such insurance
or insurances be stated in or endorsed on this Policy by or on behalf of the Company before
the occurrence of any loss or damage, all benefits under this Policy shall be forfeited"; or in
the 1930 case of Santa Ana vs. Commercial Union Assurance Co., 55 Phil. 329, 334 [1930],
which provided "that any outstanding insurance upon the whole or a portion of the objects
thereby assured must be declared by the insured in writing and he must cause the company to
add or insert it in the policy, without which such policy shall be null and void, and the insured
will not be entitled to indemnity in case of loss," Condition 3 in Country Bankers' policy F-
14622 does not absolutely declare void any violation thereof. It expressly provides that the
condition "shall not apply when the total insurance or insurances in force at the time of the
loss or damage is not more than P200,000.00." By stating within Condition 3 itself that such
condition shall not apply if the total insurance in force at the time of loss does not exceed
P200,000.00, Country Bankers was amenable to assume a co-insurer's liability up to a loss not
exceeding P200,000.00. What it had in mind was to discourage over-insurance. Indeed, the
rationale behind the incorporation of "other insurance" clause in fire policies is to prevent
over-insurance and thus avert the perpetration of fraud. When a property owner obtains
insurance policies from two or more insurers in a total amount that exceeds the property's
value, the insured may have an inducement to destroy the property for the purpose of
collecting the insurance. The public as well as the insurer is interested in preventing a
situation in which a fire would be profitable to the insured.
3. Rizal Commercial Banking Corporation (RCBC) vs. Court of Appeals [GR
128833, 20 April 1998]; also RCBC vs. Court of Appeals [GR 128834]
Second Division, Melo (J): 4 concur

Facts: Goyu & Sons, Inc. (Goyu) applied for credit facilities and accommodations with Rizal
Commercial Banking Corporation (RCBC) at its Binondo Branch. After due evaluation,
RCBC Binondo Branch, through its key officers, petitioners Uy Chun Bing and Eli D. Lao,
recommended Goyu's application for approval by RCBC's executive committee. A credit
facility in the amount of P30 million was initially granted. Upon Goyu's application and Uy's
and Lao's recommendation, RCBC's executive committee increased Goyu's credit facility to
P50 million, then to P90 million, and finally to P117 million. As security for its credit facilities
with RCBC, Goyu executed two real estate mortgages and two chattel mortgages in favor of
RCBC, which were registered with the Registry of Deeds at Valenzuela, Metro Manila. Under
each of these four mortgage contracts, Goyu committed itself to insure the mortgaged property
with an insurance company approved by RCBC, and subsequently, to endorse and deliver the
insurance policies to RCBC. Goyu obtained in its name a total of 10 insurance policies from
MICO. In February 1992, Alchester Insurance Agency, Inc., the insurance agent where Goyu
obtained the Malayan insurance policies, issued 9 endorsements in favor of RCBC seemingly
upon instructions of Goyu. On 27 April 1992, one of Goyu's factory buildings in Valenzuela
was gutted by fire. Consequently, Goyu submitted its claim for indemnity on account of the
loss insured against. MICO denied the claim on the ground that the insurance policies were
either attached pursuant to writs of attachments/garnishments issued by various courts or that
the insurance proceeds were also claimed by other creditors of Goyu alleging better rights to
the proceeds than the insured. Goyu filed a complaint for specific performance and damages
which was docketed at the Regional Trial Court of the National Capital Judicial Region
(Manila, Branch 3) as Civil Case 93-65442. RCBC, one of Goyu's creditors, also filed with
MICO its formal claim over the proceeds of the insurance policies, but said claims were also
denied for the same reasons that AGCO denied Goyu's claims. In an interlocutory order dated
12 October 1993, the Regional Trial Court of Manila (Branch 3), confirmed that Goyu's other
creditors, namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained
their respective writs of attachments from various courts, covering an aggregate amount of
P14,938,080.23, and ordered that the proceeds of the 10 insurance policies be deposited with
the said court minus the aforementioned P14,938,080.23. Accordingly, on 7 January 1994,
MICO deposited the amount of P50,505,594.60 with Branch 3 of the Manila RTC. In the
meantime, another notice of garnishment was handed down by another Manila RTC sala
(Branch 28) for the amount of P8,696,838.75. After trial, Branch 3 of the Manila RTC
rendered judgment in a favor of Goyu, ordering Malayan to pay Goyu its fire loss claims in the
total amount of P74,040,518.58 less the amount of P50,000,000.00 which is deposited with the
Court; damages by way of interest for the duration of the delay since 27 July 1992 (90 days
after Malayan's receipt of the required proof of loss and notice of loss) at the rate of twice the
ceiling prescribed by the Monetary Board, on the amounts of (1) P50,000,000.00 from 27 July
1992 up to the time said amount was deposited with the Court on 7 January 1994; and (2)
P24,040,518.58 — from 17 July 1992 up to the time when the writs of attachments were
received by Malayan. The court also ordered RCBC to pay Goyu actual and compensatory
damages in the amount of P2,000,000.00, and both Malayan and RCBC to solidarily pay Goyu
(1) P1,000,000.00 as exemplary damages; (2) P1,000,000.00 as, and for, attorneys fees; and
(3) Costs of suit. The Court, on the Counterclaim of RCBC, ordered Goyu to pay its loan
obligations with RCBC in the amount of P68,785,069.04, as of 27 April 1992, with interest
thereon at the rate stipulated in the respective promissory notes (without surcharges and
penalties). From this judgment, all parties interposed their respective appeals. Goyu was
unsatisfied with the amounts awarded in its favor. MICO and RCBC disputed the trial court's
findings of liability on their part. The Court of Appeals partly granted Goyu's appeal, but
sustained the findings of the trial court with respect to MICO and RCBC's liabilities. The
appellate court modified the decision by ordering Malayan to pay Goyu its fire loss claim in
the total amount of P74,040,518.58 less than the amount of P50,505,549.60 (per O.R. No.
3649285) plus deposited in court and damages by way of interest commencing 27 July 1992
until the time Goyu receives the said amount at the rate of 37% per annum which is twice the
ceiling prescribed by the Monetary Board; ordering RCBC to pay Goyu actual and
compensatory damages in the amount of P5,000,000.00; and Malayan and RCBC, Uy Chun
Bing and Eli Lao to pay Goyu solidarily in the amounts of (1) P1,500,000.00 as exemplary
damages; and (2) P1,500,000.00 as and for attorney's fees. The Court, on RCBC's
Counterclaim, ordered Goyuto pay its loan obligation with RCBC in the amount of
P68,785.069.04 as of 27 April 1992 without any interest, surcharges and penalties. RCBC and
Malayan appealed separately but, in view of the common facts and issues involved, their
individual petitions were consolidated.
Issue [1]: Whether RCBC, as mortgagee, has any right over the insurance policies taken by
Goyu, the mortgagor, in case of the occurrence of loss.
Held [1]: YES. It is settled that a mortgagor and a mortgagee have separate and distinct
insurable interests in the same mortgaged property, such that each one of them may insure the
same property for his own sole benefit. There is no question that Goyu could insure the
mortgaged property for its own exclusive benefit. Herein, although it appears that Goyu
obtained the subject insurance policies naming itself as the sole payee, the intentions of the
parties as shown by their contemporaneous acts, must be given due consideration in order to
better serve the interest of justice and equity. It is to be noted that nine endorsement documents
were prepared by Alchester in favor of RCBC. The Court is in a quandary how Alchester could
arrive at the idea of endorsing any specific insurance policy in favor of any particular
beneficiary or payee other than the insured had not such named payee or beneficiary been
specifically disclosed by the insured itself. It is also significant that Goyu voluntarily and
purposely took the insurance policies from MICO, a sister company of RCBC, and not just
from any other insurance company. Alchester would not have found out that the subject pieces
of property were mortgaged to RCBC had not such information been voluntarily disclosed by
Goyu itself. Had it not been for Goyu, Alchester would not have known of Goyu's intention of
obtaining insurance coverage in compliance with its undertaking in the mortgage contracts
with RCBC, and verify, Alchester would not have endorsed the policies to RCBC had it not
been so directed by Goyu. On equitable principles, particularly on the ground of estoppel, the
Court is constrained to rule in favor of mortgagor RCBC. RCBC, in good faith,
relied upon the endorsement documents sent to it as this was only pursuant to the stipulation
in the mortgage contracts. Such reliance is justified under the circumstances of the case. Goyu
failed to seasonably repudiate the authority of the person or persons who prepared such
endorsements. Over and above this, Goyu continued, in the meantime, to enjoy the benefits of
the credit facilities extended to it by RCBC. After the occurrence of the loss insured against, it
was too late for Goyu to disown the endorsements for any imagined or contrived lack of
authority of Alchester to prepare and issue said endorsements. If there had not been actually
an implied ratification of said endorsements by virtue of Goyu's inaction in this case, Goyu is
at the very least estopped from assailing their operative effects. To permit Goyu to capitalize
on its non-confirmation of these endorsements while it continued to enjoy the benefits of the
credit facilities of RCBC which believed in good faith that there was due endorsement
pursuant to their mortgage contracts, is to countenance grave contravention of public policy,
fair dealing, good faith, and justice. Such an unjust situation, the Court cannot sanction. Under
the peculiar circumstances, the Court is bound to recognize RCBC's right to the proceeds of
the insurance policies if not for the actual endorsement of the policies, at least on the basis of
the equitable principle of estoppel.
Issue [2]: Whether Goyu can insist that the proceeds of insurance shall exclusively apply to
the interest of the person in whose name or for whose benefit it is made.
Held [2]: NO. Goyu cannot seek relief under Section 53 of the Insurance Code which
provides that the proceeds of insurance shall exclusively apply to the interest of the person in
whose name or for whose benefit it is made. The peculiarity of the circumstances obtaining in
the instant case presents a justification to take exception to the strict application of said
provision, it having been sufficiently established that it was the intention of the parties to
designate RCBC as the party for whose benefit the insurance policies were taken out.
Consider thus the following: (1) It is undisputed that the insured pieces of property were the
subject of mortgage contracts entered into between RCBC and Goyu in consideration of and
for securing Goyu's credit facilities from RCBC. The mortgage contracts contained common
provisions whereby Goyu, as mortgagor, undertook to have the mortgaged property properly
covered against any loss by an insurance company acceptable to RCBC. (2) Goyu voluntarily
procured insurance policies to cover the mortgaged property from MICO, no less than a sister
company of RCBC and definitely an acceptable insurance company to RCBC. (3)
Endorsement documents were prepared by MICO's underwriter, Alchester Insurance Agency,
Inc., and copies thereof were sent to Goyu, MICO and RCBC. Goyu did not assail, until of
late, the validity of said endorsements. (4) Goyu continued until the occurrence of the fire, to
enjoy the benefits of the credit facilities extended by RCBC which was conditioned upon the
endorsement of the insurance policies to be taken by Goyu to cover the mortgaged properties.
