Insurance Contract

G.R. No. 137172            April 4, 2001

UCPB GENERAL INSURANCE CO., INC., petitioner,

vs.
MASAGANA TELAMART, INC., respondent.

RESOLUTION

DAVIDE, JR., C.J.:

In our decision of 15 June 1999 in this case, we reversed and set aside the assailed decision  of the Court of
1 

Appeals, which affirmed with modification the judgment of the trial court (a) allowing Respondent to consign the sum
of P225,753.95 as full payment of the premiums for the renewal of the five insurance policies on Respondent's
properties; (b) declaring the replacement-renewal policies effective and binding from 22 May 1992 until 22 May
1993; and (c) ordering Petitioner to pay Respondent 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 Respondent.

The material operative facts upon which the appealed judgment was based are summarized by the Court of Appeals
in its assailed decision as follows:

Plaintiff [herein Respondent] obtained from defendant [herein Petitioner] five (5) insurance policies (Exhibits
"A" to "E", Record, pp. 158-175) on its properties [in Pasay City and Manila] . . . .

All five (5) policies reflect on their face the effectivity term: "from 4:00 P.M. of 22 May 1991 to 4:00 P.M. of
22 May 1992." On June 13, 1992, plaintiffs properties located at 2410-2432 and 2442-2450 Taft Avenue,
Pasay City were razed by fire. On July 13, 1992, plaintiff tendered, and defendant accepted, five (5)
Equitable Bank Manager's Checks in the total amount of P225,753.45 as renewal premium payments for
which Official Receipt Direct Premium No. 62926 (Exhibit "Q", Record, p. 191) was issued by defendant. On
July 14, 1992, Masagana made its formal demand for indemnification for the burned insured properties. On
the same day, defendant returned the five (5) manager's checks stating in its letter (Exhibit "R" / "8", Record,
p. 192) that it was rejecting Masagana's claim on the following grounds:

"a) Said policies expired last May 22, 1992 and were not renewed for another term;

b) Defendant had put plaintiff and its alleged broker on notice of non-renewal earlier; and

c) The properties covered by the said policies were burned in a fire that took place last June 13,
1992, or before tender of premium payment."

(Record, p. 5)

Hence Masagana filed this case.

The Court of Appeals disagreed with Petitioner's stand that Respondent's tender of payment of the premiums on 13
July 1992 did not result in the renewal of the policies, having been made beyond the effective date of renewal as
provided under Policy Condition No. 26, which states:

26. Renewal Clause. — Unless the company at least forty five days in advance of the end of the policy
period mails or delivers to the assured at the address shown in the policy notice of its intention not to renew
the policy or to condition its renewal upon reduction of limits or elimination of coverages, the assured shall
be entitled to renew the policy upon payment of the premium due on the effective date of renewal.
Both the Court of Appeals and the trial court found that sufficient proof exists that Respondent, which had procured
insurance coverage from Petitioner for a number of years, had been granted a 60 to 90-day credit term for the
renewal of the policies. Such a practice had existed up to the time the claims were filed. Thus:

Fire Insurance Policy No. 34658 covering May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but
premium was paid more than 90 days later on August 31, 1990 under O.R. No. 4771 (Exhs. "T" and "T-1").
Fire Insurance Policy No. 34660 for Insurance Risk Coverage from May 22, 1990 to May 22, 1991 was
issued by UCPB on May 4, 1990 but premium was collected by UCPB only on July 13, 1990 or more than
60 days later under O.R. No. 46487 (Exhs. "V" and "V-1"). And so were as other policies: Fire Insurance
Policy No. 34657 covering risks from May 22, 1990 to May 22, 1991 was issued on May 7, 1990 but
premium therefor was paid only on July 19, 1990 under O.R. No. 46583 (Exhs. "W" and "W-1"). Fire
Insurance Policy No. 34661 covering risks from May 22, 1990 to May 22, 1991 was issued on May 3, 1990
but premium was paid only on July 19, 1990 under O.R. No. 46582 (Exhs. "X" and "X-1"). Fire Insurance
Policy No. 34688 for insurance coverage from May 22, 1990 to May 22, 1991 was issued on May 7, 1990
but premium was paid only on July 19, 1990 under O.R. No. 46585 (Exhs. "Y" and "Y-1"). Fire Insurance
Policy No. 29126 to cover insurance risks from May 22, 1989 to May 22, 1990 was issued on May 22, 1989
but premium therefor was collected only on July 25, 1990[sic] under O.R. No. 40799 (Exhs. "AA" and "AA-
1"). Fire Insurance Policy No. HO/F-26408 covering risks from January 12, 1989 to January 12, 1990 was
issued to Intratrade Phils. (Masagana's sister company) dated December 10, 1988 but premium therefor
was paid only on February 15, 1989 under O.R. No. 38075 (Exhs. "BB" and "BB-1"). Fire Insurance Policy
No. 29128 was issued on May 22, 1989 but premium was paid only on July 25, 1989 under O.R. No. 40800
for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "CC" and "CC-1"). Fire Insurance Policy
No. 29127 was issued on May 22, 1989 but premium was paid only on July 17, 1989 under O.R. No. 40682
for insurance risk coverage from May 22, 1989 to May 22, 1990 (Exhs. "DD" and "DD-1"). Fire Insurance
Policy No. HO/F-29362 was issued on June 15, 1989 but premium was paid only on February 13, 1990
under O.R. No. 39233 for insurance coverage from May 22, 1989 to May 22, 1990 (Exhs. "EE" and "EE-1").
Fire Insurance Policy No. 26303 was issued on November 22, 1988 but premium therefor was collected only
on March 15, 1989 under O.R. NO. 38573 for insurance risks coverage from December 15, 1988 to
December 15, 1989 (Exhs. "FF" and "FF-1").

Moreover, according to the Court of Appeals the following circumstances constitute preponderant proof that no
timely notice of non-renewal was made by Petitioner:

(1) Defendant-appellant received the confirmation (Exhibit "11", Record, p. 350) from Ultramar Reinsurance
Brokers that plaintiff's reinsurance facility had been confirmed up to 67.5% only on April 15, 1992 as
indicated on Exhibit "11". Apparently, the notice of non-renewal (Exhibit "7," Record, p. 320) was sent not
earlier than said date, or within 45 days from the expiry dates of the policies as provided under Policy
Condition No. 26; (2) Defendant insurer unconditionally accepted, and issued an official receipt for, the
premium payment on July 1[3], 1992 which indicates defendant's willingness to assume the risk despite only
a 67.5% reinsurance cover[age]; and (3) Defendant insurer appointed Esteban Adjusters and Valuers to
investigate plaintiff's claim as shown by the letter dated July 17, 1992 (Exhibit "11", Record, p. 254).

In our decision of 15 June 1999, we defined the main issue to be "whether the fire insurance policies issued by
petitioner to the respondent covering the period from May 22, 1991 to May 22, 1992 . . . had been extended or
renewed by an implied credit arrangement though actual payment of premium was tendered on a later date and
after the occurrence of the (fire) risk insured against." We resolved this issue in the negative in view of Section 77 of
the Insurance Code and our decisions in Valenzuela v. Court of Appeals;  South Sea Surety and Insurance Co.,
2 

Inc. v. Court of Appeals;  and Tibay v. Court of Appeals.  Accordingly, we reversed and set aside the decision of the
3  4 

Court of Appeals.

Respondent seasonably filed a motion for the reconsideration of the adverse verdict. It alleges in the motion that we
had made in the decision our own findings of facts, which are not in accord with those of the trial court and the Court
of Appeals. The courts below correctly found that no notice of non-renewal was made within 45 days before 22 May
1992, or before the expiration date of the fire insurance policies. Thus, the policies in question were renewed by
operation of law and were effective and valid on 30 June 1992 when the fire occurred, since the premiums were
paid within the 60- to 90-day credit term.
Respondent likewise disagrees with our ruling that parties may neither agree expressly or impliedly on the extension
of credit or time to pay the premium nor consider a policy binding before actual payment. It urges the Court to take
judicial notice of the fact that despite the express provision of Section 77 of the Insurance Code, extension of credit
terms in premium payment has been the prevalent practice in the insurance industry. Most insurance companies,
including Petitioner, extend credit terms because Section 77 of the Insurance Code is not a prohibitive injunction but
is merely designed for the protection of the parties to an insurance contract. The Code itself, in Section 78,
authorizes the validity of a policy notwithstanding non-payment of premiums.

Respondent also asserts that the principle of estoppel applies to Petitioner. Despite its awareness of Section 77
Petitioner persuaded and induced Respondent to believe that payment of premium on the 60- to 90-day credit term
was perfectly alright; in fact it accepted payments within 60 to 90 days after the due dates. By extending credit and
habitually accepting payments 60 to 90 days from the effective dates of the policies, it has implicitly agreed to
modify the tenor of the insurance policy and in effect waived the provision therein that it would pay only for the loss
or damage in case the same occurred after payment of the premium.

Petitioner filed an opposition to the Respondent's motion for reconsideration. It argues that both the trial court and
the Court of Appeals overlooked the fact that on 6 April 1992 Petitioner sent by ordinary mail to Respondent a notice
of non-renewal and sent by personal delivery a copy thereof to Respondent's broker, Zuellig. Both courts likewise
ignored the fact that Respondent was fully aware of the notice of non-renewal. A reading of Section 66 of the
Insurance Code readily shows that in order for an insured to be entitled to a renewal of a non-life policy, payment of
the premium due on the effective date of renewal should first be made. Respondent's argument that Section 77 is
not a prohibitive provision finds no authoritative support.

Upon a meticulous review of the records and reevaluation of the issues raised in the motion for reconsideration and
the pleadings filed thereafter by the parties, we resolved to grant the motion for reconsideration. The following facts,
as found by the trial court and the Court of Appeals, are indeed duly established:

1. For years, Petitioner had been issuing fire policies to the Respondent, and these policies were annually
renewed.

2. Petitioner had been granting Respondent a 60- to 90-day credit term within which to pay the premiums on
the renewed policies.

3. There was no valid notice of non-renewal of the policies in question, as there is no proof at all that the
notice sent by ordinary mail was received by Respondent, and the copy thereof allegedly sent to Zuellig was
ever transmitted to Respondent.

4. The premiums for the policies in question in the aggregate amount of P225,753.95 were paid by
Respondent within the 60- to 90-day credit term and were duly accepted and received by Petitioner's
cashier.

The instant case has to rise or fall on the core issue of whether Section 77 of the Insurance Code of 1978 (P.D. No.
1460) must be strictly applied to Petitioner's advantage despite its practice of granting a 60- to 90-day credit term for
the payment of premiums.

Section 77 of the Insurance Code of 1978 provides:

SECTION 77. 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.

This Section is a reproduction of Section 77 of P.D. No. 612 (The Insurance Code) promulgated on 18 December
1974. In turn, this Section has its source in Section 72 of Act No. 2427 otherwise known as the Insurance Act as
amended by R.A. No. 3540, approved on 21 June 1963, which read:
 SECTION 72. An insurer is entitled to payment of premium as soon as the thing insured is exposed to the
peril insured against, unless there is clear agreement to grant the insured credit extension of the premium
due. No policy issued by an insurance company is valid and binding unless and until the premium thereof
has been paid. (Italic supplied)

It can be seen at once that Section 77 does not restate the portion of Section 72 expressly permitting an agreement
to extend the period to pay the premium. But are there exceptions to Section 77?

The answer is in the affirmative.

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:

SECTION 78. 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 we
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. We said therein, thus:

We hold that the subject policies are valid even if the premiums were paid on installments. The records
clearly show that the petitioners and private respondent 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 three 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 petitioner. 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.

Not only that. In Tuscany, we also quoted with approval the following pronouncement of the Court of Appeals in its
Resolution denying the motion for reconsideration of its decision:

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 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. Article 1306 of the Civil Code provides:
 ARTICLE 1306. The contracting parties may establish such stipulations clauses, terms and conditions as
they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or
public policy.

Finally in the instant case, it would be unjust and inequitable if recovery on the policy would not be permitted against
Petitioner, 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 Respondent relied in good
faith on such practice. Estoppel then is the fifth exception to Section 77.

WHEREFORE, the Decision in this case of 15 June 1999 is RECONSIDERED and SET ASIDE, and a new
one is hereby entered DENYING the instant petition for failure of Petitioner to sufficiently show that a
reversible error was committed by the Court of Appeals in its challenged decision, which is hereby
AFFIRMED in toto.

No pronouncement as to cost.

SO ORDERED.

Bellosillo, Kapunan, Mendoza, Panganiban, Buena, Gonzaga-Reyes, Ynares-Santiago, De Leon, Jr. and Sandoval-
Gutierrez, JJ ., concur.
Melo, J., I join the dissents of Justice Vitug and Pardo.
Vitug, J., Please see separate opinion.
Pardo, J., I dissent. See attached.

Separate Opinions

VITUG, J .:

An essential characteristic of an insurance is its being synallagmatic, a highly reciprocal contract where the rights
and obligations of the parties correlate and mutually correspond. The insurer assumes the risk of loss which an
insured might suffer in consideration of premium payments under a risk-distributing device. Such assumption of risk
is a component of a general scheme to distribute actual losses among a group of persons, bearing similar risks, who
make ratable contributions to a fund from which the losses incurred due to exposures to the peril insured against are
assured and compensated.

It is generally recognized that the business of insurance is one imbued with public interest.  For the general good
1 

and mutual protection of all the parties, it is aptly subjected to regulation and control by the State by virtue of an
exercise of its police power.  The State may regulate in various respects the relations between the insurer and the
2 

insured, including the internal affairs of an insurance company, without being violative of due process.  3

A requirement imposed by way of State regulation upon insurers is the maintenance of an adequate legal reserve in
favor of those claiming under their policies.  The law generally mandates that insurance companies should retain an
4 

amount sufficient to guarantee the security of its policyholders in the remote future, as well as the present, and to
cover any contingencies that may arise or may be fairly anticipated. The integrity of this legal reserve is threatened
and undermined if a credit arrangement on the payment of premium were to be sanctioned. Calculations and
estimations of liabilities under the risk insured against are predicated on the basis of the payment of premiums, the
vital element that establishes the juridical relation between the insured and the insurer. By legislative fiat, any
agreement to the contrary notwithstanding, the payment of premium is a condition precedent to, and essential for,
the efficaciousness of the insurance contract, except (a) in case of life or industrial life insurance where a grace
period applies, or (b) in case of a written acknowledgment by the insurer of the receipt of premium, such as by a
deposit receipt, the written acknowledgment being conclusive evidence of the premium payment so far as to make
the policy binding. 5

Section 77 of the Insurance Code provides:

 "SECTION 77. 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."

This provision amended Section 72 of the then Insurance Act by deleting the phrase, "unless there is a clear
agreement to grant the insured credit extension of the premium due," and adding at the beginning of the second
sentence the phrase, "[n]otwithstanding any agreement to the contrary." Commenting on the new provision, Dean
Hernando B. Perez states:

"Under the former rule, whenever the insured was granted credit extension of the premium due or given a
period of time to pay the premium on the policy issued, such policy was binding although premiums had not
been paid (Section 72, Insurance Act; 6 Couch 2d. 67). This rule was changed when the present provision
eliminated the portion concerning credit agreement, and added the phrase 'notwithstanding any agreement
to the contrary' which precludes the parties from stipulating that the policy is valid even if premiums are not
paid. Hence, under the present law, the policy is not valid and binding unless and until the premium is paid
(Arce vs. Capital Insurance & Surety Co., Inc., 117 SCRA 63). If the insurer wants to favor the insured by
making the policy binding notwithstanding the non-payment of premium, a mere credit agreement would not
be sufficient. The remedy would be for the insurer to acknowledge in the policy that premiums were paid
although they were not, in which case the policy becomes binding because such acknowledgment is a
conclusive evidence of payment of premium (Section 78). Thus, the Supreme Court took note that under the
present law, Section 77 of the Insurance Code of 1978 has deleted the clause 'unless there is a clear
agreement to grant the insured credit extension of the premium due' (Velasco vs. Apostol, 173 SCRA
228)." 6

By weight of authority, estoppel cannot create a contract of insurance, 7 neither can it be successfully invoked to
create a primary liability, 8 nor can it give validity to what the law so proscribes as a matter of public policy. 9 So
essential is the premium payment to the creation of the vinculum juris between the insured and the insurer that it
would be doubtful to have that payment validly excused even for a fortuitous event.  10

The law, however, neither requires for the establishment of the juridical tie, nor measures the strength of such tie by,
any specific amount of premium payment. A part payment of the premium, if accepted by the insurer, can thus
perfect the contract and bring the parties into an obligatory relation.  Such a payment puts the contract into full
11 

binding force, not merely pro tanto, thereby entitling and obligating the parties by their agreement. Hence, in case of
loss, full recovery less the unpaid portion of the premium (by the operative act of legal compensation), can be had
by the insured and, correlatively, if no loss occurs the insurer can demand the payment of the unpaid balance of the
premium.  12

In the instant case, no juridical tie appears to have been established under any of the situations hereinabove
discussed.

WHEREFORE, I vote to deny the motion for reconsideration.

Melo, J ., concurs.

