On April 19, 1961, or before the expiration of the one-year term, plaintiff notified
defendant, through its Indorsement No. F-6963/61, of the cancellation of the Policy
FIRST DIVISION
[G.R. No. L-25317. August 6, 1979.]
PHILIPPINE PHOENIX SURETY & INSURANCE COMPANY, plaintiff-
appellee, vs. WOODWORKS, INC., defendant-appellant.
Zosimo Rivas for appellant.
Manuel O. Chan for appellee.
DECISION
MELENCIO-HERRERA, J p:
This case was certified to this Tribunal by the Court of Appeals in its Resolution of
October 4, 1965 on a pure question of law and "because the issues raised are
practically the same as those in CA-G.R. No. 32017-R" between the same parties, which
case had been forwarded to us on April 1, 1964. The latter case, "Philippine Phoenix
Surety & Insurance Inc. vs. Woodworks, Inc.," docketed in this Court as L-22684, was
decided on August 31, 1967 and has been reported in 20 SCRA 1270. LibLex
Specifically, this action is for recovery of unpaid premium on a fire insurance policy
issued by plaintiff, Philippine Phoenix Surety & Insurance Company, in favor of
defendant Woodworks, Inc.
The following are the established facts:
On July 21, 1960, upon defendant's application, plaintiff issued in its favor Fire
Insurance Policy No. 9749 for P500,000.00 whereby plaintiff insured defendant's
building, machinery and equipment for a term of one year from July 21, 1960 to July
21, 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.
It is undisputed that defendant did not pay the premium stipulated in the Policy when
it was issued nor at any time thereafter.
allegedly upon request of defendant. 1 The latter has denied having made such a
request. In said Indorsement, plaintiff credited defendant 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 July 21, 1960 to 18th April 1961 or, say 271 days."
On July 6, 1961, plaintiff demanded in writing for the payment of said
amount. 2 Defendant, through counsel, disclaimed any liability in its reply-letter of
August 15, 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." 3
On January 30, 1962, plaintiff commenced action in the Court of First Instance of
Manila, Branch IV (Civil Case No. 49468), to recover the amount of P7,483.11 as
"earned premium." Defendant 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." 4
On September 13, 1962, judgment was rendered in plaintiff's favor "ordering
defendant to pay plaintiff the sum of P7,483.11, with interest thereon at the rate of
6% per annum from January 30, 1962, until the principal shall have been fully paid, plus
the sum of P700.00 as attorney's fees of the plaintiff, and the costs of the suit." From
this adverse Decision, defendant appealed to the Court of Appeals which, as heretofore
stated, certified the case to us on a question of law.
The errors assigned read:
"1. The lower court erred in sustaining that Fire Insurance Policy,
Exhibit A, was a binding contract even if the premium stated in the
policy has not been paid.
"2. That the lower court erred in sustaining that the premium in
Insurance Policy, Exhibit B, became an obligation which was
demandable even after the period in the Policy has expired.
"3. The lower court erred in not deciding that a premium not paid
is not a debt enforceable by action of the insurer."
We find the appeal meritorious.
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." 5 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." 6
The provisions on premium in the subject Policy read:
 "THIS POLICY OF INSURANCE WITNESSETH, THAT in consideration
of — MESSRS. WOODWORKS, INC. — hereinafter called the
Insured, paying to the PHILIPPINE PHOENIX SURETY AND
INSURANCE, INC., hereinafter called the Company, the sum of —
PESOS NINE THOUSAND EIGHT HUNDRED FORTY SIX ONLY — the
Premium for the first period hereinafter mentioned, . . ."
xxx xxx xxx
"THE COMPANY HEREBY AGREES with the Insured . . . that if the
Property above described, or any part thereof, shall be destroyed
or damaged by Fire or Lightning afterpayment of Premium, at any
time between 4:00 o'clock in the afternoon of the TWENTY FIRST
day of JULY One Thousand Nine Hundred and SIXTY and 4:00
o'clock in the afternoon of the TWENTY FIRST day of JULY One
Thousand Nine Hundred and SIXTY ONE, . . ." (Emphasis supplied)
Paragraph "2" of the Policy further contained the following condition:
"2. No payment in respect of any premium shall be deemed to be
payment to the Company unless a printed form of receipt for the
same signed by an Official or duly-appointed Agent of the
Company shall have been given to the Insured."
Paragraph "10" of the Policy also provided:
"10. "This insurance may be terminated at any time at the request
of the Insured, in which case the Company will retain the
customary short period rate for the time the policy has been in
force. This insurance may also at any time be terminated at the
option of the Company, on notice to that effect being given to the
Insured, in which case the Company shall be liable to repay on
demand a ratable proportion of the premium for the unexpired
term from the date of the cancelment."
Clearly, 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." 7 To constitute
an extension of credit there must be a clear and express agreement therefor." 8
From the Policy provisions, we fail to find any clear agreement that a credit extension
was accorded defendant. And even if it were to be presumed that plaintiff had
extended credit from the circumstances of the unconditional delivery of the Policy
without prepayment of the premium, yet it is obvious that defendant had not accepted
the insurer's offer to extend credit, which is essential for the validity of such
agreement. cdll
"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
defendant. 9
In this respect, the instant case differs from that involving the same parties entitled
Philippine Phoenix Surety & Insurance Inc. vs. Woodworks, Inc., 10 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." 11
". . . 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." 12
In fact, if the peril insured against had occurred, plaintiff, as insurer, would have had a
valid defense against recovery under the Policy it had issued. Explicit in the Policy itself
is plaintiff's agreement to indemnify defendant for loss by fire only "after payment of
premium," supra. 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." 13
Moreover, "an insurer cannot treat a contract as valid for the purpose of collecting
premiums and invalid for the purpose of indemnity." 14
The foregoing findings are buttressed by section 77 of the Insurance Code (Presidential of the application. At this point, the child died of influenza with complication of
Decree No. 612, promulgated on December 18, 1974), which now provides that no broncho-pneumonia.
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 In a suit filed by private respondent to recover the proceeds of the insurance, the trial
contrary. LLpr court rendered judgment adverse to both petitioners. The Court of Appeals in its
amended decision affirmed the trial court's decision in toto.
WHEREFORE, the judgment appealed from is reversed, and plaintiff's complaint hereby
dismissed. The decisive issues in these cases are: (1) whether the binding deposit receipt
constituted a temporary contract of the life insurance in question; and (2) whether
private respondent concealed the state of health and physical condition of his child.
FIRST DIVISION The Supreme Court held that a "binding receipt" does not insure by itself; that no
insurance contract was perfected between the parties with the non-compliance of the
[G.R. No. L-31845. April 30, 1979.] conditions provided in the binding receipt and concealment having been committed
by private respondent.
GREAT PACIFIC LIFE ASSURANCE
COMPANY, petitioner, vs. HONORABLE COURT OF SYLLABUS
APPEALS, respondents.

1. INSURANCE CONTRACT; "BINDING DEPOSIT RECEIPT." — Where the binding deposit

[G.R. No. L-31878. April 30, 1979.]
LAPULAPU D. MONDRAGON, petitioner, vs. COURT OF APPEALS and
NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner
Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.
SYNOPSIS
Private respondent, a duly authorized agent of Pacific Life, applied for a 20-year
endowment policy on the life of his one-year old daughter, a mongoloid. He did not
divulge each physical defect of his daughter. He paid the premium and was issued a
binding deposit receipt. However, despite the branch manager's favorable
recommendation, the Company disapproved the application, because a 20-year
endowment plan is not available for minors. Instead, it offered the Juvenile Triple
Action Plan. The manager wrote back and again strongly recommended the approval
receipt is intended to be merely a provisional or temporary insurance contract, and
that the receipt merely acknowledged, on behalf of the insurance 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, such
binding deposit receipt does not become in force until the application is approved.