The fact that upon receiving its copies of the endorsement documents prepared by Alchester,
Goyu, despite the absence written conformity thereto, obviously considered said endorsement
to be sufficient compliance with its obligation under the mortgage contracts since RCBC
accordingly continued to extend the benefits of its credit facilities and Goyu continued to
benefit therefrom. Just as plain too is the intention of the parties to constitute RCBC as the
beneficiary of the various insurance policies obtained by Goyu. The intention of the parties
will have to be given full force and effect in this particular case. The insurance proceeds may,
therefore, be exclusively applied to RCBC, which under the factual circumstances of the case,
is truly the person or entity for whose benefit the policies were clearly intended. Moreover, the
law's evident intention to protect the interests of the mortgagee upon the mortgaged property
is expressed in Article 2127 of the Civil Code. The proceeds of the 8 insurance policies
endorsed to RCBC aggregate to P89,974,488.36. Being exclusively payable to RCBC by
reason of the endorsement by Alchester to RCBC, which we already ruled to have the force
and effect of an endorsement by Goyu itself, these 8 policies can not be attached by Goyu's
other creditors up to the extent of the Goyu's outstanding obligation in RCBC's favor. Section
53 of the Insurance Code ordains that the insurance proceeds of the endorsed policies shall be
applied exclusively to the proper interest of the person for whose benefit it was made. In this
case, to the extent of Goyu's obligation with RCBC, the interest of Goyu in the subject
policies had been transferred to RCBC effective as of the time of the endorsement. These
policies may no longer be attached by the other creditors of Goyu, like Alfredo Sebastian in
GR 128834, which may nonetheless
4. Gaisano Cagayan Inc v Insurance Company of North America, GR no 147839,
June 8, 2006
FACTS:
 Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans.
while Levi Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing
trademarks owned by Levi Strauss & Co
 IMC and LSPI separately obtained from Insurance Company of North America fire
insurance policies for their book debt endorsements related to their ready-made clothing
materials which have been sold or delivered to various customers and dealers of the
Insured anywhere in the Philippines which are unpaid 45 days after the time of the loss
 February 25, 1991: Gaisano Superstore Complex in Cagayan de Oro City, owned by
Gaisano Cagayan, Inc., containing the ready-made clothing materials sold and delivered
by IMC and LSPI was consumed by fire.
 February 4, 1992: Insurance Company of North America filed a complaint for
damages against Gaisano Cagayan, Inc. alleges that IMC and LSPI filed their claims
under their respective fire insurance policies which it paid thus it was subrogated to their
rights
 Gaisano Cagayan, Inc: not be held liable because it was destroyed due to
fortuities event or force majeure
 RTC: IMC and LSPI retained ownership of the delivered goods until fully paid, it
must bear the loss (res perit domino)
 CA: Reversed - sales invoices is an exception under Article 1504 (1) of the Civil
Code to res perit domino
ISSUE: W/N Insurance Company of North America can claim against Gaisano Cagayan for
the debt that was isnured
HELD: YES. petition is partly GRANTED. order to pay P535,613 is DELETED
 insurance policy is clear that the subject of the insurance is the book debts and
NOT goods sold and delivered to the customers and dealers of the insured
 ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery has been
made or not, except that:
(1) Where delivery of the goods has been made to the buyer or to a bailee for the buyer,
in pursuance of the contract and the ownership in the goods has been retained by the
seller merely to secure performance by the buyer of his obligations under the contract,
the goods are at the buyer's risk from the time of such delivery;
 IMC and LSPI did not lose complete interest over the goods. They have an insurable
interest until full payment of the value of the delivered goods. Unlike the civil law
concept of res perit domino, where ownership is the basis for consideration of who bears
 the risk of loss, in property insurance, one's interest is not determined by concept of title,
but whether insured has substantial economic interest in the property
 Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect thereof,
of such nature that a contemplated peril might directly damnify the insured."
Parenthetically, under Section 14 of the same Code, an insurable interest in property may
consist in: (a) an existing interest; (b) an inchoate interest founded on existing interest; or
(c) an expectancy, coupled with an existing interest in that out of which the expectancy
arises.
 Anyone has an insurable interest in property who derives a benefit from its existence
or would suffer loss from its destruction.
 it is sufficient that the insured is so situated with reference to the property
that he would be liable to loss should it be injured or destroyed by the peril against which
it is insured
 an insurable interest in property does not necessarily imply a property
interest in, or a lien upon, or possession of, the subject
 matter of the insurance, and neither the title nor a beneficial interest is
requisite to the existence of such an interest
 insurance in this case is not for loss of goods by fire but for petitioner's accounts
with IMC and LSPI that remained unpaid 45 days after the fire - obligation is pecuniary
in nature
 obligor should be held exempt from liability when the loss occurs thru a
fortuitous event only holds true when the obligation consists in the delivery of a
determinate thing and there is no stipulation holding him liable even in case of fortuitous
event
 Article 1263 of the Civil Code in an obligation to deliver a generic thing, the loss or
destruction of anything of the same kind does not extinguish the obligation (Genus
nunquan perit)
 The subrogation receipt, by itself, is sufficient to establish not only the relationship
of respondent as insurer and IMC as the insured, but also the amount paid to settle the
insurance claim
 Art. 2207. If the plaintiff's property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights of the
insured against the wrongdoer or the person who has violated the contract.
 As to LSPI, no subrogation receipt was offered in evidence.
 Failure to substantiate the claim of subrogation is fatal to petitioner's case
for recovery of the amount of P535,613
DEVICES FOR ASCERTAINING AND CONTROLLING RISK AND LOSS
1. Great Pacific Life Assurance Corp. vs.
Court of Appeals [GR 113899, 13 October
1999] Second Division, Quisumbing (J): 3
concur, 1 on official leave
Facts: A contract of group life insurance was executed between Great Pacific Life Assurance
Corporation (Grepalife) and Development Bank of the Philippines (DBP). Grepalife agreed to
insure the lives of eligible housing loan mortgagors of DBP. On 11 November 1983, Dr.
Wilfredo Leuterio, a physician and a housing debtor of DBP applied for membership in the
group life insurance plan. In an application form, Dr. Leuterio answered questions concerning
his health condition as follows: "7. Have you ever had, or consulted, a physician for a heart
condition, high blood pressure, cancer, diabetes, lung, kidney or stomach disorder or any other
physical impairment? Answer: No. If so give details ___________. 8. Are you now, to the best
of your knowledge, in good health? Answer: [ x ] Yes [ ] No." On 15 November 1983,
Grepalife issued Certificate B-18558, as insurance coverage of Dr. Leuterio, to the extent of
his DBP mortgage indebtedness amounting to P86,200.00. On 6 August 1984, Dr. Leuterio
died due to "massive cerebral hemorrhage." Consequently, DBP submitted a death claim to
Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically healthy
when he applied for an insurance coverage on 15 November 1983. Grepalife insisted that Dr.
Leuterio did not disclose he had been suffering from hypertension, which caused his death.
Allegedly, such non-disclosure constituted concealment that justified the denial of the claim.
On 20 October 1986, the widow of the late Dr. Leuterio, Medarda V. Leuterio, filed a
complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for
"Specific Performance with Damages." During the trial, Dr. Hernando Mejia, who issued the
death certificate, was called to testify. Dr. Mejia’s findings, based partly from the information
given by the widow, stated that Dr. Leuterio complained of headaches presumably due to high
blood pressure. The inference was not conclusive because Dr. Leuterio was not autopsied,
hence, other causes were not ruled out. On 22 February 1988, the trial court rendered a
decision in favor of the widow and against Grepalife. On 17 May 1993, the Court of Appeals
sustained the trial court’s decision. Grepalife filed the petition for review.
Issue: Whether Dr. Leuterio failed to disclose that he had hypertension, which might have
caused his death, and thus concealment can be interposed by Grepalife as a defense to annul
the insurance contract.
Held: Concealment exists where the assured had knowledge of a fact material to the risk, and
honesty, good faith, and fair dealing requires that he should communicate it to the assured, but
he designedly and intentionally withholds the same. Grepalife merely relied on the testimony
of the attending physician, Dr. Hernando Mejia, as supported by the information given by the
widow of the decedent. Grepalife asserts that Dr. Mejia’s technical diagnosis of the cause of
death of Dr. Leuterio was a duly documented hospital record, and that the widow’s declaration
that her husband had "possible hypertension several years ago" should not be considered as
hearsay, but as part of res gestae. On the contrary, the medical findings were not conclusive
because Dr. Mejia did not conduct an autopsy on the body of the decedent. As the attending
physician, Dr. Mejia stated that he had no knowledge of Dr. Leuterio’s any previous hospital
confinement. Dr. Leuterio’s death certificate stated that hypertension was only "the possible
cause of death." The widow’s statement, as to the medical history of her husband, was due to
her unreliable recollection of events. Hence, the statement of the physician was properly
considered by the trial court as hearsay. The insured, Dr. Leuterio, had answered in his
insurance application that he was in good health and that he had not consulted a doctor or any
of the enumerated ailments, including hypertension; when he died the attending physician had
certified in the death certificate that the former died of cerebral hemorrhage, probably
secondary to hypertension. Contrary to Grepalife’s allegations, there was no sufficient proof
that the insured had suffered from hypertension. Aside from the statement of the insured’s
widow who was not even sure if the medicines taken by Dr. Leuterio were for hypertension,
Grepalife had not proven nor produced any witness who could attest to Dr. Leuterio’s medical
history. Grepalife had failed to establish that there was concealment made by the insured,
hence, it cannot refuse payment of the claim. The fraudulent intent on the part of the insured
must be established to entitle the insurer to rescind the contract. Misrepresentation as a
defense of the insurer to avoid liability is an affirmative defense and the duty to establish such
defense by satisfactory and convincing evidence rests upon the insurer. Herein, Grepalife
failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the
proceeds of the insurance.
2. Sunlife Assurance Company of Canada vs.
Court of Appeals [GR 105135, 22 June 1995]
First Division, Quiason (J): 4 concur
Facts: On 15 April 1986, Robert John B. Bacani procured a life insurance contract for himself
from Sunlife Assurance Company of Canada. He was issued Policy 3-903-766-X valued
P100,000.00, with double indemnity in case of accidental death. The designated beneficiary
was his mother, Bernarda Bacani. On 26 June 1987, the insured died in a plane crash.
Bernarda Bacani filed a claim with Sunlife, seeking the benefits of the insurance policy taken
by her son. Sunlife conducted an investigation and its findings prompted it to reject the claim.
In its letter, Sunlife informed Bacani, that the insured did not disclosed material facts relevant
to the issuance of the policy, thus rendering the contract of insurance voidable. A check
representing the total premiums paid in the amount of P10,172.00 was attached to said letter.
Sunlife claimed that the insured gave false statements in his application when he answered the
following questions: "5. Within the past 5 years have you: a) consulted any doctor or other
health practitioner? b) submitted to: ECG? X- rays? blood tests? other tests? c) attended or
been admitted to any hospital or other medical facility? 6. Have you ever had or sought advice
for: xxx b) urine, kidney or bladder disorder?" The deceased answered questions No. 5(a) in
the affirmative but limited his answer to a consultation with a certain Dr. Reinaldo D.