PARDO, J ., dissenting:

The majority resolved to grant respondent's motion for reconsideration of the Court's decision promulgated on June
15, 1999. By this somersault, petitioner must now pay respondent's claim for insurance proceeds amounting to
P18,645,000.00, exclusive of interests, plus 25% of the amount due as attorney's fees, P25,000.00 as litigation
expenses, and costs of suit, covering its Pasay City property razed by fire. What an undeserved largess! Indeed, an
unjust enrichment at the expense of petitioner; even the award of attorney's fees is bloated to 25% of the amount
due.
We cannot give our concurrence. We beg to dissent. We find respondent's claim to be fraudulent:

First: Respondent Masagana surreptitiously tried to pay the overdue premiums before giving written notice to
petitioner of the occurrence of the fire that razed the subject property. This failure to give notice of the fire
immediately upon its occurrence blatantly showed the fraudulent character of its claim. The fire totally destroyed the
property on June 13, 1992; the written notice of loss was given only more than a month later, on July 14, 1992, the
day after respondent surreptitiously paid the overdue premiums. Respondent very well knew that the policy was not
renewed on time. Hence, the surreptitious attempt to pay overdue premiums. Such act revealed a reprehensible
disregard of the principle that insurance is a contract uberrima fides, the most abundant good faith.  Respondent is
1 

required by law and by express terms of the policy to give immediate written notice of loss. This must be complied
with in the utmost good faith.

Another badge of fraud is that respondent deviated from its previous practice of coursing its premium payments
through its brokers. This time, respondent Masagana went directly to petitioner and paid through its cashier with
manager's checks. Naturally, the cashier routinely accepted the premium payment because he had no written notice
of the occurrence of the fire. Such fact was concealed by the insured and not revealed to petitioner at the time of
payment.

Indeed, if as contended by respondent, there was a clear agreement regarding the grant of a credit extension,
respondent would have given immediate written notice of the fire that razed the property. This clearly showed
respondent's attempt to deceive petitioner into believing that the subject property still existed and the risk insured
against had not happened.

Second: The claim for insurance benefits must fall as well because the failure to give timely written notice of the fire
was a material misrepresentation affecting the risk insured against.

Section 1 of the policy provides:

"All benefits under the policy shall be forfeited if the claim be in any respect fraudulent, or if any false
declaration be made or used in support thereof, or if any false declaration be made or used in support
thereof, or if any fraudulent means or devices are used by the insured or any one acting on his behalf to
obtain any benefit under the policy."  2

In the factual milieu, the purported practice of giving 60 to 90-day credit extension for payment of premiums was a
disputed fact. But it is a given fact that the written notice of loss was not immediately given. It was given only the
day after the attempt to pay the delayed premiums.

At any rate, the purported credit was a mere verbal understanding of the respondent Masagana of an agreement
between the insurance company (petitioner) and the insurance brokers of respondent Masagana. The president of
respondent Masagana admitted that the insurance policy did not contain any proviso pertaining to the grant of
credit within which to pay the premiums. Respondent Masagana merely deduced that a credit agreement existed
based on previous years' practice that they had of delayed payments accepted by the insurer as reflected on the
face of the receipts issued by UCPB evidencing the payment of premiums.

"Q:         You also claim that you have 60 to 90 days credit arrangement with UCPB; is that correct?,

A:         Yes, ma'am.

Q:         I'm showing to you the policy which had previously been marked in evidence as Exhibit "A", "B", "C",
"D", & "E"' for the plaintiff and likewise, marked as exhibits "1", "2", "3", "4", & "5" for the defendant. Could
you show us, Mr. witness where in these policies does it show that you are actually given 60 to 90 days
credit arrangement with UCPB?

A:         Well, it's verbal with your company, and Ansons Insurance Brokerage. It is not written.

Q:         It is not written in the policy?

 A:         Yes.

Q:         You merely have verbal agreement with Ansons Insurance Brokerage?

A:         Yes; as shown in our mode of payment; in our vouchers and the receipts issued by the insurance
company."  3

It must be stressed that a verbal understanding of respondent Masagana cannot amend an insurance policy. In
insurance practice, amendments or even corrections to a policy are done by written endorsements or tickets
appended to the policy.

However, the date on the face of the receipts does not refer to the date of actual remittance by respondent
Masagana to UCPB of the premium payments, but merely to the date of remittance to UCPB of the premium
payments by the insurance brokers of respondent Masagana.

"Q: You also identified several receipts; here; official receipts issued by UCPB General Insurance Company,
Inc., which has been previously marked as Exhibits "F", "G", "H", "I", and "J" for the plaintiff; is that correct?

A:         Yes.

Q:         And, you would agree with me that the dates indicated in these particular Official Receipts (O. R.),
merely indicated the dates when UCPB General Insurance Company issued these receipts? Do you admit
that, Mr. Witness?

A:         That was written in the receipts.

Q:         But, you would also agree that this did not necessarily show the dates when you actually forwarded
the checks to your broker, Anson Insurance Agency, for payment to UCPB General Insurance Co. Inc., isn't
it?

A:         The actual support of this would be the cash voucher of the company, Masagana Telamart Inc., the
date when they picked up the check from the company.

Q:         And are these cash voucher with you?

A:         I don't know if it is in the folder or in our folder, now.

Q:         So, you are not certain, whether or not you actually delivered the checks covered by these Official
Receipts to UCPB General Insurance, on the dates indicated?

A:         I would suppose it is few days earlier, when they picked up the payment in our office." 4

Hence, what has been established was the grant of credit to the insurance brokers, not to the assured. The
insurance company recognized the payment to the insurance brokers as payment to itself, though the actual
remittance of the premium payments to the principal might be made later. Once payment of premiums is made to
the insurance broker, the assured would be covered by a valid and binding insurance policy, provided the loss
occurred after payment to the broker has been made.

Assuming arguendo that the 60 to 90 day-credit-term has been agreed between the parties, respondent could not
still invoke estoppel to back up its claim. "Estoppel is unavailing in this case," 5 thus spoke the Supreme Court
through the pen of Justice Hilario G. Davide, Jr., now Chief Justice. Mutatis mutandi, he may well be speaking of
this case. He added that "[E]stoppel can not give validity to an act that is prohibited by law or against public
policy." 6 The actual payment of premiums is a condition precedent to the validity of an insurance contract other than
life insurance policy. 7 Any agreement to the contrary is void as against the law and public policy. Section 77 of the
Insurance Code provides:
 "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." [Emphasis supplied]

An incisive reading of the afore-cited provision would show that the emphasis was on the conclusiveness of the
acknowledgment in the policy of the receipt of premium, notwithstanding the absence of actual payment of premium,
because of estoppel. Under the doctrine of estoppel, an admission or representation is rendered conclusive upon
the person making it, and cannot be denied or disproved as against the person relying thereon. "A party may not go
back on his own acts and representations to the prejudice of the other party who relied upon them." 8

This is the only case of estoppel which the law considers a valid exception to the mandatory requirement of pre-
payment of premium. The law recognized that the contracting parties, in entering a contract of insurance, are free to
enter into stipulations and make personal undertakings so long as they are not contrary to law or public policy.
However, the law is clear in providing that the acknowledgment must be contained in the policy or contract of
insurance. Anything short of it would not fall under the exception so provided in Section 78.

Hence, because of respondent's failure to pay the premiums prior to the occurrence of the fire insured against, no
valid and binding insurance policy was created to cover the loss and destruction of the property. The fire took place
on June 13, 1992, twenty-two (22) days after the expiration of the policy of fire insurance. The tender of payment of
premiums was made only thirty (30) days after the occurrence of the fire, or on July 13, 1992. Respondent
Masagana did not give immediate notice to petitioner of the fire as it occurred as required in the insurance policy.
Respondent Masagana tried to tender payment of the premiums overdue surreptitiously before giving notice of the
occurrence of the fire. More importantly, the parties themselves expressly stipulated that the insurance policy would
not be binding on the insurer unless the premiums thereon had been paid in full. Section 2 of the policy provides:

"2. This policy including any renewal and/or endorsement thereon is not in force until the premium has been
fully paid and duly receipted by the Company in the manner provided therein.

"Any supplementary agreement seeking to amend this condition prepared by agent, broker or company
official, shall be deemed invalid and of no effect.

"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, except when such printed receipt is not available at the time of payment and the
company or its representative accepts the premium in which case a temporary receipt other than the printed
form may be issued in lieu thereof. "Except only on those specific cases where corresponding rules and
regulations which now we are or may hereafter be in force provide for the payment of the stipulated
premiums in periodic installments at fixed percentages, it is hereby declared, agreed and warranted that this
policy shall be deemed effective valid and binding upon the Company when the premiums thereof have
actually been paid in full and duly acknowledged in a receipt signed by any authorized official or
representative/agent of the Company in such manner as provided herein." 9 [emphasis supplied]

Thus, the insurance policy, including any renewal thereof or any endorsements thereon shall not come in force until
the premiums have been fully paid and duly received by the insurance Company. No payment in respect of any
premiums shall be deemed to be payment to the Insurance Company unless a printed form of receipt for the same
signed by an Official or duly appointed Agent of the Company shall be given to the insured.

The case of Tibay v. Court of Appeals  is in point. The issue raised therein was: "May a fire insurance policy be
10 

valid, binding and enforceable upon mere partial payment of premium?" In the said case, Fortune Life and General
Insurance Co., Inc. issued Fire Insurance Policy No. 136171 in favor of Violeta R. Tibay and/or Nicolas Roraldo, on
a two-storey residential building located at 5855 Zobel Street, Makati City, together with all the 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, Violeta Tibay only paid P600.00, thus leaving a substantial
balance unpaid. On March 8, 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 for the
proceeds of the fire insurance policy.
In denying the claim of insurance, the Court ruled that "by express agreement of the parties, no vinculum juris or
bond of law was to be established until full payment was effected prior to the occurrence of the risk insured
against.  As expressly stipulated in the contract, full payment must be made before the risk occurs for the policy to
11 

be considered effective and in force. "No vinculum juris whereby the insurer bound itself to indemnify the assured
according to law ever resulted from the fractional payment of premium."  12

The majority cited the case of Makati Tuscany Condominium Corp. vs. Court of Appeals  to support the contention
13 

that the insurance policies subject of the instant case were valid and effective. However, the factual situation in that
case was different from the case at bar.

In Tuscany, the Court held that the insurance policies were valid and binding because there was partial payment of
the premiums and a clear understanding between the parties that they had intended the insurance policies to be
binding and effective notwithstanding the staggered payment of the premiums. On the basis of equity and fairness,
the Court ruled that there was a perfected contract of insurance upon the partial payment of the premiums,
notwithstanding the provisions of Section 77 to the contrary. The Court 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.

There is no dispute that like in any other contract, the parties to a contract of insurance enjoy the freedom to
stipulate on the terms and conditions that will govern their agreement so long as they are not contrary to law,
morals, good customs, public order or public policy. However, the agreement containing such terms and conditions
must be clear and definite.

In the case at bar, there was no clear and definite agreement between petitioner and respondent on the grant of a
credit extension; neither was there partial payment of premiums for petitioner to invoke the exceptional doctrine
in Tuscany.

Hence, the circumstances in the above cited case are totally different from the case at bar, and consequently, not
applicable herein.

Insurance is an aleatory 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
14 

paid at the time and in the manner specified in the policy, and if not so paid, the policy will lapse and be forfeited by
its own terms. 15

With regard to the contention that the absence of notice of non-renewal of the policy resulted to the automatic
renewal of the insurance policy, we find the contention untenable. As above discussed, the law provides that only
upon payment of the insurance premium will the insurance policy bind the insurer to the peril insured against and
hold it liable under the policy in case of loss.

Even in the absence of notice of non-renewal, the assured would be bound by the law that a non life insurance
policy takes effect only on the date payment of the premium was made.

Verily, it is elemental law that the payment of premium is a mandatory requisite to make the policy of insurance
effective. If the premium is not paid in the manner prescribed in the policy as intended by the parties, the policy is
void and ineffective. 
16

Basically a contract of indemnity, an insurance contract is the law between the parties. Its terms and conditions
constitute the measure of the insurer's liability and compliance therewith is a condition precedent to the insured's
right to recovery from the insurer. 
17

IN VIEW WHEREOF, I vote to DENY the respondent's motion for reconsideration, for lack of merit
G.R. No. 113899 October 13, 1999

GREAT PACIFIC LIFE ASSURANCE CORP., petitioner,

vs.
COURT OF APPEALS AND MEDARDA V. LEUTERIO, respondents.

QUISUMBING, J.:

This petition for review, under Rule 45 of the Rules of Court, assails the Decision   dated May 17, 1993, of the Court
1

of Appeals and its Resolution   dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in
2

toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance claim filed by private
respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE ASSURANCE
CORPORATION as insurer under its Group policy No. G-1907, in relation to Certification B-18558
liable and ordered to pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of the
insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS
(P86,200.00); dismissing the claims for damages, attorney's fees and litigation expenses in the
complaint and counterclaim, with costs against the defendant and dismissing the complaint in
respect to the plaintiffs, other than the widow-beneficiary, for lack of cause of action. 
3

The facts, as found by the Court of Appeals, are as follows:

A contract of group life insurance was executed between petitioner Great Pacific Life Assurance Corporation
(hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife agreed to insure the
lives of eligible housing loan mortgagors of DBP.

On November 11, 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. 

4

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio, to the
extent of his DBP mortgage indebtedness amounting to eighty-six thousand, two hundred (P86,200.00) pesos. 1âwphi1.nêt

On August 6, 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 November 15, 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 October 20, 1986, the widow of the late Dr. Leuterio, respondent 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
5

findings, based partly from the information given by the respondent 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 February 22, 1988, the trial court rendered a decision in favor of respondent widow and against Grepalife. On
May 17, 1993, the Court of Appeals sustained the trial court's decision. Hence, the present petition. Petitioners
interposed the following assigned errors:

1. THE LOWER COURT ERRED IN HOLDING DEFENDANT-APPELLANT LIABLE

TO THE DEVELOPMENT BANK OF THE PHILIPPINES (DBP) WHICH IS NOT A
PARTY TO THE CASE FOR PAYMENT OF THE PROCEEDS OF A MORTGAGE
REDEMPTION INSURANCE ON THE LIFE OF PLAINTIFF'S HUSBAND
WILFREDO LEUTERIO ONE OF ITS LOAN BORROWERS, INSTEAD OF
DISMISSING THE CASE AGAINST DEFENDANT-APPELLANT [Petitioner
Grepalife] FOR LACK OF CAUSE OF ACTION.

2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF
JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER
THE PERSON OF THE DEFENDANT.

3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO

PAY TO DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY
EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO
DBP IN ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH
DEFENDANT-APPELLANT.

4. THE LOWER COURT ERRED IN HOLDING THAT THERE WAS NO

CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF WILFREDO
LEUTERIO IN HIS APPLICATION FOR MEMBERSHIP IN THE GROUP LIFE
INSURANCE PLAN BETWEEN DEFENDANT-APPELLANT OF THE INSURANCE
CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO.  6

Synthesized below are the assigned errors for our resolution:

1. Whether the Court of Appeals erred in holding petitioner liable to DBP as

beneficiary in a group life insurance contract from a complaint filed by the widow of
the decedent/mortgagor?

2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that
he had hypertension, which would vitiate the insurance contract?

3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of
eighty six thousand, two hundred (P86,200.00) pesos without proof of the actual
outstanding mortgage payable by the mortgagor to DBP.

Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in interest, hence
the trial court acquired no jurisdiction over the case. It argues that when the Court of Appeals affirmed the trial
court's judgment, Grepalife was held liable to pay the proceeds of insurance contract in favor of DBP, the
indispensable party who was not joined in the suit.

To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to this type of
contract. The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage redemption
insurance," is a device for the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it
has to enter into such form of contract so that in the event of the unexpected demise of the mortgagor during the
subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the
mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation.   In a similar vein, ample
7

protection is given to the mortgagor under such a concept so that in the event of death; the mortgage obligation will
be extinguished by the application of the insurance proceeds to the mortgage indebtedness.   Consequently, where
8

the mortgagor pays the insurance premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagor's interest, and the mortgagor continues to be a party to the contract.
In this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-payable
clause does not make the mortgagee a party to the contract.  9

Sec. 8 of the Insurance Code provides:

Unless the policy provides, where a mortgagor of property effects insurance in his own name
providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a
mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease
to be a party to the original contract, and any act of his, prior to the loss, which would otherwise
avoid the insurance, will have the same effect, although the property is in the hands of the
mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor,
may be performed by the mortgagee therein named, with the same effect as if it had been performed
by the mortgagor.

The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance, the policy
stating that: "In the event of the debtor's death before his indebtedness with the Creditor [DBP] shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be paid to the creditor and the balance of sum
assured, if there is any, shall then be paid to the beneficiary/ies designated by the debtor."   When DBP submitted
10

the insurance claim against petitioner, the latter denied payment thereof, interposing the defense of concealment
committed by the insured. Thereafter, DBP collected the debt from the mortgagor and took the necessary action of
foreclosure on the residential lot of private respondent.   In Gonzales La O vs. Yek Tong Lin Fire & Marine Ins.
11

Co.   we held:

12

Insured, being the person with whom the contract was made, is primarily the proper person to bring
suit thereon. * * * Subject to some exceptions, insured may thus sue, although the policy is taken
wholly or in part for the benefit of another person named or unnamed, and although it is expressly
made payable to another as his interest may appear or otherwise. * * * Although a policy issued to a
mortgagor is taken out for the benefit of the mortgagee and is made payable to him, yet the
mortgagor may sue thereon in his own name, especially where the mortgagee's interest is less than
the full amount recoverable under the policy, * * *.