2. ID.; PERFECTION OF CONTRACT. — A binding deposit receipt which is merely
conditional does not insure outright. Thus, where an agreement is made between the
applicant and the agent, no liability will attack 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.
3. ID.; ID.; MEETING OF THE MIND. — A contract of insurance, like other contracts,
must be assented to by both parties either in person or by their agents. The contract,
to be binding from the date of the application, must have been a completed contract,
one that leaves nothing to be done, nothing to be completed, nothing to be passed
upon, or determined, before it shall take effect. There can be no contract of insurance
unless the minds of the parties have met in agreement.
4. ID.; ID.; FAILURE OF AGENT TO COMMUNICATE THE REJECTION TO APPLICANT. —
The failure of the insurance company's agent to communicate to the applicant the
rejection of the insurance application would not have any adverse effect on the
allegedly perfected temporary contract. In the first place, there was no contract
perfected between the parties who had no meeting of their minds. Private respondent,
being an authorized agent is indubitably aware that said company does not offer the
life insurance applied for. When he filed the insurance application in dispute he was
therefore only taking a chance that the company will approve the recommendation of
the agent for the acceptance and approval of the application in question. Secondly,
having an insurable interest on the life of his daughter, aside from being an insurance
agent and office associate of the branch, the applicant must have known and followed
the progress on the processing of such application and could not pretend ignorance of
the Company's rejection of the 20-year endowment life insurance application.
5. ID.; CONCEALMENT OF MATERIAL FACT. — The contract of insurance is one of
perfect good faith (uberrima fides meaning good faith; absolute and perfect candor or
openness and honestly; the absence of any concealment or deception, however slight
[Black's Law Dictionary, 2nd Edition], not for the insured alone but equally so for the
insurer. Concealment is a neglect to communicate that which a party knows and ought
to communicate (Section 25, Act 2427). Whether intentional or unintentional, the
concealment entities the insurer to rescind the contract of insurance.
6. ID.; ID.; CASE AT BAR. — The failure of the father who applied for a life insurance
policy on the life of his daughter to divulge the fact that his daughter is a mongoloid, a
congenital physical defect that could never be disguised, constitutes such concealment
as to render the policy void. And where the applicant himself is an insurance agent, he
ought to know, as he surely must have known, his duty and responsibility to supply
such a material fact, and his failure to divulge such significant fact is deemed to have
been done in bad faith.
DECISION
DE CASTRO, J p:
The two above-entitled cases were ordered consolidated by the Resolution of this
Court dated April 29, 1970, (Rollo, No. L-31878, p. 58), because the petitioners in both
cases seek similar relief, through these petitions for certiorari by way of appeal, from
the amended decision of respondent Court of Appeals which affirmed in toto the
decision of the Court of First Instance of Cebu, ordering "the defendants (herein
petitioners Great Pacific Life Assurance Company and Mondragon) jointly and severally
to pay plaintiff (herein private respondent 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."
In its original decision, the respondent Court of Appeals set aside the appealed decision
of the Court of First Instance of Cebu, and absolved the petitioners from liability on the
insurance policy, but ordered the reimbursement to appellee (herein private
respondent) the amount of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application
with the Great Pacific Life Assurance Company (hereinafter referred to as Pacific Life)
for a twenty-year endowment policy in the amount of P50,000.00 on the life of his one-
year old daughter Helen Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City
wrote on the corresponding form in his own handwriting (Exhibit I-M). Mondragon
finally type-wrote the data on the application form which was signed by private
respondent 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 (Exhibit E) was issued to private respondent Ngo
Hing. Likewise, petitioner 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 April 30, 1957, Mondragon received a letter from Pacific Life
disapproving the insurance application (Exhibit 3-M). The letter stated that the said life
insurance application for 20-year endowment plan is not available for minors below
seven 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 petitioner Mondragon to private respondent Ngo Hing. Instead, on
May 6, 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 (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of influenza
with complication of broncho-pneumonia. Thereupon, private respondent 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 the adverse decision as earlier referred to against both petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit
E) constituted a temporary contract of the life insurance in question; and (2) whether
private respondent Ngo Hing concealed the state of health and physical condition of
Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is
considered a BINDING RECEIPT. These conditions state that:
"A. If the Company or its agent, shall have received the premium
deposit . . . and the insurance application, ON or PRIOR to the date
of medical examination . . . said insurance shall be in force and in
effect from the date of such medical examination, for such period
 as is covered by the deposit . . ., PROVIDED the company shall be
satisfied that on said date the applicant was insurable on standard
rates under its rule for the amount of insurance and the kind of
policy requested in the application.
D. If the Company does not accept the application on standard rate
for the amount of insurance and/or the kind of policy requested in
the application but issue, or offers to issue a policy for a different
plan and/or amount . . ., the insurance shall not be in force and in
effect until the applicant shall have accepted the policy as issued
or offered by the Company and shall have paid the full premium
thereof. If the applicant does not accept the policy, the deposit
shall be refunded.
E. If the applicant shall not have been insurable under Condition A
above, and the Company declines to approve the application, the
insurance applied for shall not have been in force at any time and
the sum paid be returned to the applicant upon the surrender of
this receipt." (Emphasis Ours).
The aforequoted provisions printed on Exhibit E 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 petitioner Pacific Life disapproved the
insurance application of respondent Ngo Hing, the binding deposit receipt in question
had never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely
conditional and does not insure outright. As held by this Court, 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 (De Lim vs. Sun Life Assurance Company of Canada, 41 Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957
(Exhibit 3-M), Pacific Life disapproved the insurance application in question on the
ground that it is not offering the twenty-year endowment insurance policy to children
less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a
meeting of the minds between petitioner Pacific Life and private respondent 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
private respondent shall have to be refunded by Pacific Life. LLphil
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of
insurance, like other contracts, must be assented to by both parties either in person or
by their agents. . . . The contract, to be binding from the date of the application, must
have been a completed contract, one that leaves nothing to be done, nothing to be
completed, nothing to be passed upon, or determined, before it shall take effect. There
can be no contract of insurance unless the minds of the parties have met in
agreement."
We are not impressed with private respondent's contention that failure of petitioner
Mondragon to communicate to him the rejection of the insurance application would
not have any adverse effect on the allegedly perfected temporary contract
(Respondent's Brief, pp. 13-14). In the first place, there was no contract perfected
between the parties who had no meeting of their minds. Private respondent, being an
authorized insurance agent of Pacific Life at Cebu branch office, is indubitably aware
that said company does not offer the life insurance applied for. When he filed the
insurance application in dispute, private respondent was, therefore, only taking the
chance that Pacific Life will approve the recommendation of Mondragon for the
acceptance and approval of the application in question along with his proposal that the
insurance company starts to offer the 20-year endowment insurance plan for children
less than seven years. Nonetheless, the record discloses that Pacific Life bad rejected
the proposal and recommendation. Secondly, having an insurable interest on the life
of his one-year old daughter, aside from being an insurance agent and an office
associate of petitioner Mondragon, private respondent Ngo Hing must have known and
followed the progress on the processing of such application and could not pretend
ignorance of the Company's rejection of the 20-year endowment life insurance
application.