Raymundo of the Chinese General Hospital on February 1986, for cough and flu
complications. The other questions were answered in the negative. Sunlife discovered that two
weeks prior to his application for insurance, the insured was examined and confined at the
Lung Center of the Philippines, where he was diagnosed for renal failure. During his
confinement, the deceased was subjected to urinalysis, ultra -sonography and hematology
tests. On 17 November 1988, Bernarda Bacani and her husband, respondent Rolando Bacani,
filed an action for specific performance against Sunlife with the Regional Trial Court, Branch
191, Valenzuela, Metro Manila. Sunlife filed its answer with counterclaim and a list off
exhibits consisting of medical records furnished by the Lung Center of the Philippines. On 14
January 1990, Bacani filed a "Proposed Stipulation with Prayer for Summary Judgment"
where they manifested that they "have no evidence to refute the documentary evidence of
concealment/misrepresentation by the decedent of his health condition." Sunlife filed its
Request for Admissions relative to the authenticity and due execution of several documents as
well as allegations regarding the health of the insured. The Bacanis failed to oppose said
request or reply thereto, thereby rendering an admission of the matters alleged. Sunlife then
moved for a summary judgment and the trial court decided in favor of the Bacanis, ordering
Sunlife to pay the former the amount of P100,000.00 the face value of insured's Insurance
Policy 3903766, and the Accidental Death Benefit in the amount of P100,000.00 and further
sum of P5,000.00 in the concept of reasonable attorney's fees and the costs of the suit.
Sunlife's counterclaim was dismissed. Sunlife appealed to the Court of Appeals, which
affirmed the decision of the trial court. Sunlife's motion for reconsideration was denied, hence,
Sunlife filed the petition for review on certiorari.
Issue [1]: Whether good faith is a defense in concealment.
Held [1]: NO. Section 26 of the Insurance Code is explicit in requiring a party to a contract of
insurance to communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the other has no
means of ascertaining. Said Section provides that "a neglect to communicate that which a
party knows and ought to communicate, is called concealment."
Materiality is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom communication is due, in forming his estimate
of the disadvantages of the proposed contract or in making his inquiries. The terms of the
contract are clear. The insured is specifically required to disclose to the insurer matters relating
to his health. The information which the insured failed to disclose were material and relevant
to the approval and the issuance of the insurance policy. The matters concealed would have
definitely affected Bacani's action on his application, either by approving it with the
corresponding adjustment for a higher premium or rejecting the same. Moreover, a disclosure
may have warranted a medical examination of the insured by Sunlife in order for it to
reasonably assess the risk involved in accepting the application. In Vda. de Canilang v. Court
of Appeals, 223 SCRA 443 (1993), the Court held that materiality of the information withheld
does not depend on the state of mind of the insured. Neither does it depend on the actual or
physical events which ensue. Thus, "good faith" is no defense in concealment. The insured's
failure to disclose the fact that he was hospitalized for two weeks prior to filing his application
for insurance, raises grave doubts about his bonafides. It appears that such concealment was
deliberate on his part.
Issue [2]: Whether Sunlife's waiver of the medical examination of the insured debunks the
materiality of the facts concealed.
Held [2]: NO. The argument, that Sunlife's waiver of the medical examination of the insured
debunks the materiality of the facts concealed, is untenable. In Saturnino v. Philippine
American Life Insurance Company, 7 SCRA 316 (1963), the Court held that "the waiver of a
medical examination [in a non-medical insurance contract] renders even more material the
information required of the applicant concerning previous condition of health and diseases
suffered, for such information necessarily constitutes an important factor which the insurer
takes into consideration in deciding whether to issue the policy or not." Moreover, such
argument would make Section 27 of the Insurance Code, which allows the injured party to
rescind a contract of insurance where there is concealment, ineffective. Anent the finding that
the facts concealed had no bearing to the cause of death of the insured, it is well settled that
the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient
that his non-disclosure misled the insurer in forming his estimates of the risks of the proposed
insurance policy or in making inquiries.
 3. Philamcare Health Systems Inc. vs. Court of Appeals [GR
125678, 18 March 2002]
First Division, Ynares-Santiago (J): 3 concur
See also case entry 13
Facts: Ernani Trinos, deceased husband of Julita Trinos, applied for a health care coverage
with 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). " The application was approved for a period of one year from 1 March 1988 to 1
March 1989. Accordingly, he was issued Health Care Agreement P010194. Under the
agreement, Trinos' husband was entitled to avail of hospitalization benefits, whether ordinary
or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as
annual physical examinations, preventive health care and other out-patient services. Upon the
termination of the agreement, the same was extended for another year from 1 March 1989 to 1
March 1990, then from 1 March 1990 to 1 June 1990. The amount of coverage was increased
to a maximum sum of P75,000.00 per disability. During the period of his coverage, Ernani
suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month
beginning 9 March 1990. While her husband was in the hospital, Trinos tried to claim the
benefits under the health care agreement. However, Philamcare denied her claim saying that
the Health Care Agreement was void. According to Philamcare, there was a concealment
regarding Ernani's medical history. Doctors at the MMC allegedly discovered at the time of
Ernani's confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer
in the application form. Thus, Trinos 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, Trinos brought her husband home again. In the morning of 13
April 1990, Ernani had fever and was feeling very weak. Trinos was constrained to bring him
back to the Chinese General Hospital where he died on the same day. On 24 July 1990, Trinos
instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against
Philamcare and its president, Dr. Benito Reverente (Civil Case 90 53795) . She asked for
reimbursement of her expenses plus moral damages and attorney's fees. After trial, the lower
court ruled against Philamcare and Reverente, ordering them 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; the reduced amount of moral damages
of P10,000.00 to Trinos; the reduced amount of P10,000.00 as exemplary damages to Trinos;
and the attorney's fees of P20,000.00, plus costs of suit. On appeal, the Court of Appeals
affirmed the decision of the trial court but deleted all awards for damages and absolved
Reverente. Philamcare's motion for reconsideration was denied. Hence, Philamcare brought
the petition for review, raising the primary argument that a health care agreement is not an
insurance contract; hence the "incontestability clause" under the Insurance Code does not
apply.
Issue [2]: Whether answers made in good faith, where matters of opinion or judgment are
called for, without intent to deceive will avoid a policy when they were untrue.
Held [2]: NO. 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. Thus,
although 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. The fraudulent intent on the part of the insured must be established to
warrant rescission of the insurance contract. 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, Philamcare is liable for claims made under
the contract. Having assumed a responsibility under the agreement, Philamcare 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.
4. Vda Canilang v CA G.R. No. 92492 June 17, 1993
J. Feliciano
Facts:
Canilang was found to have suffered from sinus tachycardia then bronchitis after a check-up
from his doctor. The next day, he applied for a "non-medical" insurance policy with
respondent Grepalife naming his wife, Thelma Canilang, as his beneficiary. This was to the
value of P19,700.
He died of "congestive heart failure," "anemia," and "chronic anemia." The widow filed a
claim with Great Pacific which the insurer denied on the ground that the insured had
concealed material information from it.
Petitioner then filed a complaint against Great Pacific for recovery of the insurance proceeds.
Petitioner testified that she was not aware of any serious illness suffered by her late husband
and her husband had died because of a kidney disorder. The doctor who gave the check up
stated that he treated the deceased for “sinus tachycardia” and "acute bronchitis."
Great Pacific presented a physician who testified that the deceased's insurance application had
been approved on the basis of his medical declaration. She explained that as a rule, medical
examinations are required only in cases where the applicant has indicated in his application for
insurance coverage that he has previously undergone medical consultation and hospitalization.
The Insurance Commissioner ordered Great Pacific to pay P19,700 plus legal interest and
P2,000.00 as attorney's fees. On appeal by Great Pacific, the Court of Appeals reversed. It
found that the failure of Jaime Canilang to disclose previous medical consultation and
treatment constituted material information which should have been communicated to Great
Pacific to enable the latter to make proper inquiries.
Hence this petition by the widow.
Issue: Won Canilang was guilty of misrepresentation
Held: Yes. Petition denied.
Ratio:
There was a right of the insurance company to rescind the contract if it was proven that the
insured committed fraud in not affirming that he was treated for heart condition and other
ailments stipulated.
Apart from certifying that he didn’t suffer from such a condition, Canilang also failed to
disclose in the that he had twice consulted a doctor who had found him to be suffering from
"sinus tachycardia" and "acute bronchitis."
Under the Insurance Code:
Sec. 26. A neglect to communicate that which a party knows and ought to communicate, is
called a concealment.
Sec. 28. Each party to a contract of insurance must communicate to the other, in good faith, all
factors within his knowledge which are material to the contract and as to which he makes no
warranty, and which the other has not the means of ascertaining.
The information concealed must be information which the concealing party knew and should
have communicated. The test of materiality of such information is contained in Section 31:
Sec. 31. Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom the communication is due, in
forming his estimate of the disadvantages of the proposed contract, or in making his inquiries.
The information which Jaime Canilang failed to disclose was material to the ability of Great
Pacific to estimate the probable risk he presented as a subject of life insurance. Had he
disclosed his visits to his doctor, the diagnosis made and medicines prescribed by such doctor,
in the insurance application, it may be reasonably assumed that Great Pacific would have
made further inquiries and would have probably refused to issue a non-medical insurance
policy.
Materiality relates rather to the "probable and reasonable influence of the facts" upon the party
to whom the communication should have been made, in assessing the risk involved in making
or omitting to make further inquiries and in accepting the application for insurance; that
"probable and reasonable influence of the facts" concealed must, of course, be determined
objectively, by the judge ultimately.
The Insurance Commissioner had also ruled that the failure of Great Pacific to convey certain
information to the insurer was not "intentional" in nature, for the reason that Canilang believed
that he was suffering from minor ailment like a common cold. Section 27 stated that:
Sec. 27. A concealment whether intentional or unintentional entitles the injured party to
rescind a contract of insurance.
The failure to communicate must have been intentional rather than inadvertent. Canilang could
not have been unaware that his heart beat would at times rise to high and alarming levels and
that he had consulted a doctor twice in the two (2) months before applying for non-medical
insurance. Indeed, the last medical consultation took place just the day before the
insurance application was filed. In all probability, Jaime Canilang went to visit his doctor
precisely because of the ailment.
Canilang's failure to set out answers to some of the questions in the
insurance application constituted concealment.
5. Tan v CA G.R. No. 48049 June 29, 1989
J. Gutierrez Jr.
Facts:
Tan Lee Siong, father of the petitioners, applied for life insurance in the amount of P
80,000.00 with Philamlife. It was approved. Tan Lee Siong died of hepatoma. Petitioners then
filed a claim for the proceeds. The company denied petitioners' claim and rescinded the policy
by reason of the alleged misrepresentation and concealment of material facts. The premiums
paid on the policy were refunded. The petitioners filed a complaint in
the Insurance Commission. The latter dismissed the complaint.
The Court of Appeals dismissed ' the petitioners' appeal from the Insurance Commissioner's
decision for lack of merit. Hence, this petition.
Issue:
WON Philam didn’t have the right to rescind the contract of insurance as rescission must
allegedly be done during the lifetime of the insured within two years and prior to the
commencement of action.
Held: No. Petition dismissed.
Ratio:
The Insurance Code states in Section 48:
“Whenever a right to rescind a contract of insurance is given to the insurer by any provision of
this chapter, such right must be exercised previous to the commencement of an action on
the contract.
After a policy of life insurance made payable on the death of the insured shall have been in
force during the lifetime of the insured for a period of two years from the date of its issue or of
its last reinstatement, the insurer cannot prove that the policy is void ab initio or is rescindable
by reason of the fraudulent concealment or misrepresentation of the insured or his agent.”