And in volume 33, page 82, of the same work, we read the following:

Insured may be regarded as the real party in interest, although he has assigned the policy for the
purpose of collection, or has assigned as collateral security any judgment he may obtain.  13

And since a policy of insurance upon life or health may pass by transfer, will or succession to any person, whether
he has an insurable interest or not, and such person may recover it whatever the insured might have
recovered,   the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife.
14

The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to annul
the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had hypertension, which might
have caused his death. 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.  15

Petitioner 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
16

cause of death." The private respondent'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 question of whether there was concealment was aptly answered by the appellate court, thus:

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. From this report, the appellant insurance
company refused to pay the insurance claim. Appellant alleged that the insured had concealed the
fact that he had hypertension.

Contrary to appellant'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, the appellant had not proven nor produced
any witness who could attest to Dr. Leuterio's medical history . . .

xxx xxx xxx

Appellant insurance company had failed to establish that there was concealment made by the
insured, hence, it cannot refuse payment of the claim.  17

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
18

establish such defense by satisfactory and convincing evidence rests upon the insurer.   In the case at bar, the
19

petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds of the
insurance. 1âwphi1.nêt

And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no evidence as
to the amount of Dr. Leuterio's outstanding indebtedness to DBP at the time of the mortgagor's death. Hence, for
private respondent's failure to establish the same, the action for specific performance should be dismissed.
Petitioner's claim is without merit. A life insurance policy is a valued policy.   Unless the interest of a person insured
20

is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or
health is the sum fixed in the policy.   The mortgagor paid the premium according to the coverage of his insurance,
21

which states that:

The policy states that upon receipt of due proof of the Debtor's death during the terms of this
insurance, a death benefit in the amount of P86,200.00 shall be paid.

In the event of the debtor's death before his indebtedness with the creditor shall have been fully
paid, an amount to pay the outstanding indebtedness shall first be paid to the Creditor and the
balance of the Sum Assured, if there is any shall then be paid to the beneficiary/ies designated by
the debtor."   (Emphasis omitted)
22

However, we noted that the Court of Appeals' decision was promulgated on May 17, 1993. In private respondent's
memorandum, she states that DBP foreclosed in 1995 their residential lot, in satisfaction of mortgagor's outstanding
loan. Considering this supervening event, the insurance proceeds shall inure to the benefit of the heirs of the
deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich itself at the expense of
another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already
foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterio's heirs represented by his widow,
herein private respondent Medarda Leuterio.

WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. CV
18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance proceeds
amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio
(deceased), upon presentation of proof of prior settlement of mortgagor's indebtedness to Development Bank of the
Philippines. Costs against petitioner. 1âwphi1.nêt

SO ORDERED.
Insurance Contract as a Contract of Suretyship

G.R. No. 177839               January 18, 2012

FIRST LEPANTO-TAISHO INSURANCE CORPORATION (now known as FLT PRIME INSURANCE

CORPORATION), Petitioner,
vs.
CHEVRON PHILIPPINES, INC. (formerly known as CALTEX [PHILIPPINES], INC.), Respondent.

DECISION

VILLARAMA, JR., J.:

Before this Court is a Rule 45 Petition assailing the Decision dated November 20, 2006 and Resolution dated May
1  2 

8, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86623, which reversed the Decision dated August 5, 2005
3 

of the Regional Trial Court (RTC) of Makati City, Branch 59 in Civil Case No 02-857.

Respondent Chevron Philippines, Inc., formerly Caltex Philippines, Inc., sued petitioner First Lepanto-Taisho
Insurance Corporation (now known as FLT Prime Insurance Corporation) for the payment of unpaid oil and
petroleum purchases made by its distributor Fumitechniks Corporation (Fumitechniks).

Fumitechniks, represented by Ma. Lourdes Apostol, had applied for and was issued Surety Bond FLTICG (16) No.
01012 by petitioner for the amount of ₱15,700,000.00. As stated in the attached rider, the bond was in compliance
with the requirement for the grant of a credit line with the respondent "to guarantee payment/remittance of the cost
of fuel products withdrawn within the stipulated time in accordance with the terms and conditions of the agreement."
The surety bond was executed on October 15, 2001 and will expire on October 15, 2002. 4

Fumitechniks defaulted on its obligation. The check dated December 14, 2001 it issued to respondent in the amount
of ₱11,461,773.10, when presented for payment, was dishonored for reason of "Account Closed." In a letter dated
February 6, 2002, respondent notified petitioner of Fumitechniks’ unpaid purchases in the total amount of
₱15,084,030.30. In its letter-reply dated February 13, 2002, petitioner through its counsel, requested that it be
furnished copies of the documents such as delivery receipts. Respondent complied by sending copies of invoices
5 

showing deliveries of fuel and petroleum products between November 11, 2001 and December 1, 2001.

Simultaneously, a letter was sent to Fumitechniks demanding that the latter submit to petitioner the following: (1) its
6 

comment on respondent’s February 6, 2002 letter; (2) copy of the agreement secured by the Bond, together with
copies of documents such as delivery receipts; and (3) information on the particulars, including "the terms and
conditions, of any arrangement that [Fumitechniks] might have made or any ongoing negotiation with Caltex in
connection with the settlement of the obligations subject of the Caltex letter."

In its letter dated March 1, 2002, Fumitechniks through its counsel wrote petitioner’s counsel informing that it cannot
submit the requested agreement since no such agreement was executed between Fumitechniks and respondent.
Fumitechniks also enclosed a copy of another surety bond issued by CICI General Insurance Corporation in favor of
respondent to secure the obligation of Fumitechniks and/or Prime Asia Sales and Services, Inc. in the amount of
₱15,000,000.00. Consequently, petitioner advised respondent of the non-existence of the principal agreement as
7 

confirmed by Fumitechniks. Petitioner explained that being an accessory contract, the bond cannot exist without a
principal agreement as it is essential that the copy of the basic contract be submitted to the proposed surety for the
appreciation of the extent of the obligation to be covered by the bond applied for.8

On April 9, 2002, respondent formally demanded from petitioner the payment of its claim under the surety bond.
However, petitioner reiterated its position that without the basic contract subject of the bond, it cannot act on
respondent’s claim; petitioner also contested the amount of Fumitechniks’ supposed obligation. 9
Alleging that petitioner unjustifiably refused to heed its demand for payment, respondent prayed for judgment
ordering petitioner to pay the sum of ₱15,080,030.30, plus interest, costs and attorney’s fees equivalent to ten
percent of the total obligation.
10

Petitioner, in its Answer with Counterclaim, asserted that the Surety Bond was issued for the purpose of securing
11 

the performance of the obligations embodied in the Principal Agreement stated therein, which contract should have
been attached and made part thereof.

After trial, the RTC rendered judgment dismissing the complaint as well as petitioner’s counterclaim. Said court
found that the terms and conditions of the oral credit line agreement between respondent and Fumitechniks have
not been relayed to petitioner and neither were the same conveyed even during trial. Since the surety bond is a
mere accessory contract, the RTC concluded that the bond cannot stand in the absence of the written agreement
secured thereby. In holding that petitioner cannot be held liable under the bond it issued to Fumitechniks, the RTC
noted the practice of petitioner, as testified on by its witnesses, to attach a copy of the written agreement (principal
contract) whenever it issues a surety bond, or to be submitted later if not yet in the possession of the assured, and
in case of failure to submit the said written agreement, the surety contract will not be binding despite payment of the
premium.

Respondent filed a motion for reconsideration while petitioner filed a motion for partial reconsideration as to the
dismissal of its counterclaim. With the denial of their motions, both parties filed their respective notice of appeal.

The CA ruled in favor of respondent, the dispositive portion of its decision reads:

WHEREFORE, the appealed Decision is REVERSED and SET ASIDE. A new judgment is hereby entered
ORDERING defendant-appellant First Lepanto-Taisho Insurance Corporation to pay plaintiff-appellant Caltex
(Philippines) Inc. now Chevron Philippines, Inc. the sum of P15,084,030.00.

SO ORDERED. 12

According to the appellate court, petitioner cannot insist on the submission of a written agreement to be attached to
the surety bond considering that respondent was not aware of such requirement and unwritten company policy. It
also declared that petitioner is estopped from assailing the oral credit line agreement, having consented to the same
upon presentation by Fumitechniks of the surety bond it issued. Considering that such oral contract between
Fumitechniks and respondent has been partially executed, the CA ruled that the provisions of the Statute of Frauds
do not apply.

With the denial of its motion for reconsideration, petitioner appealed to this Court raising the following issues:

I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE
PROVISIONS OF THE SURETY BOND WHEN IT HELD THAT THE SURETY BOND SECURED AN ORAL
CREDIT LINE AGREEMENT NOTWITHSTANDING THE STIPULATIONS THEREIN CLEARLY SHOWING
BEYOND DOUBT THAT WHAT WAS BEING SECURED WAS A WRITTEN AGREEMENT, PARTICULARLY, THE
WRITTEN AGREEMENT A COPY OF WHICH WAS EVEN REQUIRED TO BE ATTACHED TO THE SURETY
BOND AND MADE A PART THEREOF.

II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING OUT THE
QUESTIONED RESPONDENT’S EVIDENCE FOR BEING CONTRARY TO THE PAROL EVIDENCE RULE,
IMMATERIAL AND IRRELEVANT AND CONTRARY TO THE STATUTE OF FRAUDS.

III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING OUT THE
RESPONDENT’S MOTION FOR RECONSIDERATION OF THE RTC DECISION FOR BEING A MERE SCRAP OF
PAPER AND PRO FORMA AND, CONSEQUENTLY, IN NOT DECLARING THE RTC DECISION AS FINAL AND
EXECUTORY IN SO FAR AS IT DISMISSED THE COMPLAINT.

IV. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE RTC DECISION
AND IN NOT GRANTING PETITIONER’S COUNTERCLAIM. 13
The main issue to be resolved is one of first impression: whether a surety is liable to the creditor in the absence of a
written contract with the principal.

Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called the
surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking
in favor of a third party, called the obligee. It includes official recognizances, stipulations, bonds or undertakings
issued under Act 536, as amended. Suretyship arises upon the solidary binding of a person – deemed the surety –
14 

with the principal debtor, for the purpose of fulfilling an obligation. Such undertaking makes a surety agreement an
15 

ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in
essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another
although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom.
And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes
liability as a regular party to the undertaking.
16

The extent of a surety’s liability is determined by the language of the suretyship contract or bond itself. It cannot be
extended by implication, beyond the terms of the contract. Thus, to determine whether petitioner is liable to
17 

respondent under the surety bond, it becomes necessary to examine the terms of the contract itself.

Surety Bond FLTICG (16) No. 01012 is a standard form used by petitioner, which states:

That we, FUMITECHNIKS CORP. OF THE PHILS. of #154 Anahaw St., Project 7, Quezon City as principal and
First Lepanto-Taisho Insurance Corporation a corporation duly organized and existing under and by virtue of the
laws of the Philippines as Surety, are held firmly bound unto CALTEX PHILIPPINES, INC. of ______ in the sum
of FIFTEEN MILLION SEVEN HUNDRED THOUSAND ONLY PESOS (P15,700,000.00), Philippine Currency, for
the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators,
successors, and assigns, jointly and severally, firmly by these presents:

The conditions of this obligation are as follows:

WHEREAS, the above-bounden principal, on 15th day of October, 2001 entered into [an] agreement with CALTEX

PHILIPPINES, INC. of ________________ to fully and faithfully

a copy of which is attached hereto and made a part hereof:

WHEREAS, said Obligee__ requires said principal to give a good and sufficient bond in the above stated sum to
secure the full and faithful performance on his part of said agreement__.

NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms,
conditions, and agreements stipulated in said agreement__ then this obligation shall be null and void; otherwise it
shall remain in full force and effect.

The liability of First Lepanto-Taisho Insurance Corporation under this bond will expire on October 15, 2002__.

x x x x (Emphasis supplied.)
18 

The rider attached to the bond sets forth the following:

WHEREAS, the Principal has applied for a Credit Line in the amount of PESOS: Fifteen Million Seven Hundred
thousand only (₱15,700,000.00), Philippine Currency with the Obligee for the purchase of Fuel Products;

WHEREAS, the obligee requires the Principal to post a bond to guarantee payment/remittance of the cost of fuel
products withdrawn within the stipulated time in accordance with terms and conditions of the agreement;

IN NO CASE, however, shall the liability of the Surety hereunder exceed the sum of PESOS: Fifteen million seven
hundred thousand only (₱15,700,000.00), Philippine Currency.
NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms and
conditions and agreements stipulated in said undertakings, then this obligation shall be null and void; otherwise, it
shall remain in full force and effect.

The liability of FIRST LEPANTO-TAISHO INSURANCE CORPORATION, under this Bond will expire on 10.15.01_.
Furthermore, it is hereby understood that FIRST LEPANTO-TAISHO INSURANCE CORPORATION will not be
liable for any claim not presented to it in writing within fifteen (15) days from the expiration of this bond, and that the
Obligee hereby waives its right to claim or file any court action against the Surety after the termination of fifteen (15)
days from the time its cause of action accrues. 19

Petitioner posits that non-compliance with the submission of the written agreement, which by the express terms of
the surety bond, should be attached and made part thereof, rendered the bond ineffective. Since all stipulations and
provisions of the surety contract should be taken and interpreted together, in this case, the unmistakable intention of
the parties was to secure only those terms and conditions of the written agreement. Thus, by deleting the required
submission and attachment of the written agreement to the surety bond and replacing it with the oral credit
agreement, the obligations of the surety have been extended beyond the limits of the surety contract.

On the other hand, respondent contends that the surety bond had been delivered by petitioner to Fumitechniks
which paid the premiums and delivered the bond to respondent, who in turn, opened the credit line which
Fumitechniks availed of to purchase its merchandise from respondent on credit. Respondent points out that a
careful reading of the surety contract shows that there is no such requirement of submission of the written credit
agreement for the bond’s effectivity. Moreover, respondent’s witnesses had already explained that distributorship
accounts are not covered by written distribution agreements. Supplying the details of these agreements is allowed
as an exception to the parol evidence rule even if it is proof of an oral agreement. Respondent argues that by
introducing documents that petitioner sought to exclude, it never intended to change or modify the contents of the
surety bond but merely to establish the actual terms of the distribution agreement between Fumitechniks and
respondent, a separate agreement that was executed shortly after the issuance of the surety bond. Because
petitioner still issued the bond and allowed it to be delivered to respondent despite the fact that a copy of the written
distribution agreement was never attached thereto, respondent avers that clearly, such attaching of the copy of the
principal agreement, was for evidentiary purposes only. The real intention of the bond was to secure the payment of
all the purchases of Fumitechniks from respondent up to the maximum amount allowed under the bond.

A reading of Surety Bond FLTICG (16) No. 01012 shows that it secures the payment of purchases on credit by
Fumitechniks in accordance with the terms and conditions of the "agreement" it entered into with respondent. The
word "agreement" has reference to the distributorship agreement, the principal contract and by implication included
the credit agreement mentioned in the rider. However, it turned out that respondent has executed written
agreements only with its direct customers but not distributors like Fumitechniks and it also never relayed the terms
and conditions of its distributorship agreement to the petitioner after the delivery of the bond. This was clearly
admitted by respondent’s Marketing Coordinator, Alden Casas Fajardo, who testified as follows:

Atty. Selim:

Q : Mr. Fajardo[,] you mentioned during your cross-examination that the surety bond as part of the
requirements of [Fumitechniks] before the Distributorship Agreement was approved?

A : Yes Sir.

xxxx

Q : Is it the practice or procedure at Caltex to reduce distributorship account into writing?

xxxx

A : No, its not a practice to make an agreement.

xxxx
 Atty. Quiroz:

Q : What was the reason why you are not reducing your agreement with your client into writing?

A : Well, of course as I said, there is no fix pricing in terms of distributorship agreement, its usually with
regards to direct service to the customers which have direct fixed price.

xxxx

Q : These supposed terms and conditions that you agreed with [Fumitechniks], did you relay to the
defendant…

A : Yes Sir.

xxxx

Q : How did you relay that, how did you relay the terms and conditions to the defendant?

A : I don’t know, it was during the time for collection because I collected them and explain the terms and
conditions.

Q : You testified awhile ago that you did not talk to the defendant First Lepanto-Taisho Insurance
Corporation?

A : I was confused with the question. I’m talking about Malou Apostol.

Q : So, in your answer, you have not relayed those terms and conditions to the defendant First Lepanto, you
have not?

A : Yes Sir.

Q : And as of this present, you have not yet relayed the terms and conditions?

A : Yes Sir.

x x x x 
20

Respondent, however, maintains that the delivery of the bond and acceptance of premium payment by petitioner
binds the latter as surety, notwithstanding the non-submission of the oral distributorship and credit agreement which
understandably cannot be attached to the bond.

The contention has no merit.

The law is clear that a surety contract should be read and interpreted together with the contract entered into
between the creditor and the principal. Section 176 of the Insurance Code states:

Sec. 176. The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the
amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal
contract between the obligor and the obligee. (Emphasis supplied.)