At this juncture, We find it fit to quote with approval, the very apt observation of then
Appellate Associate Justice Ruperto G. Martin who later came up to this Court, from
his dissenting opinion to the amended decision of the respondent court which
completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum
of rejection (Exhibit 3-M) nor the reply thereto of appellant
Mondragon reiterating the desire for applicant's father to have the
application considered as one for a 20-year endowment plan was
ever duly communicated to Ngo Hing, father of the minor
applicant. I am not quite convinced that this was so. Ngo Hing, as
father of the applicant herself, was precisely the "underwriter who
wrote this case" (Exhibit H-1). The unchallenged statement of
appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M),
specifically admits that said Ngo Hing was "our associate" and that
it was the latter who "insisted that the plan be placed on the 20-
year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application
was not brought home to his knowledge. He must have been duly
apprised of the rejection of the application for a 20-year
endowment plan otherwise Mondragon would not have asserted
that it was Ngo Hing himself who insisted on the application as
originally filed thereby implicitly declining the offer to consider the
application under the Juvenile Triple Action Plan. Besides, the
associate of Mondragon that he was, Ngo Hing should only be
presumed to know what kind of policies are available in the
company for minors below 7 years old. What he and Mondragon
were apparently trying to do in the premises was merely to prod
the company into going into the business of issuing endowment
policies for minors just as other insurance companies allegedly do.
Until such a definite policy is, however, adopted by the company,
it can hardly be said that it could have been bound at all under the
binding slip for a plan of insurance that it could not have, by then,
issued at all." (Amended Decision, Rollo, pp. 52-53).
2. Relative to the second issue of alleged concealment, this Court is of the firm belief
that private respondent had deliberately concealed the state of health and physical
condition of his daughter Helen Go. When private respondent supplied the required
essential data for the insurance application form, he was fully aware that his one-year
old daughter is typically a mongoloid child. Such a congenital physical defect could
never be ensconced nor disguised. Nonetheless, private respondent, in apparent bad
faith, withheld the fact material to the risk to be assumed by the insurance company.
As an insurance agent of Pacific Life, he ought to know, as he surely must have known,
his duty and responsibility to supply such a material fact. Had he divulged said
significant fact in the insurance application form, Pacific Life would have verified the
same and would have had no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith (uberrima fides meaning good
faith; absolute and perfect candor or openness and honesty; the absence of any
concealment or deception, however slight [Black's Law Dictionary, 2nd Edition], not for
the insured alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda
de Songco, 25 SCRA 70). Concealment is a neglect to communicate that which a party
knows and ought to communicate (Section 25, Act No. 2427). Whether intentional or
unintentional the concealment entitles the insurer to rescind the contract of insurance
(Section 26, id.: Yu Pang Cheng vs. Court of Appeals, et al., 105 Phil. 930; Saturnino vs.
Philippine American Life Insurance Company, 7 SCRA 316). Private respondent appears
guilty thereof. prcd
We are thus constrained to hold that no insurance contract was perfected between
the parties with the noncompliance of the conditions provided in the binding receipt,
and concealment, as legally defined, having been committed by herein private
respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one
is hereby entered absolving petitioners Lapulapu D. Mondragon and Great Pacific Life
Assurance Company from their civil liabilities as found by respondent Court and
ordering the aforesaid insurance company to reimburse the amount of P1,077.75,
without interest, to private respondent, Ngo Hing. Costs against private respondent.
SO ORDERED.
FIRST DIVISION
[G.R. No. 139776. August 1, 2002.]
PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE
COMPANY, petitioner, vs. JUDGE LORE R. VALENCIA-
BAGALACSA, Regional Trial Court of Libmanan, Camarines Sur,
Branch 56, and EDUARDO Z. LUMANIOG, CELSO Z. LUMANIOG
and RUBEN Z. LUMANIOG, respondents.
Roland B. Ebbah, Jr. for petitioner.
Jose Claro for private respondents.
SYNOPSIS
 Private respondents, as legitimate children and forced heirs of their late
father, filed with the Regional Trial Court, a complaint for recovery of sum of money
against petitioner alleging that their father was insured by petitioner and that despite
repeated demands for payment of the claim due from petitioner, the latter finally
refused said claim. Petitioner filed an answer with counterclaim and motion to dismiss
on ground of prescription of action. The RTC denied petitioner's motion to dismiss. In
its order, the RTC denied petitioner's motion for reconsideration. Petitioner filed a
petition for certiorari under Rule 65 of the Rules of Court in the Court of Appeals but
the latter denied the same. Hence, the present petition for review. HDcaAI
The Supreme Court ruled that the RTC committed a grave abuse of discretion
when, in resolving the motion for reconsideration of petitioner, it arbitrarily ruled in
its Order that the period of ten (10) years had not yet lapsed. It based its finding on a
mere explanation of the private respondents' counsel and not on evidence presented
by the parties as to the date when to reckon the prescriptive period. Consequently, the
Court of Appeals committed a reversible error when it declared that the RTC did not
commit any grave abuse of discretion in issuing the said Order. The appellate court
should have granted the petition for certiorari assailing said Order.Certiorari is an
appropriate remedy to assail an interlocutory order (1) when the tribunal issued such
order without or in excess of jurisdiction or with grave abuse of discretion and (2) when
the assailed interlocutory order is patently erroneous and the remedy of appeal would
not afford adequate and expeditious relief. In the case at bar, the said Order was issued
with grave abuse of discretion for being patently erroneous and arbitrary, thus,
depriving petitioner of due process.
SYLLABUS
REMEDIAL LAW; SPECIAL CIVIL ACTIONS; CERTIORARI; WHEN AVAILABLE.
— Certiorari is an appropriate remedy to assail an interlocutory order (1) when the
tribunal issued such order without or in excess of jurisdiction or with grave abuse of
discretion and (2) when the assailed interlocutory order is patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief. CcEHaI
DECISION
AUSTRIA-MARTINEZ, J p:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court. Petitioner Philippine American Life and General Insurance Company prays that
the decision of the Court of Appeals promulgated on April 30, 1999 be reversed and
set aside and that the Complaint filed against it by private respondents Eduardo Z.
Lumaniog, Celso Z. Lumaniog and Ruben Z. Lumaniog before the Regional Trial Court
of Libmanan, Camarines Sur, docketed as Civil Case No. L-787 be ordered dismissed on
ground of prescription of action. SHaATC
The facts of the case:
On June 20, 1995, private respondents, as legitimate children and forced heirs
of their late father, Faustino Lumaniog, filed with the aforesaid RTC, a complaint for
recovery of sum of money against petitioner alleging that: their father was insured by
petitioner under Life Insurance Policy No. 1305486 with a face value of P50,000.00;
their father died of "coronary thrombosis" on November 25, 1980; on June 22, 1981,
they claimed and continuously claimed for all the proceeds and interests under the life
insurance policy in the amount of P641,000.00, despite repeated demands for
payment and/or settlement of the claim due from petitioner, the last of which is on
December 1, 1994, petitioner finally refused or disallowed said claim on February 14,
1995; 1 and so, they filed their complaint on June 20, 1995.
Petitioner filed an Answer with Counterclaim and Motion to Dismiss,
contending that: the cause of action of private respondents had prescribed and they
are guilty of laches; it had denied private respondents' claim in a letter dated March
12, 1982, signed by its then Assistant Vice President, Amado Dimalanta, on ground of
concealment on the part of the deceased insured Faustino when he asserted in his
application for insurance coverage that he had not been treated for indication of "chest
pain, palpitation, high blood pressure, rheumatic fever, heart murmur, heart attack or
other disorder of the heart or blood vessel" when in fact he was a known hypertensive
since 1974; private respondents sent a letter dated May 25, 1983 2 requesting for
reconsideration of the denial; in a letter dated July 11, 1983, it reiterated its decision
to deny the claim for payment of the proceeds; 3 more than ten (10) years later, or on
December 1, 1994, it received a letter from Jose C. Claro, a provincial board member
of the province of Camarines Sur, reiterating the early request for reconsideration
which it denied in a letter dated February 14, 1995. 4
Private respondents opposed the motion to dismiss. 5
On June 7, 1996, the RTC issued an Order which reads:
"After a perusal of the motion to dismiss filed by
defendants' counsel and the objection submitted by plaintiff's
counsel, the Court finds that the matters treated in their
respective pleadings are evidentiary in nature, hence, the
necessity of a trial on the merits.