The so-called "incontestability clause" in the second paragraph prevents the insurer from
raising the defenses of false representations insofar as health and previous diseases are
concerned if the insurance has been in force for at least two years during the insured's lifetime.
The policy was in force for a period of only one year and five months. Considering that
the insured died before the two-year period had lapsed, respondent company is not, therefore,
barred from proving that the policy is void ab initio by reason of
the insured's fraudulent concealment or misrepresentation.
The "incontestability clause" added by the second paragraph of Section 48 is in force for two
years. After this, the defenses of concealment or misrepresentation no longer lie.
The petitioners argue that no evidence was presented to show that the medical terms were
explained in a layman's language to the insured. They also argue that no evidence was
presented by respondent company to show that the questions appearing in Part II of
the application for insurance were asked, explained to and understood by the deceased so as to
prove concealment on his part. This couldn’t be accepted because the insured signed the form.
He affirmed the correctness of all the entries.
The company records show that the deceased was examined by Dr. Victoriano Lim and was
found to be diabetic and hypertensive. He was also found to have suffered from hepatoma.
Because of the concealment made by the deceased, the company was thus misled into
accepting the risk and approving his application as medically fit.
6. PRUDENTIAL GUARANTEE and ASSURANCE INC., vs. TRANS-ASIA SHIPPING
LINES, INC
G.R. No. 151890 June 20, 2006
P r i n c i p l e found in the case:
a warranty is a statement or promise set forth in the policy, or b y r e f e r e n c e incorporated
therein, the untruth or non-fulfillment of which in any respect, and without reference to
whetherthe insurer was in fact prejudiced by such untruth or non-fulfillment, renders the
policy voidable by the insurer.However it must be first duly proven by the one who alleges
that there was a breach of warranty.
Facts: TRANS-ASIA is the owner of the vessel M/V Asia Korea. In consideration of payment
of premiums, PRUDENTIAL insuredM/V Asia Korea for loss/damage of the hull and
machinery arising from perils, inter alia, of fire and explosion for thesum of P40 Million,
beginning from the period of July 1, 1993 up to July 1, 1994.On October 25, 1993, while the
policy was in force, a fire broke out while [M/V Asia Korea was] undergoing repairs atthe port
of Cebu. On October 26, 1993 TRANS- ASIA filed its notice of claim for damage sustained by
the vessel evidenced by a letter/formal claim. TRANS-ASIA reserved its right to subsequently
notify PRUDENTIAL as to the fullamount of the claim upon final survey and determination
by average adjuster Richard Hogg International (Phil.) of thedamage sustained by reason of
fire. TRANS-ASIA executed a document denominated "Loan and Trust receipt", a portion of
which states that “Receivedfrom Prudential Guarantee and Assurance, Inc., the sum of PESOS
THREE MILLION ONLY (P3,000,000.00) as a loanwithout interest under Policy No. MH
93/1353 [sic], repayable only in the event and to the extent that any net recoveryis made by
TransAsia Shipping Corporation, from any person or persons, corporation or corporations, or
other parties,on account of loss by any casualty for which they may be liable occasioned by
the 25 October 1993: Fire on Board."PRUDENTIAL later on denied Trans-Asia’s claim in
stated in a letter that "After a careful review and evaluation of yourclaim arising from the
abovecaptioned incident, it has been ascertained that you are in breach of policy
conditions,among them "WARRANTED VESSEL CLASSED AND CLASS MAINTAINED".
Accordingly, we regret to advise that yourclaim is not compensable and hereby DENIED." and
asked for the return of the 3,000,000. TRANS-ASIA filed a Complaint for Sum of Money
against PRUDENTIAL with the RTC of Cebu City, wherein TRANS-ASIAsought the amount
of P8,395,072.26 from PRUDENTIAL, alleging that the same represents the balance of the
indemnity due upon the insurance policy in the total amount of
P11,395,072.26. TRANS-ASIA similarly sought interestat 42% per annum citing Section 243
of Presidential Decreee No. 1460, otherwise known as the "Insurance Code,"
asamended.PRUDENTIAL denied the material allegations of the Complaint and interposed
the defense that TRANS-ASIA breachedinsurance policy conditions, in particular:
PRUDENTIAL posits that TRANS- ASIA violated an express and material warranty in the
subject insurance contract, i.e., Marine Insurance Policy No. MH93/1363, specifically
Warranty ClauseNo. 5 thereof, which stipul ates that the insured vessel, "M/V ASIA KOREA"
is required to be CLASSED AND CLASS MAINTAINED. According to PRUDENTIAL, on
25 October 1993, or at the time of the occurrence of the fire, "M/V ASIAKOREA" was in
violation of the warranty as it was not CLASSED AND CLASS MAINTAINED.
PRUDENTIAL submits that Warranty Clause No. 5 was a condition precedent to the recovery
of TRANS-ASIA under the policy, the violation of which entitled PRUDENTIAL to rescind
the contract under Sec. 74 of the Insurance Code. By way of a counterclaim,PRUDENTIAL
sought a refund of P3,000,000.00, which it allegedly advanced to TRANS-ASIA by way of a
loan withoutinterest and without prejudice to the final evaluation of the claim, including the
amounts of P500,000.00, for surveyfees and P200,000.00, representing attorney’s fees. Trial
court ruled in favor of Prudential. It ruled that a determination of the parties’ liabilities hinged
on whether TRANS-ASIA violated and breached the policy conditi ons on WARRANTED
VESSEL CLASSED AND CLASS MAINTAINED. Itinterpreted the provision to mean that
TRANS-ASIA is required to maintain the vessel at a certain class at all timespertinent during
the life of the policy. According to the court a quo, TRANS- ASIA failed to prove compliance
of the terms of the warranty, the violation thereof entitled PRUDENTIAL to rescind the
contract. The court of appeals reversed the decision. It ruled that PRUDENTIAL, as the party
asserting the non-compensability of the loss had the burden of proof to show that TRANS-
ASIA breached the warranty, which burden it failed to discharge.P R U D E N T I A L cannot
rely on the lack of certification to the effect that TRANS- ASIA w a s C L A S S E D A N D C
L A S S MAINTAINED as its sole basis for reaching the conclusion that the warranty was
breached. It opined that the lack of acertification does not necessarily mean that the warranty
was breached by TRANS- ASIA. Instead, it consi deredPRUDENTIAL’s admission that at the
time the insurance contract was entered into between the parties, the vessel wasproperly
classed by Bureau Veritas, a classification society recognized by the industry. It similarly gave
weight to thef a c t t h a t i t w a s t h e responsibility of Richards Hogg International (Phils.)
Inc., the a v e r a g e a d j u s t e r h i r e d b y PRUDENTIAL, to secure a copy of such
certification to support its conclusion that mere absence of a certification doesnot warrant
denial of TRANSASIA’s claim under the insurance policy.
Issue: WON Trans-Asia breached the warranty stated in the insurance policy, thus absolving
Prudential from paying Trans-Asia.
Ruling: No.
Rationale:
A s f o u n d b y t h e C o u r t o f A p p e a l s a n d a s s u p p o r t e d b y the records, Bureau
Veritas is a classification society recognized in the marine industry. As it is undisputed that
TRANS-ASIA was properly classed at the time the contract of insurance was entered into,
thus , it becomes incumbent upon PRUDENTIAL to show evidence that the statusof
TRANSASIA as being properly CLASSED by Bureau Veritas had shifted in violation of the
warranty.
Unfortunately, PRUDENTIAL failed to support the allegation. The lack of a certification in
PRUDENTIAL’s records to the effect that TRANS-ASIA’s "M/V Asia Korea" was CLASSED
ANDCLASS MAINTAINED at the time of the occurrence of the fire cannot be tantamount to
the conclusion that TRANS-ASIAin fact breached the warranty contained in the policy.It was
likewise the responsibility of the average adjuster, Richards Hogg International (Phils.), Inc.,
to secure a copy of such certification, and the alleged breach of TRANS- ASIA cannot be
gleaned from the average adjuster’s survey report , or adjustment of particular average per
"M/V Asia Korea" of the 25 October 1993 fire on board. The Supreme Court is not unmindful
of the clear language of Sec. 74 of the Insurance Code which provides that ,"the violation of a
material warranty, or other material provision of a policy on the part of either party thereto,
entitles the other to rescind." It is generally accepted that "a warranty is a statement or
promiseset forth in the policy, or by reference incorporated therein, the untruth or non-
fulfillment of which inany respect, and without reference to whether the insurer was in fact
prejudiced by such untruth or non-fulfillment, renders the policy voidable by the insurer."
However, it is similarly indubitable that for the breach of a warranty to avoid a policy, the
same must be dulys h o w n b y t h e party alleging the same. We cannot sustai n an allegation
that is unfounded. Consequently, PRUDENTIAL, not having shown that TRANS-ASIA
breached the warranty condition, CLASSED AND CLASSMAINTAINED, it remains that
TRANS-ASIA must be allowed to recover its rightful claims on the policy. Assuming
arguendo that TRANS- ASIA violated the policy condi tion on WARRANTED VESSEL
CLASSED AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the
same.PRUDENTIAL can be deemed to have made a valid waiver of TRANSASIA’s breach of
warranty as alleged. Becauseafter the loss, Prudential renewed the insurance policy of Trans-
Asia for two (2) consecutive years, from noon of 01 July1994 to noon of 01 July 1995, and
then again until noon of 01 July 1996. This renewal is deemed a waiver of anybreach of
warranty.PRUDENTIAL, in renewing TRANS-ASIA’s insurance policy for two consecutive
years after the loss covered by Policy No.MH93/1363, was considered to have waived
TRANS-ASIA’s breach of the subject warranty, if any. Breach of a warrantyor of a condi tion
renders the contract defeasible at the option of the insurer; but if he so elects, he may waive
his privilege and power to rescind by the mere expression of an intention so to do. In that
event his liability under thepolicy continues as before. There can be no clearer intention of the
waiver of the alleged breach than the renewal of the policy insurance granted by
PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788, issued in the years 1994and
1995, respectively.
7. MA. LOURDES S. FLORENDO,
Petitioner,vs.
PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE ABCEDE,
Respondents.
FACTS:
Manuel Florendo filed an application for comprehensive pension plan with respondent PhilamPlans, Inc. (Philam
Plans) Manuel signed the application and left to Perla the task of supplying
the information needed in the application. Respondent Ma. Celeste Abcede, Perla’s daughter,
signed the application as sales counselor. Philam Plans issued Pension PlanAgreement toManuel, with petitioner Ma.
Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel paidhis quarterly premiums. Eleven months later,
Manuel died of blood poisoning. Subsequently,Lourdes filed a claim with Philam Plans for th
e payment of the benefits under her husband’s
plan but Philam Plans declined her claim prompting her to file the present action against thepension plan company
before the Regional Trial Court (RTC) of Quezon City and ruled in favor of Ma. Lourdes. However, the Court of
Appeals then reversed the RTC decision. Hence thisappeal.
ISSUE:
Whether or not Ma. Lourdes could claim benefits as the beneficiary of her husband under theinsurance plan despite
consideration that her husband Manuel concealed the true condition of his health.