A surety contract is merely a collateral one, its basis is the principal contract or undertaking which it
secures. Necessarily, the stipulations in such principal agreement must at least be communicated or made known
21 

to the surety particularly in this case where the bond expressly guarantees the payment of respondent’s fuel
products withdrawn by Fumitechniks in accordance with the terms and conditions of their agreement. The bond
specifically makes reference to a written agreement. It is basic that if the terms of a contract are clear and leave no
doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. Moreover,
22 
being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is
resolved in favor of the solidary debtor. Having accepted the bond, respondent as creditor must be held bound by
23 

the recital in the surety bond that the terms and conditions of its distributorship contract be reduced in writing or at
the very least communicated in writing to the surety. Such non-compliance by the creditor (respondent) impacts not
on the validity or legality of the surety contract but on the creditor’s right to demand performance.

It bears stressing that the contract of suretyship imports entire good faith and confidence between the parties in
regard to the whole transaction, although it has been said that the creditor does not stand as a fiduciary in his
relation to the surety. The creditor is generally held bound to a faithful observance of the rights of the surety and to
the performance of every duty necessary for the protection of those rights. Moreover, in this jurisdiction, obligations
24 

arising from contracts have the force of law between the parties and should be complied with in good
faith. Respondent is charged with notice of the specified form of the agreement or at least the disclosure of basic
25 

terms and conditions of its distributorship and credit agreements with its client Fumitechniks after its acceptance of
the bond delivered by the latter. However, it never made any effort to relay those terms and conditions of its contract
with Fumitechniks upon the commencement of its transactions with said client, which obligations are covered by the
surety bond issued by petitioner. Contrary to respondent’s assertion, there is no indication in the records that
petitioner had actual knowledge of its alleged business practice of not having written contracts with distributors; and
even assuming petitioner was aware of such practice, the bond issued to Fumitechniks and accepted by respondent
specifically referred to a "written agreement."

As to the contention of petitioner that respondent’s motion for reconsideration filed before the trial court should have
been deemed not filed for being pro forma, the Court finds it to be without merit. The mere fact that a motion for
reconsideration reiterates issues already passed upon by the court does not, by itself, make it a pro forma motion.
Among the ends to which a motion for reconsideration is addressed is precisely to convince the court that its ruling
is erroneous and improper, contrary to the law or evidence; the movant has to dwell of necessity on issues already
passed upon. 26 
1avvphi1

Finally, we hold that the trial court correctly dismissed petitioner’s counterclaim for moral damages and attorney’s
fees. The filing alone of a civil action should not be a ground for an award of moral damages in the same way that a
clearly unfounded civil action is not among the grounds for moral damages. Besides, a juridical person is generally
27 

not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. Although in some recent cases
28 

we have held that the Court may allow the grant of moral damages to corporations, it is not automatically granted;
there must still be proof of the existence of the factual basis of the damage and its causal relation to the defendant’s
acts. This is so because moral damages, though incapable of pecuniary estimation, are in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose a penalty on the
wrongdoer. There is no evidence presented to establish the factual basis of petitioner’s claim for moral damages.
29 

Petitioner is likewise not entitled to attorney’s fees. The settled rule is that no premium should be placed on the right
to litigate and that not every winning party is entitled to an automatic grant of attorney’s fees. In pursuing its claim
30 

on the surety bond, respondent was acting on the belief that it can collect on the obligation of Fumitechniks
notwithstanding the non-submission of the written principal contract.

WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The Decision dated November 20, 2006
and Resolution dated May 8, 2007 of the Court of Appeals in CA-G.R. CV No. 86623, are REVERSED and SET
ASIDE. The Decision dated August 5, 2005 of the Regional Trial Court of Makati City, Branch 59 in Civil Case No.
02-857 dismissing respondent’s complaint as well as petitioner’s counterclaim, is hereby REINSTATED and
UPHELD.

No pronouncement as to costs.

SO ORDERED.
G.R. No. 187116               October 18, 2010

ASSET BUILDERS CORPORATION, Petitioner,

vs.
STRONGHOLD INSURANCE COMPANY, INCORPORATED, Respondent.

DECISION

MENDOZA, J.:

This petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure assails the February 27,
2009 Decision1 of the Regional Trial Court, Pasig City, Branch 71 (RTC), in Civil Case No. 71034, ordering
defendant Lucky Star to pay petitioner Asset Builders Corporation the sum of ₱575,000.00 with damages, but
absolving respondent Stronghold Insurance Company, Incorporated (Stronghold) of any liability on its Surety Bond
and Performance Bond.

THE FACTS

On April 28, 2006, Asset Builders Corporation (ABC) entered into an agreement with Lucky Star Drilling &
Construction Corporation (Lucky Star) as part of the completion of its project to construct the ACG Commercial
Complex on "NHA Avenue corner Olalia Street, Barangay Dela Paz, Antipolo City."2 As can be gleaned from the
"Purchase Order,"3 Lucky Star was to supply labor, materials, tools, and equipment including technical supervision
to drill one (1) exploratory production well on the project site. The total contract price for the said project was
₱1,150,000.00. The salient terms and conditions of said agreement are as follows:

i. Lump sum price--------PHP1,150,000.00;

ii. 50% downpayment---upon submission of surety bond in an equivalent amount and performance bond
equivalent to 30 % of contract amount;

iii. Completion date-----60 calendar days;

iv. Penalty----2/10 of 1% of total contract amount for every day of delay;

v. Terms---50% down payment to be released after submission of bonds;

vi. Retention—Subject to 10% retention to be released after the project is accepted by the owner;

To guarantee faithful compliance with their agreement, Lucky Star engaged respondent Stronghold which issued
two (2) bonds in favor of petitioner. The first, SURETY BOND G(16) No. 141558, dated May 9, 2006, covers the
sum of ₱575,000.004 or the required downpayment for the drilling work. The full text of the surety bond is herein
quoted:

KNOW ALL MEN BY THESE PRESENTS:

That we, LUCKY STAR DRILLING & CONSTRUCTION CORP., 168 ACACIA St., Octagon Industrial Estate Subd.,
Pasig City as principal, and STRONGHOLD INSURANCE COMPANY, INC., a corporation duly organized and
existing under and by virtue of laws of the Philippines, as surety, are held and firmly bound unto ASSET BUILDERS
CORPORATION to the sum of Pesos FIVE HUNDRED SEVENTY FIVE THOUSAND ONLY (₱575,000.00)
Philippine Currency, for the payment of which, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these presents.

THE CONDITIONS OF THIS OBLIGATION ARE AS FOLLOWS:

To fully and faithfully guarantee the repayment to be done through deductions from periodic billings of the advance
payment made or to be made by the Obligee to the Principal in connection with the supply of labor, materials, tools
and equipment including technical supervision to drill one (1) exploratory production well located at NIA Ave. cor.
Olalia St., Brgy. dela Paz, Antipolo City. This bond is callable on demand.

The liability of the surety company upon determination under this bond shall in no case exceed the penal sum of
PESOS: FIVE HUNDRED SEVENTY FIVE THOUSAND (₱575,000.00) only, Philippine Currency.

WHEREAS, the Obligee requires said principal to give a good and sufficient bond in the above stated sum to secure
the full and faithful performance on his part of said undertakings.

NOW, THEREFORE, if the above bounden principal shall in all respects duly and fully observe and perform all and
singular the aforesaid [co]-venants, conditions and agreements to the true intent and meaning thereof, then this
obligation shall be null and void, otherwise to remain in full force and effect.

Liability of surety on this bond will expire on May 09, 2007 and said bond will be cancelled five DAYS after its
expiration, unless surety is notified of and existing obligations hereunder.

x x x5

With respect to the second contract, PERFORMANCE BOND G(13) No. 115388, dated May 09, 2006, it covers the
sum of ₱345,000.00.6 Thus:

KNOW ALL MEN BY THESE PRESENTS:

That we, LUCKY STAR DRILLING & CONSTRUCTION of 168 Acacia St., Octagon Ind’l., contractor, of Estate,
Sub., Pasig City Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
organized and existing under and by virtue of the laws of the Philippines, with head office at Makati, as Surety, are
held and firmly bound unto the ASSET BUILDERS CORPORATION and to any individual, firm, partnership,
corporation or association supplying the principal with labor or materials in the penal sum of THREE HUNDRED
FORTY FIVE THOUSAND ONLY (₱345,000.00), Philippine Currency, for the payment of which sum, well and truly
to be made, we bind ourselves, our heirs, executors, administrators, successors and assigns, jointly and severally,
firmly by these presents.

The CONDITIONS OF THIS OBLIGATION are as follows;

WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract with the
ASSET BUILDERS CORPORATION represented by _________________, to fully and faithfully.

Comply with the supply of labor, materials, tools and equipment including technical supervision to drill one (1)
exploratory production well located at NIA Ave. cor. Olalia St., Brgy. Dela Paz, Antipolo City. This bond is callable on
demand.

WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of PESOS THREE
HUNDRED FORTY FIVE THOUSAND ONLY (₱345,000.00) Philippine Currency, inclusive of interest, attorney’s
fee, and other damages, and shall not be liable for any advances of the obligee to the principal.

WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-stated sum to
secure the full and faithfull performance on its part of said contract, and the satisfaction of obligations for materials
used and labor employed upon the work;

NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of said contract during the original term of said contract and any extension thereof that
may be granted by the obligee, with notice to the surety and during the life of any guaranty required under the
contract, and shall also perform well and truly and fulfill all the undertakings, covenants, terms, conditions, and
agreements of any and all duly authorized modifications of said contract that may hereinafter be made, without
notice to the surety except when such modifications increase the contract price; and such principal contractor or his
or its sub-contractors shall promptly make payment to any individual, firm, partnership, corporation or association
supplying the principal of its sub-contractors with labor and materials in the prosecution of the work provided for in
the said contract, then, this obligation shall be null and void; otherwise it shall remain in full force and effect. Any
extension of the period of time which may be granted by the obligee to the contractor shall be considered as given,
and any modifications of said contract shall be considered as authorized, with the express consent of the Surety.

The right of any individual, firm, partnership, corporation or association supplying the contractor with labor or
materials for the prosecution of the work hereinbefore stated, to institute action on the penal bond, pursuant to the
provision of Act No. 3688, is hereby acknowledge and confirmed. x x x

On May 20, 2006, ABC paid Lucky Star ₱575,000.00 (with 2% withholding tax) as advance payment, representing
50% of the contract price.7 Lucky Star, thereafter, commenced the drilling work. By July 18, 2006, just a few days
before the agreed completion date of 60 calendar days, Lucky Star managed to accomplish only ten (10) % of the
drilling work. On the same date, petitioner sent a demand letter to Lucky Star for the immediate completion of the
drilling work8 with a threat to cancel the agreement and forfeit the bonds should it still fail to complete said project
within the agreed period.

On August 3, 2006, ABC sent a Notice of Rescission of Contract with Demand for Damages to Lucky
Star.9 Pertinent portions of said notice read:

Pursuant to paragraph 1 of the Terms and Conditions of the service contract, notice is hereby made on you of the
rescission of the contract and accordingly demand is hereby made on you, within seven (7) days from receipt
hereof:

(1) to refund the down payment of PHP563,500.00, plus legal interest thereon;

(2) to pay liquidated damages equivalent to 2/10 of 1% of the contract price for every day of delay, or a total
of PHP138,000.00;

(3) to pay the amount guaranteed by your performance bond in the amount of PHP345,000.00;

(4) to pay PHP150,000.00 in other consequential damages;

(5) to pay exemplary damages in the amount of PHP150,000.00;

(6) to vacate the project site, together with all your men and equipment.

Should you refuse to comply with our demand within the above period, we shall be constrained to sue you in court,
in which event we shall demand payment of attorney’s fees in the amount of at least PHP100,000.0.

On August 16, 2006, ABC sent a Notice of Claim for payment to Stronghold to make good its obligation under its
bonds.10

Despite notice, ABC did not receive any reply either from Lucky Star or Stronghold, prompting it to file its Complaint
for Rescission with Damages against both before the RTC11 on November 21, 2006.

In its "Answer (with Complusory Counterclaim and Cross-Claim)," dated January 24, 2007, Stronghold denied any
liability arguing that ABC had not shown any proof that it made an advance payment of 50% of the contract price of
the project. It further averred that ABC’s rescission of its contract with Lucky Star virtually revoked the claims against
the two bonds and absolved them from further liability.12

Lucky Star, on the other hand, failed to file a responsive pleading within the prescribed period and, thus, was
declared in default by the RTC in its Order dated August 24, 2007.13

On February 27, 2009, the RTC rendered the assailed decision ordering Lucky Star to pay ABC but absolving
Stronghold from liability.14 Relevant parts of the decision, including the decretal portion, read:
On the liability of defendant Stronghold Insurance, the Court rules on the negative.

The surety bond and performance bond executed by defendants Lucky Star and Stronghold Insurance are in the
nature of accessory contracts which depend for its existence upon another contract. Thus, when the agreement
(Exhibit ‘A’) between the plaintiff and defendant Asset Builders was rescinded, the surety and performance bond
were automatically cancelled.

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff and against defendant
Lucky Star Drilling & Construction, ordering the latter as follows:

1. to pay plaintiff in the amount of PHP575,000.00 as actual damages plus legal interest from the filing of the
complaint;

2. to pay plaintiff in the amount of PHP100,000.00 as liquidated damages;

3. to pay plaintiff in the amount of PHP50,000.00 as exemplary damages;

4. to pay plaintiff in the amount of PHP 50,000.00 as attorney’s fees;

5. to pay the costs of the suit.

Defendant Stronghold Insurance Company, Inc.’s compulsory counterclaim and cross-claim are dismissed.15

Hence, this petition.

Petitioner ABC prays for the reversal of the challenged decision based on the following

GROUNDS

A. The Lower Court seriously erred and unjustly ACTED ARBITRARILY with manifest bias and grave

abuse of discretion, CONTRARY to applicable laws and established jurisprudence in declaring the
"automatic CANCELLATION" of respondent Stronghold’s Surety Bond and Performance Bond,
because:

(a) Despite rescission, there exists a continuing VALID PRINCIPAL OBLIGATION guaranteed

by Respondent’s Bonds, arising out of the Contractor’s DEFAULT and Non-performance.

(b) Upon breach by its Principal/contractor, the LIABILITIES of Respondent’s bonds had

already ACCRUED, automatically attached, and had become already DIRECT,
PRIMARY and ABSOLUTE, even before Petitioner’s legitimate exercise of its option under
Art. 1191 of the New Civil Code.

(c) Rescission does NOT AFFECT the liabilities of the Respondent Stronghold as

its LIABILITIES on its subject bonds have already
become INTERWOVEN and INSEPARABLE with the liabilities of its Principal, the Contractor
Lucky Star.

B. With the Lower Court’s completely erroneous ruling on the liabilities of Respondent’s bonds, the
Lower Court equally ERRED with manifest bias and grave abuse, in its FAILURE to comply with the
"duty of court" to make a finding of "unreasonable denial or withholding" by Respondent Stronghold
or Petitioner’s claims and impose upon the Respondent the penalties provided for under Section 241
and 244 of the Insurance Code.16

Essentially, the primary issue is whether or not respondent insurance company, as surety, can be held liable under
its bonds.
The Court rules in the affirmative.

Respondent, along with its principal, Lucky Star, bound itself to the petitioner when it executed in its favor surety and
performance bonds. The contents of the said contracts clearly establish that the parties entered into a surety
agreement as defined under Article 2047 of the New Civil Code. Thus:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.

If a person binds himself solidarily with the principal debtor, the provisions of Section 4, Chapter 3, Title I of this
Book shall be observed. In such case the contract is called a suretyship. [Emphasis supplied]

As provided in Article 2047, the surety undertakes to be bound solidarily with the principal obligor. That undertaking
makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the
contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the
debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive
any benefit therefrom.17 Let it be stressed that notwithstanding the fact that the surety contract is secondary to the
principal obligation, the surety assumes liability as a regular party to the undertaking.18

Stronghold Insurance Company, Inc. v. Republic-Asahi Glass Corporation,19 reiterating the ruling in Garcia v. Court
of Appeals,20 expounds on the nature of the surety’s liability:

X x x. The surety’s obligation is not an original and direct one for the performance of his own act, but merely
accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety
is in essence secondary only to a valid principal obligation, his liability to the creditor or promisee of the
principal is said to be direct, primary and absolute; in other words, he is directly and equally bound with the
principal.

Suretyship, in essence, contains two types of relationship – the principal relationship between the obligee
(petitioner) and the obligor (Lucky Star), and the accessory surety relationship between the principal (Lucky Star)
and the surety (respondent). In this arrangement, the obligee accepts the surety’s solidary undertaking to pay if the
obligor does not pay. Such acceptance, however, does not change in any material way the obligee’s relationship
with the principal obligor. Neither does it make the surety an active party to the principal obligee-obligor relationship.
Thus, the acceptance does not give the surety the right to intervene in the principal contract. The surety’s role arises
only upon the obligor’s default, at which time, it can be directly held liable by the obligee for payment as a solidary
obligor.21
1avvphi1

In the case at bench, when Lucky Star failed to finish the drilling work within the agreed time frame despite
petitioner’s demand for completion, it was already in delay. Due to this default, Lucky Star’s liability attached and, as
a necessary consequence, respondent’s liability under the surety agreement arose.