"Set therefore the hearing in this case on August 1, 1996
at 8:30 a.m., considering that the calendar of the Court is already
filled up until the end of July. Notify parties and counsels. TCaADS
 "SO ORDERED." 6
Petitioner's motion for reconsideration was denied by the RTC in its Order dated
December 12, 1997 upholding however in the same Order the claim of private
respondents' counsel that the running of the 10-year period was "stopped" on
May 25, 1983 when private respondents requested for a reconsideration of the
denial and it was only on February 14, 1995 when petitioner finally decided to
deny their claim that the 10-year period began to run. 7
Petitioner filed a petition for certiorari (docketed as CA-G.R. SP No. 47885)
under Rule 65 of the Rules of Court in the Court of Appeals and after the comment of
the private respondents and reply of petitioner, the appellate court rendered its
Decision, dated April 30, 1999, portions of which read as follows:
"Thus, this Court of the opinion and so holds that the
prescriptive period to bring the present action commences to run
only on February 14, 1995 (Rollo, pp. 25-26), the date when the
petitioner finally rejected the claim of private respondents and not
in 1983. The ten year period should instead be counted from the
date of rejection by the insurer in this case February 14, 1995 —
since this is the time when the cause of action accrues.
"This fact was supported further by the letter of the
petitioner to Atty. Claro dated December 20, 1994, stating that
they were reviewing the claim and shall advise Atty. Claro of their
action regarding his request for reconsideration (Id., p. 53).
"In the case of Summit Guaranty and Insurance Co., Inc.
Vs. De Guzman (151 SCRA 389, 397-398), citing the case of Eagle
Star Insurance Co., Ltd., et al. vs. Chia Yu, the Supreme Court held
that:
'The plaintiff's cause of action did not accrue
until his claim was finally rejected by the insurance
company. This is because, before such final rejection,
there was no real necessity for bringing suit.'
"In the same case, the case of ACCFA vs. Alpha Insurance
and Surety Co., was likewise cited where the Supreme Court ruled
in this wise:
'Since a 'cause of action' requires, as essential
elements, not only a legal right of the plaintiff and a
correlative of the defendant but also 'an act or omission
of the defendant in violation of said legal right', the cause
of action does not accrue until the party obligated
refuses, expressly or impliedly, to comply with its
duty.' CAHaST
"Hence, We find no grave abuse of discretion committed
by the court a quo when it issued the Orders dated June 7, 1996
and dated December 12, 1997.
"WHEREFORE, the instant petition for certiorari with
prayer for issuance of temporary restraining order and/or
preliminary injunction is DENIED DUE COURSE and is accordingly
DISMISSED by this Court for lack of merit.
"Costs against the petitioner.
"SO ORDERED." 8
Hence, the present petition for review. Petitioner posits the following issues:
"A. Whether or not the complaint filed by private
respondents for payment of life insurance proceeds is already
barred by prescription of action.
"B. Whether or not an extrajudicial demand made after
an action has prescribed shall cause the revival of the action." 9
Private respondents filed their Comment and petitioners, their Reply.
Before we determine whether the Court of Appeals had committed any
reversible error, we must necessarily first ascertain whether or not the RTC committed
grave abuse of discretion in issuing the Orders dated June 7, 1996 and December 12,
1997.
Notably, the RTC was initially correct in issuing the Order dated June 7, 1996
when it set the case below for hearing as there are matters in the respective pleadings
of the parties "that are evidentiary in nature, hence the necessity of a trial on the
merits," 10 in effect, denying the motion to dismiss, pursuant to the then
prevailing Section 3, Rule 16, of the Rules of Court, to wit:
"Sec. 3. Hearing and order. — After hearing the court may
deny or grant the motion or allow amendment of pleading, or may
defer the hearing and determination of the motion until the trial if
the ground alleged therein does not appear to be indubitable."
before it was amended by the 1997 Rules of Civil Procedure, effective July 1,
1997. 11
It must be emphasized that petitioner had specifically alleged in the Answer
that it had denied private respondents' claim per its letter dated July 11,
1983. 12Hence, due process demands that it be given the opportunity to prove that
private respondents had received said letter, dated July 11, 1983. Said letter is crucial
to petitioner's defense that the filing of the complaint for recovery of sum of money in
June, 1995 is beyond the 10-year prescriptive period. 13
It is for the above reason that the RTC committed a grave abuse of
discretion when, in resolving the motion for reconsideration of petitioner, it
arbitrarily ruled in its Order dated December 12, 1997, that the period of ten (10)
years had not yet lapsed. It based its finding on a mere explanation of the private
respondents' counsel and not on evidence presented by the parties as to the
date when to reckon the prescriptive period. Portions of the Order dated
December 12, 1997 read:
"A perusal of the record will likewise reveal that plaintiffs'
counsel explained that the running of the ten (10) year period was
stopped on May 25, 1983, upon demand of Celso Lomaniog for the
compliance of the contract and reconsideration of the decision.
Counsel also wrote the President of the Company on December 1,
1994, asking for reconsideration. The letter was answered by the
Assistant Vice President of the Claims Department of Philamlife,
with the advise 'that the company is reviewing the claim.' On
February 14, 1995, Atty. Abis sent a letter to counsel, finally
deciding the plaintiffs' claim. Thus, the period of prescription
should commence to run only from February 14, 1995, when Atty.
Abis finally decided plaintiffs' claim. CcEHaI
"It is evident from the foregoing that the ten (10) year
period for plaintiffs to claim the insurance proceeds has not yet
prescribed. The final determination denying the claim was made
only on February 14, 1995. Hence, when the instant case was filed
on June 20, 1995, the ten year period has not yet lapsed.
Moreover, defendant's counsel failed to comply with the
requirements of the Rules in filing his motion for
reconsideration." 14 (Italics supplied)
The ruling of the RTC that the cause of action of private respondents had not
prescribed, is arbitrary and patently erroneous for not being founded on evidence on
record, and therefore, the same is void. 15
Consequently, while the Court of Appeals did not err in upholding the June 7,
1986 Order of the RTC, it committed a reversible error when it declared that the RTC
did not commit any grave abuse of discretion in issuing the Order dated December 12,
1997.
The appellate court should have granted the petition for certiorari assailing
said Order of December 12, 1997. Certiorariis an appropriate remedy to assail an
interlocutory order (1) when the tribunal issued such order without or in excess of
jurisdiction or with grave abuse of discretion and (2) when the assailed interlocutory
order is patently erroneous and the remedy of appeal would not afford adequate and
expeditious relief. 16 Said Order was issued with grave abuse of discretion for being
patently erroneous and arbitrary, thus, depriving petitioner of due process, as
discussed earlier.
WHEREFORE, the petition is partly GRANTED. The assailed decision of the
Court of Appeals dated April 30, 1999 insofar only as it upheld the Order dated
December 12, 1997 is REVERSED and SET ASIDE. A new judgment is entered reversing
and setting aside the Order dated December 12, 1997 of the Regional Trial Court of
Libmanan, Camarines Sur (Branch 56) and affirming its Order dated June 20, 1995. Said
RTC is directed to proceed with dispatch with Civil Case No. L-787. IDTHcA
No costs.
SO ORDERED.
FIRST DIVISION
[G.R. No. 119176. March 19, 2002.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. LINCOLN
PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA
LIFE INSURANCE COMPANY, INC.) and THE COURT OF
APPEALS, respondents.
Juanito C. Castañeda, Jr. for private respondent.
The Solicitor General for public respondent.
SYNOPSIS
Subject insurance policy, at the time it was issued, contained an "automatic
increase clause." Private respondent paid documentary stamp taxes due on the policy
based on the initial sum assured. In 1984, when the automatic clause took effect,
petitioner Internal Revenue Commissioner issued deficiency documentary stamps tax
assessment corresponding to the automatic increase in the insurance coverage.