RULING:
The Supreme Court answers this to the negative and the AFFIRMED in its entirety the decisionof the Court of
Appeals.The comprehensive pension plan that Philam Plans issued contains a one-year incontestabilityperiod. It
states:
VIII. INCONTESTABILITY
After this Agreement has remained in force for one (1) year, we can no longer contest for healt
h reasons any claim for insurance under thisAgreement, except for the reason thatinstallment has not been paid
(lapsed), or that you are not insurable at the time you bought thispension program by reason of age. If thisAgreement
lapses but is reinstated afterwards, theone (1) year contestability period shall start again on the date of approval of your
request for reinstatement.The above
incontestability clause
precludes the insurer from disowning liability under thepolicy it issued on the ground of concealment or
misrepresentation regarding the health of theinsured after a year of its issuance.Since
Manuel died on the eleventh month
following the issuance of his plan, the one year incontestability period has not yet set in. Consequently, Philam Plans
was not barred from
questioning Lourdes’ entitlement to the benefits of her husband’s pension plan.
POLICY OF INSURANCE
1. Pacific Timber Export Corporation vs. Court of
Appeals [GR L-38613, 25 February 1982] First
Division, De Castro (J): 6 concur
Facts: On 19 March 1963, the Pacific Timber Export Corporation (PTEC) secured temporary
insurance from the Workmen's Insurance Company Inc. (WICI) for its exportation of
1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan
Bay, Quezon Province to Okinawa and Tokyo, Japan. WICI issued on said date Cover Note
1010, insuring the said cargo of PTEC "Subject to the Terms and Conditions of the
WORKMEN'S INSURANCE COMPANY, INC. printed Marine Policy form as filed with and
approved by the Office of the Insurance Commissioner." The regular marine cargo policies
were issued by WICI in favor of PTEC on 2 April 1963. The two marine policies bore the
numbers of 53 HO 1032 and 53 HO 1033. Policy 53 HO 1032 was for 542 pieces of logs
equivalent to 499,950 board feet. Policy 53 HO 1033 was for 853 pieces of logs equivalent to
695, 548 board feet. The total cargo insured under the two marine policies accordingly
consisted of 1,395 logs, or the equivalent of 1,195,498 bd. ft. After the issuance of Cover Note
1010, but before the issuance of the two marine policies 53 HO 1032 and 53 HO 1033, some
of the logs intended to be exported were lost during loading operations in the Diapitan Bay.
The logs were to be loaded on the 'SS Woodlock' which docked about 500 meters from the
shortline of the Diapitan Bay. The logs were taken from the log pond of PTEC and from
which they were towed in rafts to the vessel. At about 10:00 a.m. on 29 March 1963, while the
logs were alongside the vessel, bad weather developed resulting in 75 pieces of logs which
were rafted together to break loose from each other 45 pieces of logs were salvaged, but 30
pieces were verified to have been lost or washed away as a result of the accident. In a letter
dated 4 April 1963, PTEC informed WICI about the loss of approximately 32 pieces of logs
during loading of the SS Woodlock. Although dated 4 April 1963, the letter was received in
the office of WICI only on 15 April 1963. PTEC subsequently submitted a Claim Statement
demanding payment of the loss under Policies 53 HO 1033, and 53 HO 1033, in the total
amount of P19,286.79. On 17 July 1963, WICI requested the First Philippine Adjustment
Corporation to inspect the loss and assess the damage. The adjustment company submitted its
Report on 23 August 1963. In said report, the adjuster found that 'the loss of 30 pieces of logs
is not covered by Policies 53 HO 1032 and 1033 inasmuch as said policies covered the actual
number of logs loaded on board the SS Woodlock. However, the loss of 30 pieces of logs is
within the 1,250,000 bd. ft. covered by Cover Note 1010 insured for $70,000.00. On 14
September 1963, the adjustment company submitted a computation of WICI's probable
liability on the loss sustained by the shipment, in the total amount of P11,042.04. On 13
January 1964, WICI wrote PTEC denying the latter's claim, on the ground that its
investigation revealed that the entire shipment of logs covered by the two marine policies 53
HO 1032 and 53 HO 1033 were received in good order at their point of destination. It was
further stated that the said loss may not be considered as covered under Cover Note 1010
because the said Note had become null and void by virtue of the issuance of Marine Policies
53 HO 1032 and 1033. The denial of the claim by WICI was brought by PTEC to the attention
of the Insurance Commissioner by means of a letter dated 21 March 1964. In a reply letter
dated 30 March 1964, Insurance Commissioner Francisco Y. Mandanas observed that it is
only fair and equitable to indemnify the insured under Cover Note 1010, and advised early
settlement of the said marine loss and salvage claim. On 26 June 1964, WICI informed the
Insurance Commissioner that, on advice of their attorneys, the claim of PTEC is being denied
on the ground that the cover note is null and void for lack of valuable consideration. The
Court of First Instance of Manila ruled in favor of PTEC and against WICI which ordered the
latter to pay the sum of P11,042.04 with interest at the rate of 12% interest from receipt of
notice of loss on 15 April 1963 up to the complete payment, the sum of P3,000.00 as
attorney's fees and the costs. The Court of Appeals, however, reversed the decision of the trial
court and thus dismissed PTEC's complaint with costs. PTEC filed the petition for review.
Issue: Whether the Cover Note is without consideration, is null and void, and thus recovery
cannot be made thereon.
Held: NO. The Cover Note was not without consideration. The fact that no separate premium
was paid on the Cover Note before the loss insured against occurred, does not militate against
the validity of PTEC's contention, for no such premium could have been paid, since by the
nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of
the shipment that would serve as basis for the computation of the premiums. As a logical
consequence, no separate premiums are intended or required to be paid on a Cover Note. This
is a fact admitted by an official of WICI, Juan Jose Camacho, in charge of issuing cover notes
of WICI. At any rate, it is not disputed that PTEC paid in full all the premiums as called for by
the statement issued by WICI after the issuance of the two regular marine insurance policies,
thereby leaving no account unpaid by PTEC due on the insurance coverage, which must be
deemed to include the Cover Note. If the Note is to be treated as a separate policy instead of
integrating it to the regular policies subsequently issued, the purpose and function of the Cover
Note would be set at naught or rendered meaningless, for it is in a real sense a contract, not a
mere application for insurance which is a mere offer. It may be true that the marine insurance
policies issued were for logs no longer including those which had been lost during loading
operations. This had to be so because the risk insured against is not for loss during loading
operations anymore, but for loss during transit, the logs having already been safely placed
aboard. This would make no difference, however, insofar as the liability on the cover note is
concerned, for the number or volume of logs lost can be determined independently, as in fact it
had been so ascertained at the instance of WICI itself when it sent its own adjuster to
investigate and assess the loss, after the issuance of the marine insurance policies. The adjuster
went as far as submitting his report to WICI, as well as its computation of WICI's liability on
the insurance coverage. This coverage could not have been no other than what was stipulated
in the Cover Note, for no loss or damage had to be assessed on the coverage arising from the
marine insurance policies. For obvious reasons, it was not necessary to ask PTEC to pay
premium on the Cover Note, for the loss insured against having already occurred, the more
practical procedure is simply to deduct the premium from the amount due PTEC on the Cover
Note. The non-payment of premium on the Cover Note is, therefore, no cause for PTEC to
lose what is due it as if there had been payment of premium, for non-payment by it was not
chargeable against its fault. Had all the logs been lost during the loading operations, but after
the issuance of the Cover Note, liability on the note would have already arisen even before
payment of premium. This is how the cover note as a "binder" should legally operate;
otherwise, it would serve no practical purpose in the realm of commerce, and is supported by
the doctrine that where a policy is delivered without requiring payment of the premium, the
presumption is that a credit was intended and policy is valid.
2. Great Pacific Life Assurance Company vs. Court of Appeals
[GR L-31845, 30 April 1979]; also Mondragon vs. Court of
Appeals [GR L-31878]
First Division, De Castro (J): 4 concur, 1 took no part
See case entry 17
Facts: On 14 March 1957, Ngo Hing filed an application with the Great Pacific Life
Assurance Company for a 20-year endowment policy in the amount of P50,000.00 on the life
of his one-year old daughter Helen Go. Ngo Hing supplied the essential data which Lapulapu
D. Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the corresponding
form in his own handwriting . Mondragon finally type-wrote the data on the application form
which was signed by Ngo Hing. The latter paid the annual premium, the sum of P1,077.75
going over to the Company, but he retained the amount of P1,317.00 as his commission for
being a duly authorized agent of Pacific Life. Upon the payment of the insurance premium,
the binding deposit receipt was issued to Ngo Hing. Likewise, Mondragon handwrote at the
bottom of the back page of the application form his strong recommendation for the approval
of the insurance application. Then on 30 April 1957, Mondragon received a letter from Pacific
Life disapproving the insurance application. The letter stated that the said life insurance
application for 20-year endowment plan is not available for minors below 7 years old, but
Pacific Life can consider the same under the Juvenile Triple Action Plan, and advised that if
the offer is acceptable, the Juvenile Non-Medical Declaration be sent to the Company. The
non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by
Mondragon to Ngo Hing. Instead, on 6 May 1957, Mondragon wrote back Pacific Life again
strongly recommending the approval of the 20-year endowment life insurance on the ground
that Pacific Life is the only insurance company not selling the 20-year endowment insurance
plan to children, pointing out that since 1954 the customers, especially the Chinese, were
asking for such coverage. It was when things were in such state that on 28 May 1957 Helen
Go died of influenza with complication of broncho-pneumonia. Thereupon, Ngo Hing sought
the payment of the proceeds of the insurance, but having failed in his effort, he filed the action
for the recovery of the same before the Court of First Instance of Cebu, which rendered a
decision against Pacific Life and Mondragon, orderig them to solidarily pay Ngo Hing the
amount of P50,000.00 with interest at 6% from the date of the filing of the complaint, and the
sum of P10,000.00 as attorney's fees plus costs of suits. On appeal, the Court of Appeals set
aside the appealed decision of the Court of First Instance of Cebu, and absolved Pacific Life
and Mondragon from liability on the insurance policy, but ordered the reimbursement to Ngo
Hing the amount of P1,077.75, without interest. On reconsideration, however, the appellate
court affirmed in toto the decision of the Court of First Instance of Cebu, ordering Pacific Life
and Mondragon jointly and severally to pay Ngo Hing. Two petitions for certiorari by way of
appeal were filed by Pacific Life and Mondragon. The petitons were consolidated by the
Supreme Court in a resolution dated 29 April 1970.
Issue: Whether the binding deposit receipt constituted a temporary contract of the life
insurance in question, and thus negate the claim that the insurance contract was perfected.