Undeniably, when Lucky Star reneged on its undertaking with the petitioner and further failed to return the
₱575,000.00 downpayment that was already advanced to it, respondent, as surety, became solidarily bound with
Lucky Star for the repayment of the said amount to petitioner. The clause, "this bond is callable on demand,"
strongly speaks of respondent’s primary and direct responsibility to the petitioner. 1avvphil

Accordingly, after liability has attached to the principal, the obligee or, in this case, the petitioner, can exercise the
right to proceed against Lucky Star or respondent or both. Article 1216 of the New Civil Code states:

The creditor may proceed against any one of the solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to those which may subsequently be directed against
the others, so long as the debt has not been fully collected.

Contrary to the trial court’s ruling, respondent insurance company was not automatically released from any liability
when petitioner resorted to the rescission of the principal contract for failure of the other party to perform its
undertaking. Precisely, the liability of the surety arising from the surety contracts comes to life upon the solidary
obligor’s default. It should be emphasized that petitioner had to choose rescission in order to prevent further loss
that may arise from the delay of the progress of the project. Without a doubt, Lucky Star’s unsatisfactory progress in
the drilling work and its failure to complete it in due time amount to non-performance of its obligation.

In fine, respondent should be answerable to petitioner on account of Lucky Star’s non-performance of its obligation
as guaranteed by the performance bond.

Finally, Article 121722 of the New Civil Code acknowledges the right of reimbursement from a co-debtor (the principal
co-debtor, in case of suretyship) in favor of the one who paid (the surety). Thus, respondent is entitled to
reimbursement from Lucky Star for the amount it may be required to pay petitioner arising from its bonds.

WHEREFORE, the February 27, 2009 Decision of the Regional Trial Court, Pasig City, Branch 71, is AFFIRMED
with MODIFICATION. Respondent Stronghold Insurance is hereby declared jointly and severally liable with Lucky
Star for the payment of ₱575,000.00 and the payment of ₱345,000.00 on the basis of its performance bond.

SO ORDERED.
Insurance Contract as a Contract of Adhession

G.R. Nos. 180880-81               September 18, 2012

KEPPEL CEBU SHIPYARD, INC., Petitioner,

vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

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

PIONEER INSURANCE AND SURETY CORPORATION, Petitioner,

vs.
KEPPEL CEBU SHIPYARD, INC., Respondent.

BERSAMIN,*

VILLARAMA,**

RESOLUTION

its full satisfaction. The arbitration costs shall be borne by both parties on at pro rata basis. 
54

A final point. As both ECSI and WG&A are equally responsible for the loss of Superferry 3, questions arises should
the liability of Pioneer to WG&A be proportionately limited? Is Pioneer entitled to any refund? Whether or not
Pioneer is entitled to the restitution of any excess payment is a question that cannot be adjudicated in this case. The
Court cannot make a final finding or pronouncement on the matter because WG&A is not a party In this case.
WG&A should be heard in this regard as it may have defenses to fend off the possible claim for refund by Pioneer. It
should be stressed that their relationship is governed by their contract of insurance, where their respective rights
and obligations are defined, and by their subsequent settlement or arrangement, if any. Due process dictates that
these should be threshed out in a separate action. Deedless to state, this decision is without prejudice to such
action.

WHEREFORE, the September 25, 2009 Decision of the Third Division is hereby MODIFIED. Accordingly, Keppel
Cebu Shipyard, Inc. is ordered to pay Pioneer Insurance and Surety Corporation the amount of ₱ 50,000,000.00
plus interest at the rate of 6% per annum from the filing of the case until the award becomes final and executory.
Thereafter, the rate of interest shall be 12% per annum. From the date the award becomes final and executory until
its fall satisfaction.

The arbitration costs shall be borne by both parties on a pro rata basis.

SO ORDERED.

JOSE CATRAL MENDOZA

Associate Justice

WE CONCUR:

MARIA LOURDES P. A. SERENO

Chief Justice

ANTONIO T. CARPIO PRESBITERO J. VELASCO, JR.

 Associate Justice Associate Justice

TERESITA J. LEONARDO-DE CASTRO ARTURO D. BRION

Associate Justice Associate Justice

DIOSDADO M. PERALTA LUCAS P. BERSAMIN

Associate Justice Associate Justice

MARIANO C. DEL CASTILLO ROBERTO A. ABAD

Associate Justice Associate Justice

(On Official Leave)

JOSE PORTUGAL PEREZ
MARTIN S. VILLARAMA, JR.
Associate Justice
Associate Justice

BIENVENIDO L. REYES ESTELA M. PERLAS-BERNABE

Associate Justice Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, l hereby certify that the conclusions in the above Resolution
had been reached in consultation before the case was assigned to the writer of the opinion of the Court.

MARIA LOURDES P. A. SERENO

Chief Justice

Footnotes
54

Eastern Shipping Lines, Inc. v. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78, 97.

The Lawphil Project - Arellano Law Foundation

G.R. Nos. 180880-81               September 18, 2012

KEPPEL CEBU SHIPYARD, INC., petitioner,

vs.
PIONEER INSURANCE AND SURETY CORPORATION, respondent.

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

G.R. Nos. 180896-97

PIONEER INSURANCE AND SURETY CORPORATION, petitioner,
vs.
KEPPEL CEBU SHIPYARD, INC., respondent.

DISSENTING OPINION

BRION, J.:

I maintain my dissent, based on my objections against the reopening of the final judgment in this case and its
acceptance by the Court En Banc for its review on the merits. Thus, I vote to DENY what effectively is the third
motion for reconsideration in this case.

In a September 25, 2009 Decision, the Second Division of the Supreme Court, thru Justice Antonio Eduardo B.
Nachura, modified the Court of Appeals (CA’s) December 20, 2007 amended decision in CA G.R. SP Nos. 74018
and 73934. It ordered Keppel Cebu Shipyard, Inc. (KCSI) to pay Pioneer Insurance and Surety Corporation
(Pioneer) ₱ 329,747,351.91, with 6% interest per annum from the time the Request for Arbitration was filed until the
Decision’s finality, plus 12% interest per annum on the said amount or any balance thereof from the Decision’s
finality until it is paid.

In a June 21, 2010 Resolution, the Court denial with finality KCSI’s first motion for reconsideration.

KSCI requested that the cases be referred to the Court En Banc, and set for oral arguments its second motion for
reconsideration and its July 30, 2010 letter. KCSI’s September 29, 2010 letter requested for the status of its July 30,
2010 letter.

For all these resons, I vote to DENY KCSI’s third motion for reconsideration for lack of jurisdiction, and to reiterate
the finality of the Decision of the Second Division dated September 25, 2009.

ARTURO D. BRION
Associate Justice

The Lawphil Project - Arellano Law Foundation

G.R. Nos. 180880-81               September 18, 2010

KEPPEL CEBU SHIPYARD, INC., petitioner,

vs.
PIONEER INSURANCE AND SURETY CORPORATION, respondent.

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

G.R. Nos. 180896-97

PIONEER INSURANCE AND SURETY CORPORATION, petitioner,

vs.
KEPPEL CEBU SHIPYARD, INC., respondent.

DISSENTING OPINION
REYES, J.:

I find myself unable to concur in the majority opinion. I would like to emphasize the applicability of Cebu Shipyard
and Engineering Works, Inc. v. William Lines, Inc.1 in this case.

Below is a summary of Cebu Shipyard insofar as it is relevant to Keppel Cebu Shipyard, Inc. v. Pioneer Insurance
and Surety Corporation.2

M/V Manila City, a luxury passenger cargo vessel owned by William Lines, Inc. (William Lines), was insured with
Prudential Guarantee and Assurance Company, Inc. (Prudential) for ₱ 45,000,000.00 for hull and machinery.
Among others, the policy provided as follows:

Subject to the conditions of the Policy, the insurance also covers loss of or damage to Vessel directly caused by the
following:

xxx

Negligence of Charterers and/or Repairers, provided such Charterers and/or Repairers are not an Assured
hereunder.

xxx

provided such loss or damage has not resulted from want of due diligence by the Assured, the Owners or Managers
of the Vessel, of any of them. Masters, Officers, Crew or Pilots are not to be considered Owners within the meaning
of this Clause should they hold shares in the Vessel.3

During the effectivity of the insurance, M/V Manila City caught fire and sank on February 16, 1991 while it was
undergoing dry-docking and repair within the premises of Cebu Shipyard and Engineering Works, Inc. (Cebu
Shipyard). On February 5, 1991, William Lines brought M/V Manila City to Cebu Shipyard for dry-docking and repair.
The Work Orders executed by William Lines and Cebu Shipyard contain the following stipulations:

11. Save as provided in Clause 10, the Contractor shall not be under any liability to the Customer either in contract
or for delict or quasi-delict or otherwise except for negligence and such liability shall itself be subject to the following
overriding limitations and exceptions, namely:

(a) The total liability of the Contractor to the Customer (over and above the liability to replace under Clause 10) or of
any sub-contractor shall be limited in respect of any defect or event (and a series of accidents arising out of the
same defect or event shall constitute one defect or event) to the sum of Pesos Philippine Currency One Million only.

xxxx

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

After M/V Manila City caught fire and sank, William Lines filed a complaint with the Regional Trial Court (RTC) of
Cebu City against Cebu Shipyard, alleging that the loss of the vessel was due to the latter’s fault and negligence.

Subsequently, Prudential paid William Lines the value of the vessel’s hull and machinery, resulting to Prudential’s
subrogation to the claims of William Lines against Cebu Shipyard. An amended complaint was filed to include
Prudential as a co-plaintiff.

In its Decision dated June 10, 1994, the RTC ruled that it was Cebu Shipyard’s negligence that caused the total loss
of the vessel. Cebu Shipyard was ordered to pay Prudential the amount of ₱ 45,000,000.00, representing the
amount the latter paid to William Lines.

On appeal, the Court of Appeals (CA) affirmed the RTC decision.

Cebu Shipyard filed a Petition for Review with this Court, claiming, among others, that: (a) it is a co-assured under
the insurance contract between William Lines and Prudential by virtue of Clause 20 of the Work Orders; thus, its
supposed negligence is an excluded risk; and (b) on the assumption that its negligence was the cause of the
vessel’s total loss, its liability is limited to ₱ 1,000,000.00.

In a Decision dated May 5, 1999 penned by Justice Fidel P. Purisima, this Court denied the petition finding no merit
in any of Cebu Shipyard’s claims. First, this Court, not being a trier of facts, is bound by the factual findings of the
RTC and the CA that Cebu Shipyard’s negligence was the cause of the loss. Second, the loss took place while the
Cebu Shipyard had custody and control of the vessel, thus, the principle of res ipsa loquitor applies. Third, Clause
20 of the Work Orders does not make Cebu Shipyard a co-assured under the insurance contract between
Prudential and William Lines. While William Lines is required to maintain an insurance contract while the vessel is
being dry-docked and repaired by Cebu Shipyard and such coverage benefits Cebu Shipyard, this does not
automatically make Cebu Shipyard a co-assured. It is only William Lines who was designated as "assured" in the
insurance contract and:

The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally
from the insurance contract or policy itself and not from any other contract or agreement because the insurance
policy denominates the assured and the beneficiaries of the insurance. x x x.5

Fourth, the Work Orders are in the nature of adhesion contract, which is recognized as valid in this jurisdiction but
reliance thereon is unfavored given a certain factual milieu. In this case, it is unfair and inequitable to limit the liability
of Cebu Shipyard to ₱ 1,000,000.00 in view of the proven fact that its failure to exercise the required diligence was
the proximate cause of the loss.

It is evident that the Decision dated September 25, 2009 of this Court in Keppel Cebu Shipyard shares a parallelism
with its Decision dated May 5, 1999 in Cebu Shipyard. As to the validity of Clause 20, the limited liability clause of
the Ship Repair Agreement between WG & A Jebsens Ship Management, Inc. (Aboitiz), this Court held that:

Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a "take-it-or-leave-it" basis. A
contract of adhesion is so-called because its terms are prepared by only one party, while the other party merely
affixes his signature signifying his adhesion thereto. Although not invalid, per se, a contract of adhesion is void when
the weaker party is imposed upon in dealing with the dominant bargaining party, and its option is reduced to the
alternative of "taking it or leaving it," completely depriving such party of the opportunity to bargain on equal footing.

xxxx

Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to limit its
liability to only ₱ 50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of
[P]360,000,000.00, would sanction the exercise of a degree of diligence short of what is ordinarily required. It would
not be difficult for a negligent party to escape liability by the simple expedient of paying an amount very much lower
than the actual damage or loss sustained by the other.6

As to the validity of Clause 22(a), the provision in the Ship Repair Agreement that required Aboitiz to maintain an
insurance cover on the vehicle while it is being dry-docked and repaired by Keppel Cebu Shipyard, Inc. (KCSI),
invoked by KCSI to claim that it is a co-assured in the insurance contract between Aboitiz and Pioneer Insurance
and Surety Corporation (Pioneer), this Court held that:

Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make each other a co-assured
under an insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any
other contract or agreement, because the insurance policy denominates the assured and the beneficiaries of the
insurance contract. Undeniably, the hull and machinery insurance procured by WG&A from Pioneer named only the
former as the assured. There was no manifest intention on the part of WG&A to constitute KCSI as a co-assured
under the policies. To have deemed KCSI as a co-assured under the policies would have had the effect of nullifying
any claim of WG&A from Pioneer for any loss or damage caused by the negligence of KCSI. No ship owner would
agree to make a ship repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage
under the policy would be rendered nugatory. WG&A could not have intended such a result.7
The re-opening of our Decision dated September 25, 2009 despite the fact that this had already become final and
executory, raises the presumption that there will be a reversal in KCSI’s favor.

At the onset, it bears stressing that the conclusions made by this Court in Keppel Cebu Shipyard was consistent
with the principles enunciated in Cebu Shipyard and in observance of the principle of stare decisis. In fact, even
without having to go through the rigorous exercise of determining whether Aboitiz consented to the limited liability
clause (a supposed fine-print in the Ship Repair Agreement), the conclusion would be the same and KCSI’s liability
to Pioneer would still be within the range of ₱ 350,000,000.00 considering the pronouncement in Cebu Shipyard that
a limitation of liability in that form is void for being against public policy.

The same is true with respect to the issue on whether KCSI can be considered a co-assured in the insurance
contract between Pioneer and Aboitiz. Even if KCSI’s being a co-assured is expressly stipulated in the Ship Repair
Agreement (compared to the Work Orders in Cebu Shipyard, which was not that explicit), that would not suffice to
make it so. Keppel Cebu Shipyard echoed the pronouncements in Cebu Shipyard that one can only claim to be a
co-assured if he is designated as one in the insurance contract itself, and no other contract where the insurer is not
a party can be invoked.

Therefore, to hold that KCSI’s liability to Pioneer is limited only to ₱ 50,000,000.00 is tantamount to a reversal of the
doctrine espoused in Cebu Shipyard; and if such is the intention then a categorical statement to that effect should
be made. For several years, ship owners had relied on this formulation that any attempt on the part of the ship
repairer and owner of docking facilities to limit their liability to a certain amount, which is way below that actual value
of the ship, is an exercise in futility. This holds true even if the ship owner had consented to a contract where such
limitation on liability has been stipulated.

It is not without reason that limited liability provisions had been struck down as void for being against public policy. It
is indeed distasteful and an affront to one’s sense of justice and fairness that: (a) ship owners would render
themselves unqualified to the services of ship repairers and owners of docking facilities should they refuse to
accede to a limited liability clause; and (b) ship repairers and owners of docking facilities would be relieved of liability
to a significant degree even if it was by their fault or negligence that the vessel was placed in utter ruin. The consent
of a ship owner to a limited liability clause is not freely given in a certain sense, most especially if the ship owner is
confronted with no choice but to engage the services of that ship repairer for being the only one available. Such
cutthroat practice is what this Court would intend to avoid by declaring such a limited liability clause invalid.

In light of the foregoing, and on the ground of immutability of judgment, I register my DISSENT. I vote to AFFIRM
the Decision dated September 25, 2009 of the Court in this case.

BIENVENIDO L. REYES
Associate Justice

Footnotes

1
 366 Phil. 439 (1999).

2
 G.R. Nos. 180880-81 & G.R. Nos. 180896-97 September 25, 2009, 601 SCRA 96.

3
 Supra note 1, at 444-445.

4
 Id. at 446.

5
 Id. at 456.

6
 Supra note 2, at 143-144.

7
 Id. at 144.
The Lawphil Project - Arellano Law Foundation

EN BANC

G.R. Nos. 180880-81               September 18, 2012

KEPPEL CEBU SHIPYARD, INC., Petitioner,

vs.
PIONEER INSURANCE AND SURETY CORPORATION, Respondent.

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

G.R. Nos. 180896-97

PIONEER INSURANCE AND SURETY CORPORATION, Petitioner,

vs.
KEPPEL CEBU SHIPYARD, INC., Respondent.

CONCURRING OPINION

ABAD, J.:

I concur with the main opinion in reconsidering the Division’s decision in these cases. I especially address the
dissenting opinion of Justice Arturo D. Brion.

On January 26, 2000 Keppel Cebu Shipyard, Inc. (KCSI) and WG&A Jebsens Shipmanagement, Inc. (WG&A)
executed a Shiprepair Agreement where KCSI agreed to renovate and reconstruct WG&A’s M/V Superferry 3 using
its dry docking facilities pursuant to its safety and security rules and regulations. Under the agreement, KCSI’s total
liability was limited to ₱ 50 Million. Meanwhile, the ship was insured with Pioneer Insurance and Surety Corporation
(Pioneer) for US$8,472,581.78

In the course of the repairs, M/V Superferry 3 was destroyed by fire. WG&A declared a "total constructive loss" and
filed an insurance claim with Pioneer which, in turn, paid WG&A the total sum insured equivalent to ₱ 360 Million.
WG&A then executed a Loss and Subrogation Receipt in favor of Pioneer.