Private respondent questioned the deficiency documentary stamps tax
assessment because the "automatic increase clause" is not a separate agreement from
the main agreement.
 The CTA nullified the deficiency tax assessment on the policy, which was
affirmed by the CA, ruling that the increase in the amount insured should not be
included in the computation of the documentary stamp taxes on the policy.
The Supreme Court held that the "automatic increase clause" in the policy is
in the nature of a condition obligation under Art. 1181 of the Civil Code. The additional
insurance that took effect in 1984 was an obligation to a suspensive obligation, but still
part of the insurance sold, to which private respondent was liable for the payment of
the documentary stamp tax without the need of another contract. IaTSED
SYLLABUS
1. TAXATION; NATIONAL INTERNAL REVENUE CODE; DOCUMENTARY STAMPS
TAX ON LIFE INSURANCE POLICIES; PAYMENT, WHEN MADE; BASIS THEREOF; CASE AT
BAR. — The subject insurance policy at the time it was issued contained an "automatic
increase clause." Although the clause was to take effect only in 1984, it was written
into the policy at the time of its issuance. The distinctive feature of the "junior estate
builder policy" called the "automatic increase clause" already formed part and parcel
of the insurance contract, hence, there was no need for an execution of a separate
agreement for the increase in the coverage that took effect in 1984 when the assured
reached a certain age. It is clear from Section 173 that the payment of documentary
stamp taxes is done at the time the act is done or transaction had and the tax base for
the computation of documentary stamp taxes on life insurance policies under Section
183 is the amount fixed in policy, unless the interest of a person insured is susceptible
of exact pecuniary measurement. What then is the amount fixed in the policy?
Logically, we believe that the amount fixed in the policy is the figure written on its face
and whatever increases will take effect in the future by reason of the "automatic
increase clause" embodied in the policy without the need of another contract.
2. ID.; ID.; ID.; LIABILITY FOR DEFICIENCY OF DOCUMENTARY STAMP TAX
UPON THE EFFECTIVITY OF AN "AUTOMATIC INCREASE CLAUSE" IN THE POLICY; CASE
AT BAR. — The "automatic increase clause" in the policy is in the nature of a conditional
obligation under Article 1181, by which the increase of the insurance coverage shall
depend upon the happening of the event which constitutes the obligation. In the
instant case, the additional insurance that took effect in 1984 was an obligation subject
to a suspensive obligation, but still a part of the insurance sold to which private
respondent was liable for the payment of the documentary stamp tax. The deficiency
of documentary stamp tax imposed on private respondent is definitely not on the
amount of the original insurance coverage, but on the increase of the amount insured
upon the effectivity of the "Junior Estate Builder Policy." IaHCAD
DECISION
KAPUNAN, J p:
This is a petition for review on certiorari filed by the Commission of Internal
Revenue of the decision of the Court of Appeals dated November 18, 1994 in C.A. G.R.
SP No. 31224 which reversed in part the decision of the Court of Tax Appeals in C.T.A.
Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-
CMA Life Insurance Company, Inc.) is a domestic corporation registered with the
Securities and Exchange Commission and engaged in life insurance business. In the
years prior to 1984, private respondent issued a special kind of life insurance policy
known as the "Junior Estate Builder Policy," the distinguishing feature of which is a
clause providing for an automatic increase in the amount of life insurance coverage
upon attainment of a certain age by the insured without the need of issuing a new
policy. The clause was to take effect in the year 1984. Documentary stamp taxes due
on the policy were paid by petitioner only on the initial sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with
a par value of P100.00 per share or a total par value of P5,000,000.00. The actual value
of said shares, represented by its book value, was P19,307,500.00. Documentary stamp
taxes were paid based only on the par value of P5,000,000.00 and not on the book
value.
Subsequently, petitioner issued deficiency documentary stamps tax
assessment for the year 1984 in the amounts of (a) P464,898.75, corresponding to the
amount of automatic increase of the sum assured on the policy issued by respondent,
and (b) P78,991.25 corresponding to the book value in excess of the par value of the
stock dividends. The computation of the deficiency documentary stamp taxes is as
follows:
On Policies Issued:
Total policy issued during the year P1,360,054,000.00
Documentary stamp tax due thereon
(P1,360,054,000.00 divided by
P200.00 multiplied by P0.35) P2,380,094.50
Less: Payment P1,915,495.75
Deficiency P464,598.75
Add: Compromise Penalty 300.00
-------------------
TOTAL AMOUNT DUE & COLLECTIBLE P464,898.75
 Private respondent questioned the deficiency assessments and sought their
cancellation in a petition filed in the Court of Tax Appeals, docketed as CTA Case No.
4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the
deficiency tax assessment on the stock dividends, as well as on the insurance policy.
The dispositive portion of the CTA's decision reads:
WHEREFORE, the deficiency documentary stamp tax
assessments in the amount of P464,898.76 and P78,991.25 or a
total of P543,890.01 are hereby cancelled for lack of merit.
Respondent Commissioner of Internal Revenue is ordered to desist
from collecting said deficiency documentary stamp taxes for the
same are considered withdrawn.
SO ORDERED. 1
Petitioner appealed the CTA's decision to the Court of Appeals. On November
18, 1994, the Court of Appeals promulgated a decision affirming the CTA's decision
insofar as it nullified the deficiency assessment on the insurance policy, but reversing
the same with regard to the deficiency assessment on the stock dividends. The CTA
ruled that the correct basis of the documentary stamp tax due on the stock dividends
is the actual value or book value represented by the shares. The dispositive portion of
the Court of Appeals' decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed
from is hereby REVERSED with respect to the deficiency tax
assessment on the stock dividends, butAFFIRMED with regards to
the assessment on the Insurance Policies. Consequently, private
respondent is ordered to pay the petitioner herein the sum of
P78,991.25, representing documentary stamp tax on the stock
dividends it issued. No costs pronouncement.
SO ORDERED. 2
A motion for reconsideration of the decision having been denied, 3 both the
Commissioner of Internal Revenue and private respondent appealed to this Court,
docketed as G.R. No. 118043 and G.R. No. 119176, respectively. In G.R. No. 118043,
private respondent appealed the decision of the Court of Appeals insofar as it upheld
the validity of the deficiency tax assessment on the stock dividends. The Commissioner
of Internal Revenue, on his part, filed the present petition questioning that portion of
the Court of Appeals' decision which invalidated the deficiency assessment on the
insurance policy, attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED
THAT THERE IS A SINGLE AGREEMENT EMBODIED IN THE POLICY
AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE
AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE
CODE AND SECTION 183 OF THE REVENUE CODE THAT A RIDER, A
CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING
THE AMOUNT OF TAX ON THE TOTAL VALUE OF THE INSURANCE
ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE
ASSURED BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS
RULING THAT THE ORIGINAL POLICY AND THE AUTOMATIC CLAUSE
CONSTITUTED ONLY A SINGULAR TRANSACTION. 4
Section 173 of the National Internal Revenue Code on documentary stamp
taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and
papers. — Upon documents, instruments, loan agreements, and
papers, and upon acceptances, assignments, sales, and transfers
of the obligation, right or property incident thereto, there shall be
levied, collected and paid for, and in respect of the transaction so
had or accomplished, the corresponding documentary stamp taxes
prescribed in the following section of this Title, by the person
making, signing, issuing, accepting, or transferring the same
wherever the document is made, signed, issued, accepted, or
transferred when the obligation or right arises from Philippine
sources or the property is situated in the Philippines, and at the
same time such act is done or transaction had: Provided, That
whenever one party to the taxable document enjoys exemption
from the tax herein imposed, the other party thereto who is not
exempt shall be the one directly liable for the tax. (As amended
by PD No. 1994) The basis for the value of documentary stamp
taxes to be paid on the insurance policy is Section 183 of
the National Internal Revenue Code which states in part:
The basis for the value of documentary stamp taxes to be paid on the
insurance policy is Section 183 of the National Internal Revenue Code which states in
part:
Sec. 183. Stamp tax on life insurance policies. — On all
policies of insurance or other instruments by whatever name the
same may be called, whereby any insurance shall be made or
renewed upon any life or lives, there shall be collected a
documentary stamp tax of thirty (now 50c) centavos on each Two
hundred pesos per fractional part thereof, of the amount insured
by any such policy.