Held: YES. The provisions printed on the binding deposit receipt show that the binding
deposit receipt is intended to be merely a provisional or temporary insurance contract and only
upon compliance of the following conditions: (1) that the company shall be satisfied that the
applicant was insurable on standard rates; (2) that if the company does not accept the
application and offers to issue a policy for a different plan, the insurance contract shall not be
binding until the applicant accepts the policy offered; otherwise, the deposit shall be refunded;
and (3) that if the applicant is not insurable according to the standard rates, and the company
disapproves the application, the insurance applied for shall not be in force at any time, and the
premium paid shall be returned to the applicant. Clearly implied from the aforesaid conditions
is that the binding deposit receipt in question is merely an acknowledgment, on behalf of the
company, that the latter's branch office had received from the applicant the insurance premium
and had accepted the application subject for processing by the insurance company; and that the
latter will either approve or reject the same on the basis of whether or not the applicant is
"insurable on standard rates." Since Pacific Life disapproved the insurance application of Ngo
Hing, the binding deposit receipt in question had never become in force at any time. Upon this
premise, the binding deposit receipt is, manifestly, merely conditional and does not insure
outright. Where an agreement is made between the applicant and the agent, no liability shall
attach until the principal approves the risk and a receipt is given by the agent. The acceptance
is merely conditional, and is subordinated to the act of the company in approving or rejecting
the application. Thus, in life insurance, a "binding slip" or "binding receipt" does not insure by
itself. It bears repeating that through the intra-company communication of 30 April 1957,
Pacific Life disapproved the insurance application in question on the ground that it is not
offering the 20- year endowment insurance policy to children less than 7 years of age. What it
offered instead is another plan known as the Juvenile Triple Action, which Ngo Hing failed to
accept. In the absence of a meeting of the minds between Pacific Life and Ngo Hing over the
20- year endowment life insurance in the amount of P50,000.00 in favor of the latter's one-
year old daughter, and with the non-compliance of the abovequoted conditions stated in the
disputed binding deposit receipt, there could have been no insurance contract duly perfected
between them. Accordingly, the deposit paid by Ngo Hing shall have to be refunded by Pacific
Life.
3. Asian Terminals, INC v First Lepanto-Taisho Insurance
Corp, GR. No 185964m June 16, 2014.
FACTS: A shipment of 3,000 bags of sodium tripolyphosphate arrived in Manila through CO
SCO and was discharged into the possession and custody of ATI, a domestic corporation enga
ged in arrastre business. The shipment remained for quite some time at ATI’s storage area until
it was withdrawn by broker, PROVEN, on for delivery to the consignee. Upon receipt of the s
hipment, it was found out that the delivered goods incurred shortages and spillage for a loss/da
mage valued at P166,772.41. GASI sought recompense from COSCO, thru its Philippine agen
t SMITH BELL, ATI and PROVEN but was denied. Hence, it pursued indemnification from th
e shipment’s insurer, FIRST LEPANTO. As subrogee, FIRST LEPANTO demanded from CO
SCO, its shipping agency in the Philippines, SMITH BELL, PROVEN and ATI, reimbursemen
t of the amount it paid to GASI. ATI and PROVEN denied liability for the lost/damaged shipm
ent and claimed that it exercised due diligence and care in handling the same.
MeTC dismissed the case. On appeal, the Regional Trial Court (RTC) reversed the MeTC’s fin
dings. ATI sought recourse with the CA challenging the RTC’s finding that FIRST LEPANTO
was validly subrogated to the rights of GASI with respect to the lost/damaged shipment. ATI a
rgued that there was no valid subrogation because FIRSTLEPANTO failed to present a valid, e
xisting and enforceable Marine Open Policy or insurance contract. ATI reasoned that the Certif
icate of Insurance or Marine Cover Note submitted by FIRST LEPANTO as evidence is not th
e same as an actual insurance contract.
ISSUE: Whether or not the non
presentation of an insurance contract will bar a subrogee from collecting reimbursement.
HELD: No, Non-
presentation of the insurance contract is not fatal to FIRST LEPANTO’s cause of action for rei
mbursement as subrogee. Subrogation is the substitution of one person in the place of another
with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of
the other in relation to a debt or claim, including its remedies or securities.
In the case at bar, the Supreme Court observed that it is conspicuous from the records that ATI
put in issue the submission of the insurance contract for the first time before the CA. Despite o
pportunity to study FIRST LEPANTO’s complaint before the MeTC, ATI failed to allege in its
answer the necessity of the insurance contract. Neither was the same considered during pre-
trial as one of the decisive matters in the case. Further, ATI never challenged the relevancy or
materiality of the Certificate of Insurance presented by FIRST LEPANTO as evidence during t
rial as proof of its right to be subrogated in the consignee’s stead. Since it was not agreed durin
g the pre-trial proceedings that FIRST LEPANTO will have to prove its subrogation rights by
presenting a copy of the insurance contract, ATI is barred from pleading the absence of such c
ontract in its appeal. It is imperative for the parties to disclose during pre-trial all issues they in
tend to raise during the trial because, they are bound by the delimitation of such issues. The de
termination of issues during the pre-trial conference bars the consideration of other questions,
whether during trial or on appeal.
PREMIUM
1. Makati Tuscany Condominium Corporation vs. Court of Appeals [GR
95546, 6 November 1992] First Division, Bellosillo (J): 3 concur, 1 on leave
Facts: Sometime in early 1982, American Home Assurance Co. (AHAC), represented by
American International Underwriters (Phils.), Inc., (AIUI) issued in favor of Makati Tuscany
Condominium Corporation (Tuscany) Insurance Policy AH-CPP-9210452 on the latter's
building and premises, for a period beginning 1 March 1982 and ending 1 March 1983, with a
total premium of P466,103.05. The premium was paid on installments on 12 March 1982, 20
May 1982, 21 June 1982 and 16 November 1982, all of which were accepted by AHAC. On
10 February 1983, AHAC issued to Tuscany Insurance Policy No.which replaced and renewed
the previous policy, for a term covering 1 March 1903 to 1 March 1984. The premium in the
amount of P466,103.05 was again paid on installments on 13 April 1983, 13 July 1983, 3
August 1983, 9 September 1983, and 21 November 1983. All payments were likewise
accepted by AHAC. On 20 January 1984, the policy was again renewed and AHAC issued to
Tuscany Insurance Policy AH-CPP-9210651 for the period 1 March 1984 to 1 March 1985.
On this renewed policy, Tuscany made two installment payments, both accepted by AHAC,
the first on 6 February 1984 for P52,000.00 and the second, on 6 June 1984 for P100,000.00.
Thereafter, Tuscany refused to pay the balance of the premium. Consequently, AHAC filed an
action to recover the unpaid balance of P314,103.05 for Insurance Policy AH-CPP-9210651.
In its answer with counterclaim, Tuscany admitted the issuance of Insurance Policy AH-CPP-
9210651. It explained that it discontinued the payment of premiums because the policy did not
contain a credit clause in its favor and the receipts for the installment payments covering the
policy for 1984-85, as well as the two (2) previous policies, stated the following reservations:
(2) Acceptance of this payment shall not waive any of the company rights to deny liability on
any claim under the policy arising before such payments or after the expiration of the credit
clause of the policy; and (3) Subject to no loss prior to premium payment. If there be any loss
such is not covered. Tuscany further claimed that the policy was never binding and valid, and
no risk attached to the policy. It then pleaded a counterclaim for P152,000.00 for the premiums
already paid for 1984-85, and in its answer with amended counterclaim, sought the refund of
P924,206.10 representing the premium payments for 1982-85. After some incidents, Tuscany
and AHAC moved for summary judgment. On 8 October 1987, the trial court dismissed the
complaint and the counterclaim. Both parties appealed from the judgment of the trial court.
Thereafter, the Court of Appeals rendered a decision modifying that of the trial court by
ordering Tuscany to pay the balance of the premiums due on Policy AH-CPP-921-651, or
P314,103.05 plus legal interest until fully paid, and affirming the denial of the counterclaim.
Tuscany filed the petition.
Issue: Whether payment by installment of the premiums due on an insurance policy
invalidates the contract of insurance.
Held: NO. The subject policies are valid even if the premiums were paid on installments. The
records clearly show that Tuscany and AHAC intended subject insurance policies to be
binding and effective notwithstanding the staggered payment of the premiums. The initial
insurance contract entered into in 1982 was renewed in 1983, then in 1984. In those 3 years,
the insurer accepted all the installment payments. Such acceptance of payments speaks loudly
of the insurer's intention to honor the policies it issued to Tuscany. Certainly, basic principles
of equity and fairness would not allow the insurer to continue collecting and accepting the
premiums, although paid on installments, and later deny liability on the lame excuse that the
premiums were not prepaid in full. Thus, while the import of Section 77 is that prepayment of
premiums is strictly required as a condition to the validity of the contract, the Court was not
prepared to rule that the request to make installment payments duly approved by the insurer,
would prevent the entire contract of insurance from going into effect despite payment and
acceptance of the initial premium or first installment. Section 78 of the Insurance Code in
effect allows waiver by the insurer of the condition of prepayment by making an
acknowledgment in the insurance policy of receipt of premium as conclusive evidence of
payment so far as to make the policy binding despite the fact that premium is actually unpaid.
Section 77 merely precludes the parties from stipulating that the policy is valid even if
premiums are not paid, but does not expressly prohibit an agreement granting credit extension,
and such an agreement is not contrary to morals, good customs, public order or public policy.
So is an understanding to allow insured to pay premiums in installments not so proscribed. At
the very least, both parties should be deemed in estoppel to question the arrangement they
have voluntarily accepted. It appearing from the peculiar circumstances that the parties
actually intended to make the three (3) insurance contracts valid, effective and binding,
Tuscany may not be allowed to renege on its obligation to pay the balance of the premium
after the expiration of the whole term of the third policy (AH-CPP-9210651) in March 1985.
Moreover, where the risk is entire and the contract is indivisible, the insured is not entitled to a
refund of the premiums paid if the insurer was exposed to the risk insured for any period,
however brief or momentary.
2. UCPB General Insurance vs. Masagana Telamart Inc.
[GR 137172, 15 June 1999] First Division, Pardo (J): 4
concur
Facts: On 15 April 1991, UCPB General Insurance Co. Inc. (UCPBGen) issued 5 insurance
policies covering Masagana Telamart, Inc.'s various property described therein against fire, for
the period from 22 May 1991 to 22 May 1992. In March 1992, UCPBGen evaluated the
policies and decided not to renew them upon expiration of their terms on 22 May 1992.