Pioneer tried to collect from KCSI the full amount of ₱ 360 Million that it had paid to WG&A, but KCSI denied any
responsibility for the loss of the vessel. Consequently, Pioneer filed a Request for Arbitration before the Construction
Industry Arbitration Commission (CTAC).

Besides, the Court acted in accordance with its internal rules which recognize the En Banc’s power to review and
take cognizance of cases under exceptional circumstances. Section 3(m), Rule 2 of the rules expressly provides
that the Court En Banc shall act on cases that it deems of sufficient importance to merit its attention. In this regard,
the rules also state that a second motion for reconsideration may be entertained, in the higher interest of justice, by
a two-thirds vote of the Court En Banc’s members
G.R. No. 184300               July 11, 2012

MALAYAN INSURANCE CO., INC., Petitioner,

vs.
PHILIPPINES FIRST INSURANCE CO., INC. and REPUTABLE FORWARDER SERVICES, INC., Respondents.

DECISION

REYES, J.:

Before the Court is a petitiOn for review on certiorari filed by petitioner Malayan Insurance Co., lnc. (Malayan)
assailing the Decision dated February 29, 2008 and Resolution dated August 28, 2008 of the Court of Appeals (CA)
1  2 

in CA-G.R. CV No. 71204 which affirmed with modification the decision of the Regional Trial Court (RTC), Branch
38 of Manila.

Antecedent Facts

Since 1989, Wyeth Philippines, Inc. (Wyeth) and respondent Reputable Forwarder Services, Inc. (Reputable) had
been annually executing a contract of carriage, whereby the latter undertook to transport and deliver the former’s
products to its customers, dealers or salesmen. 3

On November 18, 1993, Wyeth procured Marine Policy No. MAR 13797 (Marine Policy) from respondent Philippines
First Insurance Co., Inc. (Philippines First) to secure its interest over its own products. Philippines First thereby
insured Wyeth’s nutritional, pharmaceutical and other products usual or incidental to the insured’s business while
the same were being transported or shipped in the Philippines. The policy covers all risks of direct physical loss or
damage from any external cause, if by land, and provides a limit of P6,000,000.00 per any one land vehicle.

On December 1, 1993, Wyeth executed its annual contract of carriage with Reputable. It turned out, however, that
the contract was not signed by Wyeth’s representative/s. Nevertheless, it was admittedly signed by Reputable’s
4 

representatives, the terms thereof faithfully observed by the parties and, as previously stated, the same contract of
carriage had been annually executed by the parties every year since 1989. 5

Under the contract, Reputable undertook to answer for "all risks with respect to the goods and shall be liable to the
COMPANY (Wyeth), for the loss, destruction, or damage of the goods/products due to any and all causes
whatsoever, including theft, robbery, flood, storm, earthquakes, lightning, and other force majeure while the
goods/products are in transit and until actual delivery to the customers, salesmen, and dealers of the COMPANY". 6

The contract also required Reputable to secure an insurance policy on Wyeth’s goods. Thus, on February 11, 1994,
7 

Reputable signed a Special Risk Insurance Policy (SR Policy) with petitioner Malayan for the amount of
P1,000,000.00.

On October 6, 1994, during the effectivity of the Marine Policy and SR Policy, Reputable received from Wyeth 1,000
boxes of Promil infant formula worth P2,357,582.70 to be delivered by Reputable to Mercury Drug Corporation in
Libis, Quezon City. Unfortunately, on the same date, the truck carrying Wyeth’s products was hijacked by about 10
armed men. They threatened to kill the truck driver and two of his helpers should they refuse to turn over the truck
and its contents to the said highway robbers. The hijacked truck was recovered two weeks later without its cargo.
On March 8, 1995, Philippines First, after due investigation and adjustment, and pursuant to the Marine Policy, paid
Wyeth P2,133,257.00 as indemnity. Philippines First then demanded reimbursement from Reputable, having been
subrogated to the rights of Wyeth by virtue of the payment. The latter, however, ignored the demand.

Consequently, Philippines First instituted an action for sum of money against Reputable on August 12, 1996. In its
8 

complaint, Philippines First stated that Reputable is a "private corporation engaged in the business of a common
carrier." In its answer, Reputable claimed that it is a private carrier. It also claimed that it cannot be made liable
9 

under the contract of carriage with Wyeth since the contract was not signed by Wyeth’s representative and that the
cause of the loss was force majeure, i.e., the hijacking incident.

Subsequently, Reputable impleaded Malayan as third-party defendant in an effort to collect the amount covered in
the SR Policy. According to Reputable, "it was validly insured with Malayan for P1,000,000.00 with respect to the
lost products under the latter’s Insurance Policy No. SR-0001-02577 effective February 1, 1994 to February 1,
1995" and that the SR Policy covered the risk of robbery or hijacking. 10

Disclaiming any liability, Malayan argued, among others, that under Section 5 of the SR Policy, the insurance does
not cover any loss or damage to property which at the time of the happening of such loss or damage is insured by
any marine policy and that the SR Policy expressly excluded third-party liability.

After trial, the RTC rendered its Decision finding Reputable liable to Philippines First for the amount of indemnity it
11 

paid to Wyeth, among others. In turn, Malayan was found by the RTC to be liable to Reputable to the extent of the
policy coverage. The dispositive portion of the RTC decision provides:

WHEREFORE, on the main Complaint, judgment is hereby rendered finding [Reputable] liable for the loss of the
Wyeth products and orders it to pay Philippines First the following:

1. the amount of P2,133,257.00 representing the amount paid by Philippines First to Wyeth for the loss of
the products in question;

2. the amount of P15,650.00 representing the adjustment fees paid by Philippines First to hired
adjusters/surveyors;

3. the amount of P50,000.00 as attorney’s fees; and

4. the costs of suit.

On the third-party Complaint, judgment is hereby rendered finding

Malayan liable to indemnify [Reputable] the following:

1. the amount of P1,000,000.00 representing the proceeds of the insurance policy;

2. the amount of P50,000.00 as attorney’s fees; and

3. the costs of suit.

SO ORDERED. 12

Dissatisfied, both Reputable and Malayan filed their respective appeals from the RTC decision.

Reputable asserted that the RTC erred in holding that its contract of carriage with Wyeth was binding despite
Wyeth’s failure to sign the same. Reputable further contended that the provisions of the contract are unreasonable,
unjust, and contrary to law and public policy.

For its part, Malayan invoked Section 5 of its SR Policy, which provides:
Section 5. INSURANCE WITH OTHER COMPANIES. The insurance does not cover any loss or damage to property
which at the time of the happening of such loss or damage is insured by or would but for the existence of this policy,
be insured by any Fire or Marine policy or policies except in respect of any excess beyond the amount which would
have been payable under the Fire or Marine policy or policies had this insurance not been effected.

Malayan argued that inasmuch as there was already a marine policy issued by Philippines First securing the same
subject matter against loss and that since the monetary coverage/value of the Marine Policy is more than enough to
indemnify the hijacked cargo, Philippines First alone must bear the loss.

Malayan sought the dismissal of the third-party complaint against it. In the alternative, it prayed that it be held liable
for no more than P468,766.70, its alleged pro-rata share of the loss based on the amount covered by the policy,
subject to the provision of Section 12 of the SR Policy, which states:

12. OTHER INSURANCE CLAUSE. If at the time of any loss or damage happening to any property hereby insured,
there be any other subsisting insurance or insurances, whether effected by the insured or by any other person or
persons, covering the same property, the company shall not be liable to pay or contribute more than its ratable
proportion of such loss or damage.

On February 29, 2008, the CA rendered the assailed decision sustaining the ruling of the RTC, the decretal portion
of which reads:

WHEREFORE, in view of the foregoing, the assailed Decision dated 29 September 2000, as modified in the Order
dated 21 July 2001, is AFFIRMED with MODIFICATION in that the award of attorney’s fees in favor of Reputable is
DELETED.

SO ORDERED. 13

The CA ruled, among others, that: (1) Reputable is estopped from assailing the validity of the contract of carriage on
the ground of lack of signature of Wyeth’s representative/s; (2) Reputable is liable under the contract for the value of
the goods even if the same was lost due to fortuitous event; and (3) Section 12 of the SR Policy prevails over
Section 5, it being the latter provision; however, since the ratable proportion provision of Section 12 applies only in
case of double insurance, which is not present, then it should not be applied and Malayan should be held liable for
the full amount of the policy coverage, that is, P1,000,000.00. 14

On March 14, 2008, Malayan moved for reconsideration of the assailed decision but it was denied by the CA in its
Resolution dated August 28, 2008. 15

Hence, this petition.

Malayan insists that the CA failed to properly resolve the issue on the "statutory limitations on the liability of common
carriers" and the "difference between an ‘other insurance clause’ and an ‘over insurance clause’."

Malayan also contends that the CA erred when it held that Reputable is a private carrier and should be bound by the
contractual stipulations in the contract of carriage. This argument is based on its assertion that Philippines First
judicially admitted in its complaint that Reputable is a common carrier and as such, Reputable should not be held
liable pursuant to Article 1745(6) of the Civil Code. Necessarily, if Reputable is not liable for the loss, then there is
16 

no reason to hold Malayan liable to Reputable.

Further, Malayan posits that there resulted in an impairment of contract when the CA failed to apply the express
provisions of Section 5 (referred to by Malayan as over insurance clause) and Section 12 (referred to by Malayan as
other insurance clause) of its SR Policy as these provisions could have been read together there being no actual
conflict between them.

Reputable, meanwhile, contends that it is exempt from liability for acts committed by thieves/robbers who act with
grave or irresistible threat whether it is a common carrier or a private/special carrier. It, however, maintains the
correctness of the CA ruling that Malayan is liable to Philippines First for the full amount of its policy coverage and
not merely a ratable portion thereof under Section 12 of the SR Policy.
Finally, Philippines First contends that the factual finding that Reputable is a private carrier should be accorded the
highest degree of respect and must be considered conclusive between the parties, and that a review of such finding
by the Court is not warranted under the circumstances. As to its alleged judicial admission that Reputable is a
common carrier, Philippines First proffered the declaration made by Reputable that it is a private carrier. Said
declaration was allegedly reiterated by Reputable in its third party complaint, which in turn was duly admitted by
Malayan in its answer to the said third-party complaint. In addition, Reputable even presented evidence to prove
that it is a private carrier.

As to the applicability of Sections 5 and 12 in the SR Policy, Philippines First reiterated the ruling of the CA.
Philippines First, however, prayed for a slight modification of the assailed decision, praying that Reputable and
Malayan be rendered solidarily liable to it in the amount of P998,000.00, which represents the balance from the
P1,000.000.00 coverage of the SR Policy after deducting P2,000.00 under Section 10 of the said SR Policy. 17

Issues

The liability of Malayan under the SR Policy hinges on the following issues for resolution:

1) Whether Reputable is a private carrier;

2) Whether Reputable is strictly bound by the stipulations in its contract of carriage with Wyeth, such that it
should be liable for any risk of loss or damage, for any cause whatsoever, including that due to theft or
robbery and other force majeure;

3) Whether the RTC and CA erred in rendering "nugatory" Sections 5 and Section 12 of the SR Policy; and

4) Whether Reputable should be held solidarily liable with Malayan for the amount of P998,000.00 due to
Philippines First.

The Court’s Ruling

On the first issue – Reputable is a private carrier.

The Court agrees with the RTC and CA that Reputable is a private carrier. Well-entrenched in jurisprudence is the
rule that factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest
degree of respect and considered conclusive between the parties, save for certain exceptional and meritorious
circumstances, none of which are present in this case. 18

Malayan relies on the alleged judicial admission of Philippines First in its complaint that Reputable is a common
carrier. Invoking Section 4, Rule 129 of the Rules on Evidence that "an admission verbal or written, made by a party
19 

in the course of the proceeding in the same case, does not require proof," it is Malayan’s position that the RTC and
CA should have ruled that

Reputable is a common carrier. Consequently, pursuant to Article 1745(6) of the Civil Code, the liability of Reputable
for the loss of Wyeth’s goods should be dispensed with, or at least diminished.

It is true that judicial admissions, such as matters alleged in the pleadings do not require proof, and need not be
offered to be considered by the court. "The court, for the proper decision of the case, may and should consider,
without the introduction of evidence, the facts admitted by the parties." The rule on judicial admission, however,
20 

also states that such allegation, statement, or admission is conclusive as against the pleader, and that the facts
21 

alleged in the complaint are deemed admissions of the plaintiff and binding upon him. In this case, the pleader or
22 

the plaintiff who alleged that Reputable is a common carrier was Philippines First. It cannot, by any stretch of
imagination, be made conclusive as against Reputable whose nature of business is in question.

It should be stressed that Philippines First is not privy to the SR Policy between Wyeth and Reputable; rather, it is a
mere subrogee to the right of Wyeth to collect from Reputable under the terms of the contract of carriage.
Philippines First is not in any position to make any admission, much more a definitive pronouncement, as to the
nature of Reputable’s business and there appears no other connection between Philippines First and Reputable
which suggests mutual familiarity between them.

Moreover, records show that the alleged judicial admission of Philippines First was essentially disputed by
Reputable when it stated in paragraphs 2, 4, and 11 of its answer that it is actually a private or special carrier. In 23 

addition, Reputable stated in paragraph 2 of its third-party complaint that it is "a private carrier engaged in the
carriage of goods." Such allegation was, in turn, admitted by Malayan in paragraph 2 of its answer to the third-party
24 

complaint. There is also nothing in the records which show that Philippines First persistently maintained its stance
25 

that Reputable is a common carrier or that it even contested or proved otherwise Reputable’s position that it is a
private or special carrier.

Hence, in the face of Reputable’s contrary admission as to the nature of its own business, what was stated by
Philippines First in its complaint is reduced to nothing more than mere allegation, which must be proved for it to be
given any weight or value. The settled rule is that mere allegation is not proof. 26

More importantly, the finding of the RTC and CA that Reputable is a special or private carrier is warranted by the
evidence on record, primarily, the unrebutted testimony of Reputable’s Vice President and General Manager, Mr.
William Ang Lian Suan, who expressly stated in open court that Reputable serves only one customer, Wyeth. 27

Under Article 1732 of the Civil Code, common carriers are persons, corporations, firms, or associations engaged in
the business of carrying or transporting passenger or goods, or both by land, water or air for compensation, offering
their services to the public. On the other hand, a private carrier is one wherein the carriage is generally undertaken
by special agreement and it does not hold itself out to carry goods for the general public. A common carrier
28 

becomes a private carrier when it undertakes to carry a special cargo or chartered to a special person only. For all
29 

intents and purposes, therefore, Reputable operated as a private/special carrier with regard to its contract of
carriage with Wyeth.

On the second issue – Reputable is bound by the terms of the contract of carriage.

The extent of a private carrier’s obligation is dictated by the stipulations of a contract it entered into, provided its
stipulations, clauses, terms and conditions are not contrary to law, morals, good customs, public order, or public
policy. "The Civil Code provisions on common carriers should not be applied where the carrier is not acting as such
but as a private carrier. Public policy governing common carriers has no force where the public at large is not
involved."30

Thus, being a private carrier, the extent of Reputable’s liability is fully governed by the stipulations of the contract of
carriage, one of which is that it shall be liable to Wyeth for the loss of the goods/products due to any and all causes
whatsoever, including theft, robbery and other force majeure while the goods/products are in transit and until actual
delivery to Wyeth’s customers, salesmen and dealers. 31

On the third issue – other insurance vis-à-vis over insurance.

Malayan refers to Section 5 of its SR Policy as an "over insurance clause" and to Section 12 as a "modified ‘other
insurance’ clause". In rendering inapplicable said provisions in the SR Policy, the CA ruled in this wise:
32 

Since Sec. 5 calls for Malayan’s complete absolution in case the other insurance would be sufficient to cover the
entire amount of the loss, it is in direct conflict with Sec. 12 which provides only for a pro-rated contribution between
the two insurers. Being the later provision, and pursuant to the rules on interpretation of contracts, Sec. 12 should
therefore prevail.

xxxx

x x x The intention of both Reputable and Malayan should be given effect as against the wordings of Sec. 12 of their
contract, as it was intended by the parties to operate only in case of double insurance, or where the benefits of the
policies of both plaintiff-appellee and Malayan should pertain to Reputable alone. But since the court a quo correctly
ruled that there is no double insurance in this case inasmuch as Reputable was not privy thereto, and therefore did
not stand to benefit from the policy issued by plaintiff-appellee in favor of Wyeth, then Malayan’s stand should be
rejected.

To rule that Sec. 12 operates even in the absence of double insurance would work injustice to Reputable which,
despite paying premiums for a P1,000,000.00 insurance coverage, would not be entitled to recover said amount for
the simple reason that the same property is covered by another insurance policy, a policy to which it was not a party
to and much less, from which it did not stand to benefit. Plainly, this unfair situation could not have been the
intention of both Reputable and Malayan in signing the insurance contract in question. 33

In questioning said ruling, Malayan posits that Sections 5 and 12 are separate provisions applicable under distinct
circumstances. Malayan argues that "it will not be completely absolved under Section 5 of its policy if it were the
assured itself who obtained additional insurance coverage on the same property and the loss incurred by Wyeth’s
cargo was more than that insured by Philippines First’s marine policy. On the other hand, Section 12 will not
completely absolve Malayan if additional insurance coverage on the same cargo were obtained by someone
besides Reputable, in which case Malayan’s SR policy will contribute or share ratable proportion of a covered cargo
loss."
34

Malayan’s position cannot be countenanced.