 Petitioner claims that the "automatic increase clause" in the subject insurance
policy is separate and distinct from the main agreement and involves another
transaction; and that, while no new policy was issued, the original policy was
essentially re-issued when the additional obligation was assumed upon the effectivity
of this "automatic increase clause" in 1984; hence, a deficiency assessment based on
the additional insurance not covered in the main policy is in order.
The Court of Appeals sustained the CTA's ruling that there was only one
transaction involved in the issuance of the insurance policy and that the "automatic
increase clause" is an integral part of that policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the
written instrument in which a contract of insurance is set forth. 5 Section 50 of the
same Code provides that the policy, which is required to be in printed form, may
contain any word, phrase, clause, mark, sign, symbol, signature, number, or
wordnecessary to complete the contract of insurance. 6 It is thus clear that any rider,
clause, warranty or endorsement pasted or attached to the policy is considered part of
such policy or contract of insurance.
The subject insurance policy at the time it was issued contained an "automatic
increase clause." Although the clause was to take effect only in 1984, it was written
into the policy at the time of its issuance. The distinctive feature of the "junior estate
builder policy" called the "automatic increase clause" already formed part and parcel
of the insurance contract, hence, there was no need for an execution of a separate
agreement for the increase in the coverage that took effect in 1984 when the assured
reached a certain age.
It is clear from Section 173 that the payment of documentary stamp taxes is
done at the time the act is done or transaction had and the tax base for the
computation of documentary stamp taxes on life insurance policies under Section 183
is the amount fixed in policy, unless the interest of a person insured is susceptible of
exact pecuniary measurement. 7 What then is the amount fixed in the policy?
Logically, we believe that the amount fixed in the policy is the figure written on its face
and whatever increases will take effect in the future by reason of the "automatic
increase clause" embodied in the policy without the need of another contract.
Here, although the automatic increase in the amount of life insurance
coverage was to take effect later on, the date of its effectivity, as well as the amount
of the increase, was already definite at the time of the issuance of the policy. Thus, the
amount insured by the policy at the time of its issuance necessarily included the
additional sum covered by the automatic increase clause because it was already
determinable at the time the transaction was entered into and formed part of the
policy.
The "automatic increase clause" in the policy is in the nature of a conditional
obligation under Article 1181, 8 by which the increase of the insurance coverage shall
depend upon the happening of the event which constitutes the obligation. In the
instant case, the additional insurance that took effect in 1984 was an obligation subject
to a suspensive obligation, 9 but still a part of the insurance sold to which private
respondent was liable for the payment of the documentary stamp tax.
The deficiency of documentary stamp tax imposed on private respondent is
definitely not on the amount of the original insurance coverage, but on the increase of
the amount insured upon the effectivity of the "Junior Estate Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes and
arrangements are not prohibited, 10 tax laws cannot be circumvented in order to
evade the payment of just taxes. In the case at bar, to claim that the increase in the
amount insured (by virtue of the automatic increase clause incorporated into the policy
at the time of issuance) should not be included in the computation of the documentary
stamp taxes due on the policy would be a clear evasion of the law requiring that the
tax be computed on the basis of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the
Court of Appeals is SET ASIDE insofar as it affirmed the decision of the Court of Tax
Appeals nullifying the deficiency stamp tax assessment petitioner imposed on private
respondent in the amount of P464,898.75 corresponding to the increase in 1984 of the
sum under the policy issued by respondent.
SO ORDERED.
THIRD DIVISION
[G.R. No. 112360. July 18, 2000.]
RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT
OF APPEALS and TRANSWORLD KNITTING MILLS,
INC., respondents.
Magno & Associates for petitioner.
Edgardo V. Guevarra for respondents.
Pelaez Adriano Gregorio for New India Assurance.
SYNOPSIS
 On March 13, 1980, Rizal Surety & Insurance Company issued Fire Insurance
Policy No. 45727 in favor of Transworld Knitting Mills, Inc. initially for P1,000,000.00
and eventually increased to P1,500,000.00 covering the period from August 14, 1980
to March 13, 1981. On January 12, 1981, fire broke out in the compound of Transworld
razing the middle portion of its four-span building and partly gutting the left and right
sections thereof. A two-storey building (behind the four-span building) where fun and
amusement machines and spare parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with petitioner and New India Assurance
Company, but to no avail. On May 26, 1982 private respondent brought against the
said insurance companies an action for collection of sum of money and damages. After
trial on the merits, the trial court rendered a decision dismissing the case against New
India Assurance Co., but ordering petitioner to pay private respondent the amount of
P826,500.00 as payment for the actual value of the losses suffered by it. Both parties
appealed to the Court of Appeals, which came out with a decision on July 15, 1993
modifying the decision of the court below. New India Assurance Company was required
to pay Transworld the amount of P1,818,604.19, while Rizal Surety was ordered to pay
Transworld the sum of P470,328.67. On August 20, 1993, New India appealed the
decision of the Court of Appeals before the Court, but the appeal was denied with
finality. Petitioner and private respondent interposed a motion of reconsideration
before the Court of Appeals, but reconsidered its decision as regards the imposition of
interest. Undaunted, petitioner filed a petition for review before the Court.
The Court found the petition not impressed with merit. The Court is mindful
of the well-entrenched doctrine that factual findings by the Court of Appeals are
conclusive on the parties and not reviewable by the Court, and the same carry even
more weight when the Court of Appeals had affirmed the findings of fact arrived at by
the lower court. In the case under consideration, both the trial court and the Court of
Appeals found the so-called annex was not an annex building but an integral and
inseparable part of the four-span building described in the policy and consequently,
the machines and spare parts stored therein were covered by the fire insurance in
dispute. Verily, the two-story building involved a permanent structure which adjoins
and intercommunicates with the first right span of the lofty story building, formed part
thereof, and meets the requisites for compensability under the fire insurance policy
sued upon. Moreover, the issue of whether or not private respondent has an insurable
interest in the fun and amusement machines and spare parts, which entitles it to be
indemnified for the loss thereof, had been settled in the case of New India Assurance
Company vs. CA. Accordingly, the assailed decision and resolution of the Court of
Appeals were affirmed in toto.
SYLLABUS
1. COMMERCIAL LAW; INSURANCE LAW; TERMS IN AN INSURANCE POLICY
WHICH ARE AMBIGUOUS, EQUIVOCAL OR UNCERTAIN ARE TO BE CONSTRUED
STRICTLY AND MOST STRONGLY AGAINST THE INSURER AND LIBERALLY IN FAVOR OF
THE INSURED. — The stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building insured thereby.