UCPBGen advised Masagana's broker, Zuellig Insurance Brokers, Inc. of its intention not to
renew the policies. On 6 April 1992, UCPBGen gave written notice to Masagana of the non-
renewal of the policies at the address stated in the policies. On 13 June 1992, fire razed
Masagana's property covered by three of the insurance policies UCPBGen issued. On 13 July
1992, Masagana presented to UCPBGen's cashier at its head office 5 manager's checks in the
total amount of P225,753.95, representing premium for the renewal of the policies from 22
May 1992 to 22 May 1993. No notice of loss was filed by Masagana under the policies prior
to 14 July 1992. On 14 July 1992, Masagana filed with UCPBGen its formal claim for
indemnification of the insured property razed by fire. On the same day, 14 July 1992,
UCPBGen returned to Masagana the 5 manager's checks that it tendered, and at the same time
rejected Masagana's claim for the reasons (a) that the policies had expired and were not
renewed, and (b) that the fire occurred on 13 June 1992, before Masagana's tender of premium
payment. On 21 July 1992, Masagana filed with the Regional Trial Court, Branch 58, Makati
City, a civil complaint against UCPBGen for recovery of P18,645,000.00, representing the
face value of the policies covering Masagana's insured property razed by fire, and for
attorney's fees. On 23 October 1992, after its motion to dismiss had been denied, UCPBGen
filed an answer to the complaint. It alleged that the complaint "fails to state a cause of action";
that UCPBGen was not liable to Masagana for insurance proceeds under the policies because
at the time of the loss of Masagana's property due to fire, the policies had long expired and
were not renewed. After due trial, on 10 March 1993, the Regional Trial Court, Branch 58,
Makati, rendered decision, (1) authorizing and allowing Masagana to consign/deposit with this
Court the sum of P225,753.95 (refused by UCPBGen) as full payment of the corresponding
premiums for the replacement-renewal policies; (2) declaring Masagana to have fully
complied with its obligation to pay the premium thereby rendering the replacement-renewal
policy effective and binding for the duration 22 May 1992 until 22 May 1993; and, ordering
UCPBGen to deliver forthwith to Masagana the said replacement -renewal policies; (3)
declaring two of the policies in force from 22 August 1991 up to 23 August 1992 and 9 August
1991 to 9 August 1992, respectively; and (4) ordering UCPBGen to pay Masagana the sums
of: (a) P18,645,000.00 representing the latter's claim for indemnity under three policies and/or
its replacement-renewal policies; (b) 25% of the total amount due as and for attorney's fees;
(c) P25,000.00 as necessary litigation expenses; and, (d) the costs of suit. In due time,
UCPBGen appealed to the Court of Appeals. On 7 September 1998, the Court of Appeals
promulgated its decision affirming that of the Regional Trial Court with the modification that
item 3 of the dispositive portion was deleted, and the award of attorney's fees was reduced to
10% of the total amount due. The Court of Appeals held that following previous practise,
Masagana was allowed a 60 to 90 day credit term for the renewal of its policies, and that the
acceptance of the late premium payment suggested an understanding that payment could be
made later. UCPBGen appealed.
Issue: Whether the fire insurance policies issued by UCPBGen to the Masagana covering the
period 22 May 1991 to 22 May 1992, had expired on the latter date or had been extended or
renewed by an implied credit arrangement though actual payment of premium was tendered
on a latter date after the occurrence of the risk (fire) insured against.
Held: The answer is easily found in the Insurance Code. No, an insurance policy, other than
life, issued originally or on renewal, is not valid and binding until actual payment of the
premium. Any agreement to the contrary is void. The parties may not agree expressly or
impliedly on the extension of credit or time to pay the premium and consider the policy
binding before actual payment. The case of Malayan Insurance Co., Inc. vs. Cruz-Arnaldo is
not applicable. In that case, payment of the premium was in fact actually made on 24
December 1981, and the fire occurred on 18 January 1982. Here, the payment of the premium
for renewal of the policies was tendered on 13 July 1992, a month after the fire occurred on 13
June 1992. The assured did not even give the insurer a notice of loss within a reasonable time
after occurrence of the fire. Hence, the Supreme Court reversed and set aside the decision of
the Court of Appeals in CA-GR CV 42321. In lieu thereof, the Court rendered judgment
dismissing Masagana's complaint and UCPBGen's counterclaims thereto filed with the
Regional Trial Court, Branch 58, Makati City, in Civil Case 92-2023, without costs.
3. UCPB General Insurance vs. Masagana Telamart Inc. [GR 137172, 14 April
2001]
Resolution En Banc, Davide Jr (CJ): 9 concur, 2 file separate dissenting opinions to
which 3 joined
Facts: In the Supreme Court's decision of 15 June 1999, it reversed and set aside the decision
of the Court of Appeals, which affirmed with modification the judgment of the trial court (a)
allowing Masagana to consign the sum of P225,753.95 as full payment of the premiums for
the renewal of the five insurance policies on Masagana's properties; (b) declaring the
replacement-renewal policies effective and binding from 22 May 1992 until 22 May 1993; and
(c) ordering UCPBGen to pay Masagana P18,645,000.00 as indemnity for the burned
properties covered by the renewal-replacement policies. The modification consisted in the (1)
deletion of the trial court's declaration that three of the policies were in force from August
1991 to August 1992; and
(2) reduction of the award of the attorney's fees from 25% to 10% of the total amount due the
Masagana. Masagana seasonably filed a motion for the reconsideration of the adverse verdict.
Issue [1]: Whether there are exceptions to Section 77, to allow Masagana to recover from
UCPBGen.
Held [1]: YES. The first exception is provided by Section 77 itself, and that is, in case of a life
or industrial life policy whenever the grace period provision applies. The second is that
covered by Section 78 of the Insurance Code, which provides that "Any acknowledgment in a
policy or contract of insurance of the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein that it
shall not be binding until premium is actually paid." A third exception was laid down in
Makati Tuscany Condominium Corporation vs. Court of Appeals, 5 wherein the Court ruled
that Section 77 may not apply if the parties have agreed to the payment in installments of the
premium and partial payment has been made at the time of loss. Further, in Tuscany, the Court
also quoted with approval the following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision that "While the import of
Section 77 is that prepayment of premiums is strictly required as a condition to the validity of
the contract, We are not prepared to rule that the request to make installment payments duly
approved by the insurer would prevent the entire contract of insurance from going into effect
despite payment and acceptance of the initial premium or first installment. Section 78 of the
Insurance Code in effect allows waiver by the insurer of the condition of prepayment by
making an acknowledgment in the insurance policy of receipt of premium as conclusive
evidence of payment so far as to make the policy binding despite the fact that premium is
actually unpaid. Section 77 merely precludes the parties from stipulating that the policy is
valid even if premiums are not paid, but does not expressly prohibit an agreement granting
credit extension, and such an agreement is not contrary to morals, good customs, public order
or public policy (De Leon, The Insurance Code, p. 175). So is an understanding to allow
insured to pay premiums in installments not so prescribed. At the very least, both parties
should be deemed in estoppel to question the arrangement they have voluntarily accepted." By
the approval of the aforequoted findings and conclusion of the Court of Appeals, Tuscany has
also provided a fourth exception to Section 77, namely, that the insurer may grant credit
extension for the payment of the premium. This simply means that if the insurer has granted
the insured a credit term for the payment of the premium and loss occurs before the expiration
of the term, recovery on the policy should be allowed even though the premium is paid after
the loss but within the credit term. Moreover, there is nothing in Section 77 which prohibits
the parties in an insurance contract to provide a credit term within which to pay the premiums.
That agreement is not against the law, morals, good customs, public order or public policy.
The agreement binds the parties. Herein, it would be unjust and inequitable if recovery on the
policy would not be permitted against UCPBGen, which had consistently granted a 60- to 90-
day credit term for the payment of premiums despite its full awareness of Section 77.
Estoppel bars it from taking refuge under said Section, since Masagana relied in good faith on
such practice.
Estoppel then is the fifth exception to Section 77.
 4. American Home Assurance Company vs. Chua
[GR 130421, 28 June 1999] First Division,
Davide Jr. (CJ): 4 concur
Facts: American Home Assurance Company (AHAC) is a domestic corporation engaged in
the insurance business. Sometime in 1990, Antonio Chua obtained from AHAC a fire
insurance covering the stock-in-trade of his business, Moonlight Enterprises, located at
Valencia, Bukidnon. The insurance was due to expire on 25 March 1990. On 5 April 1990
Chua issued PCIBank Check 352123 in the amount of P2,983.50 to AHAC’s agent, James Uy,
as payment for the renewal of the policy. In turn, the latter delivered Renewal Certificate
00099047 to Chua. The check was drawn against a Manila bank and deposited in AHAC’s
bank account in Cagayan de Oro City. The corresponding official receipt was issued on 10
April. Subsequently, a new insurance policy, Policy 206-4234498-7, was issued, whereby
AHAC undertook to indemnify Chua for any damage or loss arising from fire up to P200,000
for the period 25 March 1990 to 25 March 1991. On 6 April 1990 Moonlight Enterprises was
completely razed by fire. Total loss was estimated between P4,000,000 and P5,000,000. Chua
filed an insurance claim with AHAC and four other co-insurers, namely, Pioneer Insurance
and Surety Corporation, Prudential Guarantee and Assurance, Inc., Filipino Merchants
Insurance Co. and Domestic Insurance Company of the Philippines. AHAC refused to honor
the claim notwithstanding several demands by Chua, thus, the latter filed an action against
AHAC before the trial court. In its defense, AHAC claimed there was no existing insurance
contract when the fire occurred since Chua did not pay the premium. It also alleged that even
assuming there was a contract, Chua violated several conditions of the policy, particularly: (1)
his submission of fraudulent income tax return and financial statements; (2) his failure to
establish the actual loss, which AHAC assessed at P70,000; and (3) his failure to notify to
AHAC of any insurance already effected to cover the insured goods. These violations, AHAC
insisted, justified the denial of the claim. The trial court ruled in favor of Chua. It found that
Chua paid by way of check a day before the fire occurred. The check, which was deposited in
AHAC’s bank account, was even acknowledged in the renewal certificate issued by AHAC’s
agent. It declared that the alleged fraudulent documents were limited to the disparity between
the official receipts issued by the Bureau of Internal Revenue (BIR) and the income tax
returns for the years 1987 to 1989. All the other documents were found to be genuine.
Nonetheless, it gave credence to the BIR certification that Chua paid the corresponding taxes
due for the questioned years. As to Chua’s failure to notify AHAC of the other insurance
contracts covering the same goods, the trial court held that AHAC failed to show that such
omission was intentional and fraudulent. Finally, it noted that AHAC’s investigation of Chua's
claim was done in collaboration with the representatives of other insurance companies who
found no irregularity therein. In fact, Pioneer Insurance and Surety Corporation and Prudential
Guarantee and Assurance, Inc. promptly paid the claims filed by Chua. The trial court ordered
AHAC to pay Chua P200,000.00, representing the amount of the insurance, plus legal interest
from the date of filing of the case;
P200,000.00 as moral damages; P200,000.00 as loss of profit; P100,000.00 as exemplary
damages; P50,000.00 as attorney’s fees; and Cost of suit. On appeal, the assailed decision was
affirmed in toto by the Court of Appeals. The Court of Appeals found that Chua’s claim was
substantially proved and AHAC’s unjustified refusal to pay the claim entitled Chua to the
award of damages. Its motion for reconsideration of the judgment having been denied, AHAC
filed the petition for review on certiorari.
Issue: Whether there was a valid payment of premium, considering that Chua’s check was
cashed after the occurrence of the fire.
Held: YES. The general rule in insurance laws is that unless the premium is paid the insurance
policy is not valid and binding. The only exceptions are life and industrial life insurance.
Whether payment was indeed made is a question of fact which is best determined by the trial
court. The trial court found, as affirmed by the Court of Appeals, that there was a valid check
payment by Chua to AHAC. Well-settled is the rule that the factual findings and conclusions
of the trial court and the Court of Appeals are entitled to great weight and respect, and will not
be disturbed on appeal in the absence of any clear showing that the trial court overlooked
certain facts or circumstances which would substantially affect the disposition of the case. The
Supreme Cpurt sees no reason to depart from this ruling. According to the trial court the
renewal certificate issued to Chua contained the acknowledgment that premium had been paid.