Section 5 is actually the other insurance clause (also called "additional insurance" and "double insurance"), one akin
to Condition No. 3 in issue in Geagonia v. CA, which validity was upheld by the Court as a warranty that no other
35 

insurance exists. The Court ruled that Condition No. 3 is a condition which is not proscribed by law as its
36 

incorporation in the policy is allowed by Section 75 of the Insurance Code. It was also the Court’s finding that unlike
the other insurance clauses, Condition No. 3 does not absolutely declare void any violation thereof but 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."

In this case, similar to Condition No. 3 in Geagonia, Section 5 does not provide for the nullity of the SR Policy but
simply limits the liability of Malayan only up to the excess of the amount that was not covered by the other insurance
policy. In interpreting the "other insurance clause" in Geagonia, the Court ruled that the prohibition applies only in
case of double insurance. The Court ruled that in order to constitute a violation of the clause, the other insurance
must be upon same subject matter, the same interest therein, and the same risk. Thus, even though the multiple
insurance policies involved were all issued in the name of the same assured, over the same subject matter and
covering the same risk, it was ruled that there was no violation of the "other insurance clause" since there was no
double insurance.

Section 12 of the SR Policy, on the other hand, is the over insurance clause. More particularly, it covers the situation
where there is over insurance due to double insurance. In such case, Section 15 provides that Malayan shall "not be
liable to pay or contribute more than its ratable proportion of such loss or damage." This is in accord with the
principle of contribution provided under Section 94(e) of the Insurance Code, which states that "where the insured
37 

is over insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute
ratably to the loss in proportion to the amount for which he is liable under his contract."

Clearly, both Sections 5 and 12 presuppose the existence of a double insurance. The pivotal question that now
arises is whether there is double insurance in this case such that either Section 5 or Section 12 of the SR Policy
may be applied.

By the express provision of Section 93 of the Insurance Code, double insurance exists where the same person is
insured by several insurers separately in respect to the same subject and interest. The requisites in order for double
insurance to arise are as follows: 38

1. The person insured is the same;

2. Two or more insurers insuring separately;

3. There is identity of subject matter;

 4. There is identity of interest insured; and

5. There is identity of the risk or peril insured against.

In the present case, while it is true that the Marine Policy and the SR Policy were both issued over the same subject
matter, i.e. goods belonging to Wyeth, and both covered the same peril insured against, it is, however, beyond cavil
that the said policies were issued to two different persons or entities. It is undisputed that Wyeth is the recognized
insured of Philippines First under its Marine Policy, while Reputable is the recognized insured of Malayan under the
SR Policy. The fact that Reputable procured Malayan’s SR Policy over the goods of Wyeth pursuant merely to the
stipulated requirement under its contract of carriage with the latter does not make Reputable a mere agent of Wyeth
in obtaining the said SR Policy.

The interest of Wyeth over the property subject matter of both insurance contracts is also different and distinct from
that of Reputable’s. The policy issued by Philippines First was in consideration of the legal and/or equitable interest
of Wyeth over its own goods. On the other hand, what was issued by Malayan to Reputable was over the latter’s
insurable interest over the safety of the goods, which may become the basis of the latter’s liability in case of loss or
damage to the property and falls within the contemplation of Section 15 of the Insurance Code. 39

Therefore, even though the two concerned insurance policies were issued over the same goods and cover the same
risk, there arises no double insurance since they were issued to two different persons/entities having distinct
insurable interests. Necessarily, over insurance by double insurance cannot likewise exist. Hence, as correctly ruled
by the RTC and CA, neither Section 5 nor Section 12 of the SR Policy can be applied.

Apart from the foregoing, the Court is also wont to strictly construe the controversial provisions of the SR Policy
against Malayan.  This is in keeping with the rule that:
1âwphi1

"Indemnity and liability insurance policies are construed in accordance with the general rule of resolving any
ambiguity therein in favor of the insured, where the contract or policy is prepared by the insurer. A contract of
insurance, being a contract of adhesion, par excellence, any ambiguity therein should be resolved against the
insurer; in other words, it should be construed liberally in favor of the insured and strictly against the insurer.
Limitations of liability should be regarded with extreme jealousy and must be construed in such a way as to preclude
the insurer from noncompliance with its obligations." 40

Moreover, the CA correctly ruled that:

To rule that Sec. 12 operates even in the absence of double insurance would work injustice to Reputable which,
despite paying premiums for a P1,000,000.00 insurance coverage, would not be entitled to recover said amount for
the simple reason that the same property is covered by another insurance policy, a policy to which it was not a party
to and much less, from which it did not stand to benefit. x x x 41

On the fourth issue – Reputable is not solidarily liable with Malayan.

There is solidary liability only when the obligation expressly so states, when the law so provides or when the nature
of the obligation so requires.

In Heirs of George Y. Poe v. Malayan lnsurance Company., lnc., the Court ruled that:
42 

Where the insurance contract provides for indemnity against liability to third persons, the liability of the insurer is
direct and such third persons can directly sue the insurer. The direct liability of the insurer under indemnity contracts
against third party[- ]liability does not mean, however, that the insurer can be held solidarily liable with the insured
and/or the other parties found at fault, since they are being held liable under different obligations. The liability of the
insured carrier or vehicle owner is based on tort, in accordance with the provisions of the Civil Code; while that of
the insurer arises from contract, particularly, the insurance policy: (Citation omitted and emphasis supplied)
43 

Suffice it to say that Malayan's and Reputable's respective liabilities arose from different obligations- Malayan's is
based on the SR Policy while Reputable's is based on the contract of carriage.
All told, the Court finds no reversible error in the judgment sought to be reviewed.

WHEREFORE, premises considered, the petition is DENIED. The Decision dated February 29, 2008 and Resolution
dated August 28, 2008 of the Court of Appeals in CA-G.R. CV No. 71204 are hereby AFFIRMED.

Cost against petitioner Malayan Insurance Co., Inc. SO ORDERED.

G.R. No. 186983               February 22, 2012

MA. LOURDES S. FLORENDO, Petitioner,

vs.
PHILAM PLANS, INC., PERLA ABCEDE MA. CELESTE ABCEDE, Respondents.

DECISION

ABAD, J.:

This case is about an insured’s alleged concealment in his pension plan application of his true state of health and its
effect on the life insurance portion of that plan in case of death.

The Facts and the Case

On October 23, 1997 Manuel Florendo filed an application for comprehensive pension plan with respondent Philam
Plans, Inc. (Philam Plans) after some convincing by respondent Perla Abcede. The plan had a pre-need price of
₱997,050.00, payable in 10 years, and had a maturity value of ₱2,890,000.00 after 20 years. Manuel signed the
1 

application and left to Perla the task of supplying the information needed in the application. Respondent Ma. Celeste
2 

Abcede, Perla’s daughter, signed the application as sales counselor. 3

Aside from pension benefits, the comprehensive pension plan also provided life insurance coverage to
Florendo. This was covered by a Group Master Policy that Philippine American Life Insurance Company (Philam
4 

Life) issued to Philam Plans. Under the master policy, Philam Life was to automatically provide life insurance
5 

coverage, including accidental death, to all who signed up for Philam Plans’ comprehensive pension plan. If the plan
6 

holder died before the maturity of the plan, his beneficiary was to instead receive the proceeds of the life insurance,
equivalent to the pre-need price. Further, the life insurance was to take care of any unpaid premium until the
pension plan matured, entitling the beneficiary to the maturity value of the pension plan. 7

On October 30, 1997 Philam Plans issued Pension Plan Agreement PP43005584 to Manuel, with petitioner Ma.
8 

Lourdes S. Florendo, his wife, as beneficiary. In time, Manuel paid his quarterly premiums. 9

Eleven months later or on September 15, 1998, Manuel died of blood poisoning. Subsequently, Lourdes filed a
claim with Philam Plans for the payment of the benefits under her husband’s plan. Because Manuel died before his
10 

pension plan matured and his wife was to get only the benefits of his life insurance, Philam Plans forwarded her
claim to Philam Life.11

On May 3, 1999 Philam Plans wrote Lourdes a letter, declining her claim. Philam Life found that Manuel was on
12 

maintenance medicine for his heart and had an implanted pacemaker. Further, he suffered from diabetes mellitus
and was taking insulin. Lourdes renewed her demand for payment under the plan but Philam Plans rejected
13 

it, prompting her to file the present action against the pension plan company before the Regional Trial Court (RTC)
14 

of Quezon City. 15

On March 30, 2006 the RTC rendered judgment, ordering Philam Plans, Perla and Ma. Celeste, solidarily, to pay
16 

Lourdes all the benefits from her husband’s pension plan, namely: ₱997,050.00, the proceeds of his term insurance,
and ₱2,890,000.00 lump sum pension benefit upon maturity of his plan; ₱100,000.00 as moral damages; and to pay
the costs of the suit. The RTC ruled that Manuel was not guilty of concealing the state of his health from his pension
plan application.
On December 18, 2007 the Court of Appeals (CA) reversed the RTC decision, holding that insurance policies are
17 

traditionally contracts uberrimae fidae or contracts of utmost good faith. As such, it required Manuel to disclose to
Philam Plans conditions affecting the risk of which he was aware or material facts that he knew or ought to know. 18

Issues Presented

The issues presented in this case are:

1. Whether or not the CA erred in finding Manuel guilty of concealing his illness when he kept blank and did
not answer questions in his pension plan application regarding the ailments he suffered from;

2. Whether or not the CA erred in holding that Manuel was bound by the failure of respondents Perla and
Ma. Celeste to declare the condition of Manuel’s health in the pension plan application; and

3. Whether or not the CA erred in finding that Philam Plans’ approval of Manuel’s pension plan application
and acceptance of his premium payments precluded it from denying Lourdes’ claim.

Rulings of the Court

One. Lourdes points out that, seeing the unfilled spaces in Manuel’s pension plan application relating to his medical
history, Philam Plans should have returned it to him for completion. Since Philam Plans chose to approve the
application just as it was, it cannot cry concealment on Manuel’s part. Further, Lourdes adds that Philam Plans
never queried Manuel directly regarding the state of his health. Consequently, it could not blame him for not
mentioning it.
19

But Lourdes is shifting to Philam Plans the burden of putting on the pension plan application the true state of
Manuel’s health. She forgets that since Philam Plans waived medical examination for Manuel, it had to rely largely
on his stating the truth regarding his health in his application. For, after all, he knew more than anyone that he had
been under treatment for heart condition and diabetes for more than five years preceding his submission of that
application. But he kept those crucial facts from Philam Plans.

Besides, when Manuel signed the pension plan application, he adopted as his own the written representations and
declarations embodied in it. It is clear from these representations that he concealed his chronic heart ailment and
diabetes from Philam Plans. The pertinent portion of his representations and declarations read as follows:

I hereby represent and declare to the best of my knowledge that:

xxxx

(c) I have never been treated for heart condition, high blood pressure, cancer, diabetes, lung, kidney or
stomach disorder or any other physical impairment in the last five years.

(d) I am in good health and physical condition.

If your answer to any of the statements above reveal otherwise, please give details in the space provided for:

Date of confinement : ____________________________

Name of Hospital or Clinic : ____________________________

Name of Attending Physician : ____________________________

Findings : ____________________________

Others: (Please specify) : ____________________________

x x x x. (Emphasis supplied)
20 

Since Manuel signed the application without filling in the details regarding his continuing treatments for heart
condition and diabetes, the assumption is that he has never been treated for the said illnesses in the last five years
preceding his application. This is implicit from the phrase "If your answer to any of the statements above
(specifically, the statement: I have never been treated for heart condition or diabetes) reveal otherwise, please give
details in the space provided for." But this is untrue since he had been on "Coumadin," a treatment for venous
thrombosis, and insulin, a drug used in the treatment of diabetes mellitus, at that time.
21  22

Lourdes insists that Manuel had concealed nothing since Perla, the soliciting agent, knew that Manuel had a
pacemaker implanted on his chest in the 70s or about 20 years before he signed up for the pension plan. But by its
23 

tenor, the responsibility for preparing the application belonged to Manuel. Nothing in it implies that someone else
may provide the information that Philam Plans needed. Manuel cannot sign the application and disown the
responsibility for having it filled up. If he furnished Perla the needed information and delegated to her the filling up of
the application, then she acted on his instruction, not on Philam Plans’ instruction.

Lourdes next points out that it made no difference if Manuel failed to reveal the fact that he had a pacemaker
implant in the early 70s since this did not fall within the five-year timeframe that the disclosure contemplated. But a
24 

pacemaker is an electronic device implanted into the body and connected to the wall of the heart, designed to
provide regular, mild, electric shock that stimulates the contraction of the heart muscles and restores normalcy to
the heartbeat. That Manuel still had his pacemaker when he applied for a pension plan in October 1997 is an
25 

admission that he remained under treatment for irregular heartbeat within five years preceding that application.

Besides, as already stated, Manuel had been taking medicine for his heart condition and diabetes when he
submitted his pension plan application. These clearly fell within the five-year period. More, even if Perla’s knowledge
of Manuel’s pacemaker may be applied to Philam Plans under the theory of imputed knowledge, it is not claimed
26 

that Perla was aware of his two other afflictions that needed medical treatments. Pursuant to Section 27 of the
27 

Insurance Code, Manuel’s concealment entitles Philam Plans to rescind its contract of insurance with him.

Two. Lourdes contends that the mere fact that Manuel signed the application in blank and let Perla fill in the
required details did not make her his agent and bind him to her concealment of his true state of health. Since there
is no evidence of collusion between them, Perla’s fault must be considered solely her own and cannot prejudice
Manuel. 28

But Manuel forgot that in signing the pension plan application, he certified that he wrote all the information stated in
it or had someone do it under his direction. Thus:

APPLICATION FOR PENSION PLAN

(Comprehensive)

I hereby apply to purchase from PHILAM PLANS, INC. a Pension Plan Program described herein in accordance
with the General Provisions set forth in this application and hereby certify that the date and other information stated
herein are written by me or under my direction. x x x. (Emphasis supplied)
29 

Assuming that it was Perla who filled up the application form, Manuel is still bound by what it contains since he
certified that he authorized her action. Philam Plans had every right to act on the faith of that certification.

Lourdes could not seek comfort from her claim that Perla had assured Manuel that the state of his health would not
hinder the approval of his application and that what is written on his application made no difference to the insurance
company. But, indubitably, Manuel was made aware when he signed the pension plan application that, in granting
the same, Philam Plans and Philam Life were acting on the truth of the representations contained in that application.
Thus:

DECLARATIONS AND REPRESENTATIONS

xxxx
I agree that the insurance coverage of this application is based on the truth of the foregoing representations and is
subject to the provisions of the Group Life Insurance Policy issued by THE PHILIPPINE AMERICAN LIFE
INSURANCE CO. to PHILAM PLANS, INC. (Emphasis supplied)
30 

As the Court said in New Life Enterprises v. Court of Appeals: 31

It may be true that x x x insured persons may accept policies without reading them, and that this is not negligence
per se. But, this is not without any exception. It is and was incumbent upon petitioner Sy to read the insurance
contracts, and this can be reasonably expected of him considering that he has been a businessman since 1965 and
the contract concerns indemnity in case of loss in his money-making trade of which important consideration he could
not have been unaware as it was precisely the reason for his procuring the same. 32

The same may be said of Manuel, a civil engineer and manager of a construction company. He could be expected
33 

to know that one must read every document, especially if it creates rights and obligations affecting him, before
signing the same. Manuel is not unschooled that the Court must come to his succor. It could reasonably be
expected that he would not trifle with something that would provide additional financial security to him and to his wife
in his twilight years.

Three. In a final attempt to defend her claim for benefits under Manuel’s pension plan, Lourdes points out that any
defect or insufficiency in the information provided by his pension plan application should be deemed waived after
the same has been approved, the policy has been issued, and the premiums have been collected.  34

The Court cannot agree. The comprehensive pension plan that Philam Plans issued contains a one-year
incontestability period. It states:

VIII. INCONTESTABILITY

After this Agreement has remained in force for one (1) year, we can no longer contest for health reasons any claim
for insurance under this Agreement, except for the reason that installment has not been paid (lapsed), or that you
are not insurable at the time you bought this pension program by reason of age. If this Agreement lapses but is
reinstated afterwards, the one (1) year contestability period shall start again on the date of approval of your request
for reinstatement.35 
1âwphi1

The above incontestability clause precludes the insurer from disowning liability under the policy it issued on the
ground of concealment or misrepresentation regarding the health of the insured after a year of its issuance.

Since Manuel died on the eleventh month following the issuance of his plan, the one year incontestability period
36 

has not yet set in. Consequently, Philam Plans was not barred from questioning Lourdes’ entitlement to the benefits
of her husband’s pension plan.

WHEREFORE, the Court AFFIRMS in its entirety the decision of the Court of Appeals in CA-G.R. CV 87085 dated
December 18, 2007.