Article 1377 of the New Civil Code provides: "Art. 1377. The interpretation of obscure
words or stipulations in a contract shall not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the
petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted the fire
insurance policy contract under scrutiny. Citing the aforecited provision of law in point,
the Court in Landicho vs. Government Service Insurance System, ruled: "This is
particularly true as regards insurance policies, in respect of which it is settled that the
'terms in an insurance policy, which are ambiguous, equivocal, or uncertain . . . are to
be construed strictly and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or payment to the insured,
especially where forfeiture is involved' (29 Am. Jur., 181), and the reason for this is that
the 'insured usually has no voice in the selection or arrangement of the words employed
and that the language of the contract is selected with great care and deliberation by
experts and legal advisers employed by, and acting exclusively in the interest of, the
insurance company.' (44 C.J.S., p. 1174)." "
2. REMEDIAL LAW; CIVIL PROCEDURE; JUDGMENT; CONCLUSIVENESS OF
JUDGMENT; APPLICABLE IN CASE AT BAR. — The rule on conclusiveness of judgment,
which obtains under the premises, precludes the relitigation of a particular fact or issue
in another action between the same parties based on a different claim or cause of
action. ". . . the judgment in the prior action operates as estoppel only as to those
matters in issue or points controverted, upon the determination of which the finding
or judgment was rendered. In fine, the previous judgment is conclusive in the second
case, only as those matters actually and directly controverted and determined and not
as to matters merely involved therein." Applying the abovecited pronouncement, the
Court, in Smith Bell and Company (Phils.), Inc. vs. Court of Appeals, held that the issue
of negligence of the shipping line, which issue had already been passed upon in a case
filed by one of the insurers, is conclusive and can no longer be relitigated in a similar
case filed by another insurer against the same shipping line on the basis of the same
factual circumstances. Ratiocinating further, the Court opined: "In the case at bar, the
issue of which vessel ('Don Carlos' or 'Yotai Maru') had been negligent, or so negligent
as to have proximately caused the collision between them, was an issue that was
actually, directly and expressly raised, controverted and litigated in C.A.-G.R. No.
61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the 'Don Carlos' to
have been negligent rather than the 'Yotai Maru' and, as already noted, that Decision
was affirmed by this Court in G.R. No. L-48839 in a Resolution dated 6 December 1987.
The Reyes Decision thus became final and executory approximately two (2) years before
the Sison Decision, which is assailed in the case at bar, was promulgated. Applying the
rule of conclusiveness of judgment, the question of which vessel had been negligent in
the collision between the two (2) vessels, had long been settled by this Court and could
no longer be relitigated in C.A.-G.R. No. 61206-R. Private respondent Go Thong was
certainly bound by the ruling or judgment of Reyes, L.B., J. and that of this Court. The
Court of Appeals fell into clear and reversible error when it disregarded the Decision of
this Court affirming the Reyes Decision." The controversy at bar is on all fours with the
aforecited case. Considering that private respondent's insurable interest in, and
compensability for the loss of subject fun and amusement machines and spare parts,
had been adjudicated, settled and sustained by the Court of Appeals in CA-G.R. CV NO.
28779, and by this Court in G.R. No. L-111118, in a Resolution, dated February 2, 1994,
the same can no longer be relitigated and passed upon in the present case. Ineluctably,
the petitioner, Rizal Surety Insurance Company, is bound by the ruling of the Court of
Appeals and of this Court that the private respondent has an insurable interest in the
aforesaid fun and amusement machines and spare parts; and should be indemnified
for the loss of the same. cSIADa
DECISION
PURISIMA, J p:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
seeking to annul and set aside the July 15, 1993 Decision 1 and October 22, 1993
Resolution 2 of the Court of Appeals 3 in CA-G.R. CV NO. 28779, which modified the
Ruling 4 of the Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106. cda
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued
Fire Insurance Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld),
initially for One Million (P1,000,000.00) Pesos and eventually increased to One Million
Five Hundred Thousand (P1,500,000.00) Pesos, covering the period from August 14,
1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location
thereof, read:
"'On stocks of finished and/or unfinished
products, raw materials and supplies of every kind and
description, the properties of the Insureds and/or held by
them in trust, on commission or on joint account with
others and/or for which they (sic) responsible in case of
loss whilst contained and/or stored during the currency of
this Policy in the premises occupied by them forming part
of the buildings situate (sic) within own Compound at
MAGDALO STREET, BARRIO UGONG, PASIG, METRO
MANILA, PHILIPPINES, BLOCK NO. 601.'
xxx xxx xxx
'Said building of four-span lofty one storey in
height with mezzanine portions is constructed of
reinforced concrete and hollow blocks and/or concrete
under galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly
plant, offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete
building under galvanized iron roof occupied as canteen
and guardhouse, partly by building of two and partly one
storey constructed of concrete below, timber above
undergalvanized iron roof occupied as garage and
quarters and partly by open space and/or
tracking/packing, beyond which is the aforementioned
Magdalo Street; on its right and left by driveway, thence
open spaces, and at the rear by open spaces."' 5
The same pieces of property insured with the petitioner were also insured
with New India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld, razing
the middle portion of its four-span building and partly gutting the left and right sections
thereof. A two-storey building (behind said four-span building) where fun and
amusement machines and spare parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company
and New India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance
companies an action for collection of sum of money and damages, docketed as Civil
Case No. 46106 before Branch 161 of the then Court of First Instance of Rizal; praying
for judgment ordering Rizal Insurance and New India to pay the amount of
P2,747,867.00 plus legal interest, P400,000.00 as attorney's fees, exemplary damages,
expenses of litigation of P50,000.00 and costs of suit. 6
Petitioner Rizal Insurance countered that its fire insurance policy sued upon
covered only the contents of the four-span building, which was partly burned, and not
the damage caused by the fire on the two-storey annex building. 7
On January 4, 1990, the trial court rendered its decision; disposing as follows:
 "ACCORDINGLY, judgment is hereby rendered as follows:
(1) Dismissing the case as against The New India
Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance
Company to pay Transwrold (sic) Knitting Mills, Inc. the amount of
P826,500.00 representing the actual value of the losses suffered by
it; and
(3) Cost against defendant Rizal Surety and Insurance
Company.
SO ORDERED." 8
Both the petitioner, Rizal Insurance Company, and private respondent,
Transworld Knitting Mills, Inc., went to the Court of Appeals, which came out with its
decision of July 15, 1993 under attack, the decretal portion of which reads:
"WHEREFORE, and upon all the foregoing, the decision of
the court below is MODIFIED in that defendant New India
Assurance Company has and is hereby required to pay plaintiff-
appellant the amount of P1,818,604.19 while the other Rizal Surety
has to pay the plaintiff-appellant P470,328.67, based on the actual
losses sustained by plaintiff Transworld in the fire, totalling
P2,790,376.00 as against the amounts of fire insurance coverages
respectively extended by New India in the amount of P5,800,000.00
and Rizal Surety and Insurance Company in the amount of
P1,500,000.00.
No costs.
SO ORDERED." 9
On August 20, 1993, from the aforesaid judgment of the Court of Appeals New
India appealed to this Court theorizing inter alia that the private respondent could not
be compensated for the loss of the fun and amusement machines and spare parts
stored at the two-storey building because it (Transworld) had no insurable interest in
said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-
111118 (New India Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a
Motion for Reconsideration before the Court of Appeals, and on October 22, 1993, the
Court of Appeals reconsidered its decision of July 15, 1993, as regards the imposition
of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended
but only insofar as the imposition of legal interest is concerned,
that, on the assessment against New India Assurance Company on
the amount of P1,818,604.19 and that against Rizal Surety &
Insurance Company on the amount of P470,328.67, from May 26,
1982 when the complaint was filed until payment is made. The rest
of the said decision is retained in all other respects.
SO ORDERED." 10
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this
Court via the present Petition, contending that:
I. SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE
ANNEX BUILDING WHERE THE BULK OF THE BURNED
PROPERTIES WERE STORED, WAS INCLUDED IN THE
COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL
SURETY TO TRANSWORLD.
II. SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN
NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL
SURETY), TAKEN IMMEDIATELY AFTER THE FIRE, WHICH
CLEARLY SHOW THAT THE PREMISES OCCUPIED BY
TRANSWORLD, WHERE THE INSURED PROPERTIES WERE
LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND
WITH MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL
ACTION, AND IN NOT ORDERING TRANSWORLD TO PAY
TO RIZAL SURETY MORAL AND PUNITIVE DAMAGES (ART.