It is not disputed that the check drawn by Chua in favor of AHAC and delivered to its agent
was honored when presented and AHAC forthwith issued its official receipt to Chua on 10
April 1990. Section 306 of the Insurance Code provides that any insurance company which
delivers a policy or contract of insurance to an insurance agent or insurance broker shall be
deemed to have authorized such agent or broker to receive on its behalf payment of any
premium which is due on such policy or contract of insurance at the time of its issuance or
delivery or which becomes due thereon. Herein, the best evidence of such authority is the fact
that AHAC accepted the check and issued the official receipt for the payment. It is, as well,
bound by its agent’s acknowledgment of receipt of payment. Section 78 of the Insurance Code
explicitly provides that "An acknowledgment in a policy or contract of insurance of the receipt
of premium is conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until the premium is
actually paid." This Section establishes a legal fiction of payment and should be interpreted as
an exception to Section 77.
5. Tibay vs. Court of Appeals [GR 119655, 24 May 1996]
First Division, Bellosillo (J): 2 concur, 1 filed a separate opinion to which 1 joined
Facts: On 22 January 1987, Fortune Life and General Insurance Co., Inc. (Fortune) issued
Fire Insurance Policy 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo on their
two-storey residential building located at 5855 Zobel Street, Makati City, together with all
their personal effects therein. The insurance was for P600,000.00 covering the period from 23
January 1987 to 23 January 1988. On 23 January 1987, of the total premium of P2,983.50,
petitioner Violeta Tibay only paid P600.00 thus leaving a considerable balance unpaid. On 8
March 1987 the insured building was completely destroyed by fire. Two days later or on 10
March 1987 Violeta Tibay paid the balance of the premium. On the same day, she filed with
Fortune a claim on the fire insurance policy. Her claim was accordingly referred to its adjuster,
Goodwill Adjustment Services, Inc. (GASI), which immediately wrote Violeta requesting her
to furnish it with the necessary documents for the investigation and processing of her claim.
Petitioner forthwith complied. On 28 March 1987 she signed a non-waiver agreement with
GASI to the effect that any action taken by the companies or their representatives in
investigating the claim made by the claimant for his loss which occurred at 5855 Zobel Roxas,
Makati on 8 March 1987, or in the investigating or ascertainment of the amount of actual cash
value and loss, shall not waive or invalidate any condition of the policies of such companies
held by said claimant, nor the rights of either or any of the parties to this agreement, and such
action shall not be, or be claimed to be, an admission of liability on the part of said companies
or any of them. In a letter dated 11 June 1987 Fortune denied the claim of Violeta for violation
of Policy Condition 2 and of Section 77 of the Insurance Code. Efforts to settle the case before
the Insurance Commission proved futile. On 3 March 1988 Violeta and the other petitioners
(Antonio Tibay, Ofelia M. Roraldo, Victorina M. Roraldo, Virgilio M. Roraldo, Myrna M.
Roraldo, and Rosabella M. Roraldo) sued Fortune for damages in the amount of P600,000.00
representing the total coverage of the fire insurance policy plus 12% interest per annum,
P100,000.00 moral damages, and attorney's fees equivalent to 20% of the total claim. On 19
July 1990 the trial court ruled for Tibay, et al. and adjudged Fortune liable for the total value
of the insured building and personal properties in the amount of P600,000.00 plus interest at
the legal rate of 6% per annum from the filing of the complaint until full payment, and
attorney's fees equivalent to 20% of the total amount claimed plus costs of suit. On 24 March
1995 the Court of Appeals reversed the court a quo by declaring Fortune not to be liable to
Tibay et al. but ordering Fortune to return to the former the premium of P2,983.50 plus 12%
interest from 10 March 1987 until full payment. Tibay, et al. filed the petition for review.
Issue: Whether a fire insurance policy be valid, binding and enforceable upon mere partial
payment of
premium.
Held: NO. Insurance is a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event. The
consideration is the premium, which must be paid at the time and in the way and manner
specified in the policy, and if not so paid, the policy will lapse and be forfeited by its own
terms. The Policy provides for payment of premium in full. Accordingly, where the premium
has only been partially paid and the balance paid only after the peril insured against has
occurred, the insurance contract did not take effect and the insured cannot collect at all on the
policy. This is fully supported by Section 77 of the Insurance Code which provides that "An
insurer is entitled to payment of the premium as soon as the thing insured is exposed to the
peril insured against. Notwithstanding any agreement to the contrary, no policy or contract of
insurance issued by an insurance company is valid and binding unless and until the premium
thereof has been paid, except in the case of a life or an industrial life policy whenever the
grace period provision applies." Apparently the crux of the controversy lies in the phrase
"unless and until the premium thereof has been paid." This leads us to the manner of payment
envisioned by the law to make the insurance policy operative and binding. For whatever
judicial construction may be accorded the disputed phrase must ultimately yield to the clear
mandate of the law. The principle that where the law does not distinguish the court should
neither distinguish assumes that the legislature made no qualification on the use of a general
word or expression. It cannot be disputed that premium is the elixir vitae of the insurance
business because by law the insurer must maintain a legal reserve fund to meet its contingent
obligations to the public, hence, the imperative need for its prompt payment and full
satisfaction. It must be emphasized here that all actuarial calculations and various tabulations
of probabilities of losses under the risks insured against are based on the sound hypothesis of
prompt payment of premiums. Upon this bedrock insurance firms are enabled to offer the
assurance of security to the public at favorable rates. But once payment of premium is left to
the whim and caprice of the insured, as when the courts tolerate the payment of a mere
P600.00 as partial undertaking out of the stipulated total premium of P2,983.50 and the
balance to be paid even after the risk insured against has occurred, as Tibay et al. have done in
this case, on the principle that the strength of the vinculum juris is not measured by any
specific amount of premium payment, we will surely wreak havoc on the business and set to
naught what has taken actuarians centuries to devise to arrive at a fair and equitable
distribution of risks and benefits between the insurer and the insured.
Philippine Phoenix Surety & Insurance Company vs. Woodworks Inc. [GR L-25317,
6 August 1979] First Division, Melencio-Herrera (J): 4 concur, 1 abroad.
Facts: On 21 July 1960, upon Woodworks Inc.'s application, Philippine Phoenix Surety &
Insurance Company (Phoenix) issued in its favor Fire Insurance Policy 9749 for P500,000.00
whereby Phoenix insured Woodworks Inc.'s building, machinery and equipment for a term of
one year from 21 July 1960 to 21 July 1961 against loss by fire. The premium and other
charges including the margin fee surcharge of P590.76 and the documentary stamps in the
amount of P156.60 affixed on the Policy, amounted to P10,593.36. Woodworks Inc. did not
pay the premium stipulated in the Policy when it was issued nor at any time thereafter. On 19
April 1961, or before the expiration of the one-year term, Phoenix notified Woodworks Inc.,
through its Indorsement F-6963/61, of the cancellation of the Policy allegedly upon request of
Woodworks Inc. The latter has denied having made such a request. In said Indorsement,
Phoenix credited Woodworks Inc. with the amount of P3,110.25 for the unexpired period of
94 days, and claimed the balance of P7,483.11 representing "earned premium from 21 July
1960 to 18 April 1961 or, say 271 days. On 6 July 1961, Phoenix demanded in writing for the
payment of said amount. Woodworks Inc., through counsel, disclaimed any liability in its
reply-letter of 15 August 1961, contending, in essence, that it need not pay premium "because
the Insurer did not stand liable for any indemnity during the period the premiums were not
paid." On 30 January 1962, Phoenix commenced action in the Court of First Instance of
Manila, Branch IV (Civil Case 49468), to recover the amount of P7,483.11 as "earned
premium." Woodworks Inc. controverted basically on the theory that its failure "to pay the
premium after the issuance of the policy put an end to the insurance
contract and rendered the policy unenforceable." On 13 September 1962, judgment was
rendered in Phoenix's favor "ordering Woodworks Inc. to pay Phoenix the sum of P7,483.11,
with interest thereon at the rate of 6% per annum from 30 January 1962, until the principal
shall have been fully paid, plus the sum of P700.00 as attorney's fees of the Phoenix, and the
costs of the suit." From this adverse Decision, Woodworks Inc. appealed to the Court of
Appeals which certified the case to the Supreme Court on a question of law.
Issue: Whether the Fire Insurance Policy was a binding contract even if the premium stated in
the policy has not been paid.
Held: Insurance is "a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown or contingent event." The
consideration is the "premium". "The premium must be paid at the time and in the way and
manner specified in the policy and, if not so paid, the policy will lapse and be forfeited by its
own terms." The Policy provides for pre-payment of premium. Accordingly, "when the policy
is tendered the insured must pay the premium unless credit is given or there is a waiver, or
some agreement obviating the necessity for prepayment." To constitute an extension of credit
there must be a clear and express agreement therefor. From the Policy provisions, there was no
clear agreement that a credit extension was accorded Woodworks Inc. And even if it were to
be presumed that Phoenix had extended credit from the circumstances of the unconditional
delivery of the Policy without prepayment of the premium, yet it is obvious that Woodworks
Inc. had not accepted the insurer's offer to extend credit, which is essential for the validity of
such agreement. An acceptance of an offer to allow credit, if one was made, is as essential to
make a valid agreement for credit, to change a conditional delivery of an insurance policy to
an unconditional delivery, as it is to make any other contract. Such an acceptance could not be
merely a mental act or state of mind, but would require a promise to pay made known in some
manner to Woodworks Inc. In this respect, the present case differs from that involving the
same parties where recovery of the balance of the unpaid premium was allowed inasmuch as
in that case "there was not only a perfected contract of insurance but a partially performed one
as far as the payment of the agreed premium was concerned." This is not the situation
obtaining here where no partial payment of premiums has been made whatsoever. Since the
premium had not been paid, the policy must be deemed to have lapsed. The non-payment of
premiums does not merely suspend but puts an end to an insurance contract, since the time of
the payment is peculiarly of the essence of the contract. The rule is that under policy
provisions that upon the failure to make a payment of a premium or assessment at the time
provided for, the policy shall become void or forfeited, or the obligation of the insurer shall
cease, or words to like effect, because the contract so prescribes and because such a stipulation
is a material and essential part of the contract. This is true, for instance, in the case of life,
health and accident, fire and hail insurance policies. In fact, if the peril insured against had
occurred, Phoenix, as insurer, would have had a valid defense against recovery under the
Policy it had issued. Explicit in the Policy itself is Phoenix's agreement to indemnify
Woodworks Inc. for loss by fire only "after payment of premium. Compliance by the insured
with the terms of the contract is a condition precedent to the right of recovery. The burden is
on an insured to keep a policy in force by the payment of premiums, rather than on the insurer
to exert every effort to prevent the insured from allowing a policy to elapse through a failure to
make premium payments. The continuance of the insurer's obligation is conditional upon the
payment of premiums, so that no recovery can be had upon a lapsed policy, the contractual
relation between the parties having ceased. Moreover, an insurer cannot treat a contract as
valid for the purpose of collecting premiums and invalid for the purpose of indemnity. The
foregoing findings are buttressed by section 77 of the Insurance Code (Presidential Decree No.
612, promulgated on December 18, 1974), which now provides that no contract of insurance
issued by an insurance company is valid and binding unless and until the premium thereof has
been paid, notwithstanding any agreement to the contrary.