2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND
EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11,
CIVIL CODE). 11
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon
protected only the contents of the main building (four-span), 12 and did not include
those stored in the two-storey annex building. On the other hand, the private
respondent theorized that the so called "annex" was not an annex but was actually an
integral part of the four-span building 13 and therefore, the goods and items stored
therein were covered by the same fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation of
the stipulation in subject fire insurance policy regarding its coverage, which reads:
 ". . . contained and/or stored during the currency of this
Policy in the premises occupied by them forming part of the
buildings situate (sic) within own Compound . . ."
Therefrom, it can be gleaned unerringly that the fire insurance policy in
question did not limit its coverage to what were stored in the four-span building. As
opined by the trial court of origin, two requirements must concur in order that the said
fun and amusement machines and spare parts would be deemed protected by the fire
insurance policy under scrutiny, to wit: llcd
"First, said properties must be contained and/or stored in
the areas occupied by Transworld and second, said areas must
form part of the building described in the policy . . ." 14
'Said building of four-span lofty one storey in
height with mezzanine portions is constructed of
reinforced concrete and hollow blocks and/or concrete
under galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly
plant, offices, ware house and caretaker's quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by
the Court of Appeals are conclusive on the parties and not reviewable by this Court,
and the same carry even more weight when the Court of Appeals has affirmed the
findings of fact arrived at by the lower court. 15
In the case under consideration, both the trial court and the Court of Appeals
found that the so called "annex " was not an annex building but an integral and
inseparable part of the four-span building described in the policy and consequently,
the machines and spare parts stored therein were covered by the fire insurance in
dispute. The letter-report of the Manila Adjusters and Surveyor's Company, which
petitioner itself cited and invoked, describes the "annex" building as follows:
"Two-storey building constructed of partly
timber and partly concrete hollow blocks under g.i. roof
which is adjoining and intercommunicating with the
repair of the first right span of the lofty storey building
and thence by property fence wall." 16
Verily, the two-storey building involved, a permanent structure which adjoins
and intercommunicates with the "first right span of the lofty storey
building," 17formed part thereof, and meets the requisites for compensability under
the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was already
existing when subject fire insurance policy contract was entered into on January 12,
1981, having been constructed sometime in 1978, 18 petitioner should have
specifically excluded the said two-storey building from the coverage of the fire
insurance if minded to exclude the same but it did not, and instead, went on to provide
that such fire insurance policy covers the products, raw materials and supplies stored
within the premises of respondent Transworld which was an integral part of the four-
span building occupied by Transworld, knowing fully well the existence of such building
adjoining and intercommunicating with the right section of the four-span building.
After a careful study, the Court does not find any basis for disturbing what the
lower courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under
controversy has created a doubt regarding the portions of the building insured thereby.
Article 1377 of the New Civil Code provides:
"Art. 1377. The interpretation of obscure words or
stipulations in a contract shall not favor the party who caused the
obscurity."
Conformably, it stands to reason that the doubt should be resolved against the
petitioner, Rizal Surety Insurance Company, whose lawyer or managers drafted
the fire insurance policy contract under scrutiny. Citing the aforecited provision
of law in point, the Court in Landicho vs. Government Service Insurance
System, 19 ruled:
"This is particularly true as regards insurance policies, in
respect of which it is settled that the 'terms in an insurance policy,
which are ambiguous, equivocal, or uncertain . . . are to be
construed strictly and most strongly against the insurer, and
liberally in favor of the insured so as to effect the dominant purpose
of indemnity or payment to the insured, especially where forfeiture
is involved' (29 Am. Jur., 181), and the reason for this is that the
'insured usually has no voice in the selection or arrangement of the
words employed and that the language of the contract is selected
with great care and deliberation by experts and legal advisers
employed by, and acting exclusively in the interest of, the insurance
company.' (44 C.J.S., p. 1174)." 20
Equally relevant is the following disquisition of the Court in Fieldmen's
Insurance Company, Inc. vs. Vda. De Songco, 21 to wit:
"'This rigid application of the rule on ambiguities has
become necessary in view of current business practices. The courts
cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic
power, manage to impose upon parties dealing with them
cunningly prepared 'agreements' that the weaker party may not
change one whit, his participation in the 'agreement' being
 reduced to the alternative to 'take it or leave it' labelled since
Raymond Saleilles 'contracts by adherence' (contrats [sic]
d'adhesion), in contrast to these entered into by parties bargaining
on an equal footing, such contracts (of which policies of insurance
and international bills of lading are prime example) obviously call
for greater strictness and vigilance on the part of courts of justice
with a view to protecting the weaker party from abuses and
imposition, and prevent their becoming traps for the unwary (New
Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec.
1934, 27 February 1942.) "' 22
The issue of whether or not Transworld has an insurable interest in the fun
and amusement machines and spare parts, which entitles it to be indemnified for the
loss thereof, had been settled in G.R. No. L-111118, entitled New India Assurance
Company, Ltd., vs. Court of Appeals, where the appeal of New India from the decision
of the Court of Appeals under review, was denied with finality by this Court on February
2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises,
precludes the relitigation of a particular fact or issue in another action between the
same parties based on a different claim or cause of action. ". . . the judgment in the
prior action operates as estoppel only as to those matters in issue or points
controverted, upon the determination of which the finding or judgment was rendered.
In fine, the previous judgment is conclusive in the second case, only as those matters
actually and directly controverted and determined and not as to matters merely
involved therein." 23
Applying the abovecited pronouncement, the Court, in Smith Bell and
Company (Phils.), Inc. vs. Court of Appeals, 24 held that the issue of negligence of the
shipping line, which issue had already been passed upon in a case filed by one of the
insurers, is conclusive and can no longer be relitigated in a similar case filed by another
insurer against the same shipping line on the basis of the same factual circumstances.
Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos'
or 'Yotai Maru') had been negligent, or so negligent as to have
proximately caused the collision between them, was an issue that
was actually, directly and expressly raised, controverted and
litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue
in his Decision and held the 'Don Carlos' to have been negligent
rather than the 'Yotai Maru' and, as already noted, that Decision
was affirmed by this Court in G.R. No. L-48839 in a Resolution dated
6 December 1987. The Reyes Decision thus became final and
executory approximately two (2) years before the Sison Decision,
which is assailed in the case at bar, was promulgated. Applying the
rule of conclusiveness of judgment, the question of which vessel
had been negligent in the collision between the two (2) vessels, had
long been settled by this Court and could no longer be relitigated
in C.A.-G.R. No. 61206-R. Private respondent Go Thong was
certainly bound by the ruling or judgment of Reyes, L.B., J. and that
of this Court. The Court of Appeals fell into clear and reversible
error when it disregarded the Decision of this Court affirming the
Reyes Decision." 25
The controversy at bar is on all fours with the aforecited case. Considering
that private respondent's insurable interest in, and compensability for the loss of
subject fun and amusement machines and spare parts, had been adjudicated, settled
and sustained by the Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in
G.R. No. L-111118, in a Resolution, dated February 2, 1994, the same can no longer be
relitigated and passed upon in the present case. Ineluctably, the petitioner, Rizal Surety
Insurance Company, is bound by the ruling of the Court of Appeals and of this Court
that the private respondent has an insurable interest in the aforesaid fun and
amusement machines and spare parts; and should be indemnified for the loss of the
same.
So also, the Court of Appeals correctly adjudged petitioner liable for the
amount of P470,328.67, it being the total loss and damage suffered by Transworld for
which petitioner Rizal Insurance is liable. 26
All things studiedly considered and viewed in proper perspective, the Court is
of the irresistible conclusion, and so finds, that the Court of Appeals erred not in
holding the petitioner, Rizal Surety Insurance Company, liable for the destruction and
loss of the insured buildings and articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated
October 22, 1993, of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in
toto. No pronouncement as to costs. cda
SO ORDERED.