SO ORDERED
Insurance Contract as a Contract of Indemnity

G.R. No. 198588               July 11, 2012

UNITED MERCHANTS CORPORATION, Petitioner,

vs.
COUNTRY BANKERS INSURANCE CORPORATION, Respondent.

DECISION

CARPIO, J.:

The Case

This Petition for Review on Certiorari seeks to reverse the Court of Appeals’ Decision dated 16 June 2011 and its
1  2 

Resolution dated 8 September 2011 in CA-G.R. CV No. 85777. The Court of Appeals reversed the Decision of the
3  4 

Regional Trial Court (RTC) of Manila, Branch 3, and ruled that the claim on the Insurance Policy is void.

The Facts

The facts, as culled from the records, are as follows:

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

On 6 September 1995, UMC’s General Manager Alfredo Tan insured UMC’s stocks in trade of Christmas lights
against fire with defendant Country Bankers Insurance Corporation (CBIC) for ₱15,000,000.00. The Fire Insurance
Policy No. F-HO/95-576 (Insurance Policy) and Fire Invoice No. 12959A, valid until 6 September 1996, states:

AMOUNT OF INSURANCE: FIFTEEN

MILLION PESOS
PHILIPPINE
CURRENCY

xxx

PROPERTY INSURED: On stocks in trade only, consisting of Christmas Lights, the properties of the Assured or
held by them in trust, on commissions, or on joint account with others and/or for which they are responsible in the
event of loss and/or damage during the currency of this policy, whilst contained in the building of one lofty storey in
height, constructed of concrete and/or hollow blocks with portion of galvanized iron sheets, under galvanized iron
rood, occupied as Christmas lights storage. 5

On 7 May 1996, UMC and CBIC executed Endorsement F/96-154 and Fire Invoice No. 16583A to form part of the
Insurance Policy. Endorsement F/96-154 provides that UMC’s stocks in trade were insured against additional perils,
to wit: "typhoon, flood, ext. cover, and full earthquake." The sum insured was also increased to ₱50,000,000.00
effective 7 May 1996 to 10 January 1997. On 9 May 1996, CBIC issued Endorsement F/96-157 where the name of
the assured was changed from Alfredo Tan to UMC.

On 3 July 1996, a fire gutted the warehouse rented by UMC. CBIC designated CRM Adjustment Corporation (CRM)
to investigate and evaluate UMC’s loss by reason of the fire. CBIC’s reinsurer, Central Surety, likewise requested
the National Bureau of Investigation (NBI) to conduct a parallel investigation. On 6 July 1996, UMC, through CRM,
submitted to CBIC its Sworn Statement of Formal Claim, with proofs of its loss.

On 20 November 1996, UMC demanded for at least fifty percent (50%) payment of its claim from CBIC. On 25
February 1997, UMC received CBIC’s letter, dated 10 January 1997, rejecting UMC’s claim due to breach of
Condition No. 15 of the Insurance Policy. Condition No. 15 states:

If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting in his behalf to obtain any benefit under this
Policy; or if the loss or damage be occasioned by the willful act, or with the connivance of the Insured, all the
benefits under this Policy shall be forfeited.
6

On 19 February 1998, UMC filed a Complaint against CBIC with the RTC of Manila. UMC anchored its insurance
7 

claim on the Insurance Policy, the Sworn Statement of Formal Claim earlier submitted, and the Certification dated
24 July 1996 made by Deputy Fire Chief/Senior Superintendent Bonifacio J. Garcia of the Bureau of Fire Protection.
The Certification dated 24 July 1996 provides that:

This is to certify that according to available records of this office, on or about 6:10 P.M. of July 3, 1996, a fire broke
out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon City incurring an
estimated damage of Fifty-Five Million Pesos (₱55,000,000.00) to the building and contents, while the reported
insurance coverage amounted to Fifty Million Pesos (₱50,000,000.00) with Country Bankers Insurance Corporation.

The Bureau further certifies that no evidence was gathered to prove that the establishment was willfully, feloniously
and intentionally set on fire.

That the investigation of the fire incident is already closed being ACCIDENTAL in nature. 8

In its Answer with Compulsory Counterclaim dated 4 March 1998, CBIC admitted the issuance of the Insurance
9 

Policy to UMC but raised the following defenses: (1) that the Complaint states no cause of action; (2) that UMC’s
claim has already prescribed; and (3) that UMC’s fire claim is tainted with fraud. CBIC alleged that UMC’s claim was
fraudulent because UMC’s Statement of Inventory showed that it had no stocks in trade as of 31 December 1995,
and that UMC’s suspicious purchases for the year 1996 did not even amount to ₱25,000,000.00. UMC’s GIS and
Financial Reports further revealed that it had insufficient capital, which meant UMC could not afford the alleged
₱50,000,000.00 worth of stocks in trade.

In its Reply dated 20 March 1998, UMC denied violation of Condition No. 15 of the Insurance Policy. UMC claimed
10 

that it did not make any false declaration because the invoices were genuine and the Statement of Inventory was for
internal revenue purposes only, not for its insurance claim.

During trial, UMC presented five witnesses. The first witness was Josie Ebora (Ebora), UMC’s disbursing officer.
Ebora testified that UMC’s stocks in trade, at the time of the fire, consisted of: (1) raw materials for its Christmas
lights; (2) Christmas lights already assembled; and (3) Christmas lights purchased from local suppliers. These
stocks in trade were delivered from August 1995 to May 1996. She stated that Straight Cargo Commercial
Forwarders delivered the imported materials to the warehouse, evidenced by delivery receipts. However, for the
year 1996, UMC had no importations and only bought from its local suppliers. Ebora identified the suppliers as Fiber
Technology Corporation from which UMC bought stocks worth ₱1,800,000.00 on 20 May 1996; Fuze Industries
Manufacturer Philippines from which UMC bought stocks worth ₱19,500,000.00 from 20 January 1996 to 23
February 1996; and Tomco Commercial Press from which UMC bought several Christmas boxes. Ebora testified
that all these deliveries were not yet paid. Ebora also presented UMC’s Balance Sheet, Income Statement and
Statement of Cash Flow. Per her testimony, UMC’s purchases amounted to ₱608,986.00 in 1994; ₱827,670.00 in
1995; and ₱20,000,000.00 in 1996. Ebora also claimed that UMC had sales only from its fruits business but no
sales from its Christmas lights for the year 1995.
The next witness, Annie Pabustan (Pabustan), testified that her company provided about 25 workers to assemble
and pack Christmas lights for UMC from 28 March 1996 to 3 July 1996. The third witness, Metropolitan Bank and
Trust Company (MBTC) Officer Cesar Martinez, stated that UMC opened letters of credit with MBTC for the year
1995 only. The fourth witness presented was Ernesto Luna (Luna), the delivery checker of Straight Commercial
Cargo Forwarders. Luna affirmed the delivery of UMC’s goods to its warehouse on 13 August 1995, 6 September
1995, 8 September 1995, 24 October 1995, 27 October 1995, 9 November 1995, and 19 December 1995. Lastly,
CRM’s adjuster Dominador Victorio testified that he inspected UMC’s warehouse and prepared preliminary reports
in this connection.

On the other hand, CBIC presented the claims manager Edgar Caguindagan (Caguindagan), a Securities and
Exchange Commission (SEC) representative, Atty. Ernesto Cabrera (Cabrera), and NBI Investigator Arnold Lazaro
(Lazaro). Caguindagan testified that he inspected the burned warehouse on 5 July 1996, took pictures of it and
referred the claim to an independent adjuster. The SEC representative’s testimony was dispensed with, since the
parties stipulated on the existence of certain documents, to wit: (1) UMC’s GIS for 1994-1997; (2) UMC’s Financial
Report as of 31 December 1996; (3) SEC Certificate that UMC did not file GIS or Financial Reports for certain years;
and (4) UMC’s Statement of Inventory as of 31 December 1995 filed with the BIR.

Cabrera and Lazaro testified that they were hired by Central Surety to investigate UMC’s claim. On 19 November
1996, they concluded that arson was committed based from their interview with barangay officials and the pictures
showing that blackened surfaces were present at different parts of the warehouse. On cross-examination, Lazaro
admitted that they did not conduct a forensic investigation of the warehouse, nor did they file a case for arson.

For rebuttal, UMC presented Rosalinda Batallones (Batallones), keeper of the documents of UCPB General
Insurance, the insurer of Perfect Investment Company, Inc., the warehouse owner. When asked to bring documents
related to the insurance of Perfect Investment Company, Inc., Batallones brought the papers of Perpetual
Investment, Inc.

The Ruling of the Regional Trial Court

On 16 June 2005, the RTC of Manila, Branch 3, rendered a Decision in favor of UMC, the dispositive portion of
which reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and ordering defendant to pay plaintiff:

a) the sum of ₱43,930,230.00 as indemnity with interest thereon at 6% per annum from November 2003
until fully paid;

b) the sum of ₱100,000.00 for exemplary damages;

c) the sum of ₱100,000.00 for attorney’s fees; and

d) the costs of suit.

Defendant’s counterclaim is denied for lack of merit.

SO ORDERED. 11

The RTC found no dispute as to UMC’s fire insurance contract with CBIC. Thus, the RTC ruled for UMC’s
entitlement to the insurance proceeds, as follows:

Fraud is never presumed but must be proved by clear and convincing evidence. (see Alonso v. Cebu Country Club,
417 SCRA 115 [2003]) Defendant failed to establish by clear and convincing evidence that the documents submitted
to the SEC and BIR were true. It is common business practice for corporations to have 2 sets of reports/statements
for tax purposes. The stipulated documents of plaintiff (Exhs. 2 – 8) may not have been accurate.

The conflicting findings of defendant’s adjuster, CRM Adjustment [with stress] and that made by Atty. Cabrera & Mr.
Lazaro for Central Surety shall be resolved in favor of the former. Definitely the former’s finding is more credible as it
was made soon after the fire while that of the latter was done 4 months later. Certainly it would be a different
situation as the site was no longer the same after the clearing up operation which is normal after a fire incident. The
Christmas lights and parts could have been swept away. Hence the finding of the latter appears to be speculative to
benefit the reinsurer and which defendant wants to adopt to avoid liability.

The CRM Adjustment report found no arson and confirmed substantial stocks in the burned warehouse (Exhs.
QQQ) [underscoring supplied]. This is bolstered by the BFP certification that there was no proof of arson and the fire
was accidental (Exhs. PPP). The certification by a government agency like BFP is presumed to be a regular
performance of official duty. "Absent convincing evidence to the contrary, the presumption of regularity in the
performance of official functions has to be upheld." (People vs. Lapira, 255 SCRA 85) The report of UCPB General
Insurance’s adjuster also found no arson so that the burned warehouse owner PIC was indemnified. 12

Hence, CBIC filed an appeal with the Court of Appeals (CA).

The Ruling of the Court of Appeals

On 16 June 2011, the CA promulgated its Decision in favor of CBIC. The dispositive portion of the Decision reads:

WHEREFORE, in view of the foregoing premises, the instant appeal is GRANTED and the Decision of the Regional
Trial Court, of the National Judicial Capital Region, Branch 3 of the City of Manila dated June 16, 2005 in Civil Case
No. 98-87370 is REVERSED and SET ASIDE. The plaintiff-appellee’s claim upon its insurance policy is deemed
avoided.

SO ORDERED. 13

The CA ruled that UMC’s claim under the Insurance Policy is void. The CA found that the fire was intentional in
origin, considering the array of evidence submitted by CBIC, particularly the pictures taken and the reports of
Cabrera and Lazaro, as opposed to UMC’s failure to explain the details of the alleged fire accident. In addition, it
found that UMC’s claim was overvalued through fraudulent transactions. The CA ruled:

We have meticulously gone over the entirety of the evidence submitted by the parties and have come up with a
conclusion that the claim of the plaintiff-appellee was indeed overvalued by transactions which were fraudulently
concocted so that the full coverage of the insurance policy will have to be fully awarded to the plaintiff-appellee.

First, We turn to the backdrop of the plaintiff-appellee’s case, thus, [o]n September 6, 1995 its stocks-in-trade were
insured for Fifteen Million Pesos and on May 7, 1996 the same was increased to 50 Million Pesos. Two months
thereafter, a fire gutted the plaintiff-appellee’s warehouse.

Second, We consider the reported purchases of the plaintiff-appellee as shown in its financial report dated
December 31, 1996 vis-à-vis the testimony of Ms. Ebora thus:

1994 - ₱608,986.00

1995 - ₱827,670.00

1996 - ₱20,000,000.00 (more or less) which were purchased for a period of one month.

Third, We shall also direct our attention to the alleged true and complete purchases of the plaintiff-appellee as well
as the value of all stock-in-trade it had at the time that the fire occurred. Thus:

Amount Dates
Exhibit Source
(pesos) Covered

Exhs. "P"-"DD", Fuze Industries 19,550,400.00 January 20,

inclusive Manufacturer Phils. 1996
January 31,
 1996
February 12,
1996
February 20,
1996
February 23,
1996

Exhs. "EE"-"HH", Tomco Commercial 1,712,000.00 December 19,

inclusive Press 1995
January 24,
1996
February 21,
1996
November 24,
1995

Exhs. "II"-"QQ", Precious Belen 2,720,400.00 January 13,

inclusive Trading 1996
January 19,
1996
January 26,
1996
February 3,
1996
February 13,
1996
February 20,
1996
February 27,
1996

Exhs. "RR"- Wisdom Manpower 361,966.00 April 3, 1996

"EEE", inclusive Services April 12, 1996
April 19, 1996
April 26, 1996
May 3, 1996
May 10, 1996
May 17, 1996
May 24, 1996
June 7, 1996
June 14, 1996
June 21, 1996
June 28, 1996
July 5, 1996

Exhs. "GGG"- Costs of Letters of 15,159,144.71 May 29, 1995

"NNN", inclusive Credit for June 15, 1995
imported raw July 5, 1995
materials September 4,
1995
October 2,
1995
October 27,
1995
January 8,
1996
March 19,
1996
 Exhs. "GGG-11" SCCFI statements 384,794.38 June 15, 1995
- "GGG-24", of account June 28, 1995
"HHH-12", "HHH-22", August 1, 1995
"III-11", "III-14", September 4,
"JJJ-13", "KKK-11", 1995
"LLL-5" September 8,
1995
September 11,
1995
October 30,
199[5]
November 10,
1995
December 21,
1995

  TOTAL 44,315,024.31  

Fourth, We turn to the allegation of fraud by the defendant-appellant by thoroughly looking through the pieces of
evidence that it adduced during the trial. The latter alleged that fraud is present in the case at bar as shown by the
discrepancy of the alleged purchases from that of the reported purchases made by plaintiff-appellee. It had also
averred that fraud is present when upon verification of the address of Fuze Industries, its office is nowhere to be
found. Also, the defendant-appellant expressed grave doubts as to the purchases of the plaintiff-appellee sometime
in 1996 when such purchases escalated to a high 19.5 Million Pesos without any contract to back it up. 14

On 7 July 2011, UMC filed a Motion for Reconsideration, which the CA denied in its Resolution dated 8 September
15 

2011. Hence, this petition.

The Issues

UMC seeks a reversal and raises the following issues for resolution:

I.

WHETHER THE COURT OF APPEALS MADE A RULING INCO[N]SISTENT WITH LAW, APPLICABLE
JURISPRUDENCE AND EVIDENCE AS TO THE EXISTENCE OF ARSON AND FRAUD IN THE ABSENCE
OF "MATERIALLY CONVINCING EVIDENCE."

II.

WHETHER THE COURT OF APPEALS MADE A RULING INCONSISTENT WITH LAW, APPLICABLE
JURISPRUDENCE AND EVIDENCE WHEN IT FOUND THAT PETITIONER BREACHED ITS
WARRANTY. 16

The Ruling of the Court

At the outset, CBIC assails this petition as defective since what UMC ultimately wants this Court to review are
questions of fact. However, UMC argues that where the findings of the CA are in conflict with those of the trial court,
a review of the facts may be made. On this procedural issue, we find UMC’s claim meritorious.

A petition for review under Rule 45 of the Rules of Court specifically provides that only questions of law may be
raised. The findings of fact of the CA are final and conclusive and this Court will not review them on appeal, subject
17 

to exceptions as when the findings of the appellate court conflict with the findings of the trial court. Clearly, the
18 

present case falls under the exception. Since UMC properly raised the conflicting findings of the lower courts, it is
proper for this Court to resolve such contradiction.
Having settled the procedural issue, we proceed to the primordial issue which boils down to whether UMC is
entitled to claim from CBIC the full coverage of its fire insurance policy.

UMC contends that because it had already established a prima facie case against CBIC which failed to prove its
defense, UMC is entitled to claim the full coverage under the Insurance Policy. On the other hand, CBIC contends
that because arson and fraud attended the claim, UMC is not entitled to recover under Condition No. 15 of the
Insurance Policy.

Burden of proof is the duty of any party to present evidence to establish his claim or defense by the amount of
evidence required by law, which is preponderance of evidence in civil cases. The party, whether plaintiff or
19  20 

defendant, who asserts the affirmative of the issue has the burden of proof to obtain a favorable
judgment. Particularly, in insurance cases, once an insured makes out a prima facie case in its favor, the burden of
21 

evidence shifts to the insurer to controvert the insured’s prima facie case. In the present case, UMC established
22 

a prima facie case against CBIC. CBIC does not dispute that UMC’s stocks in trade were insured against fire under
the Insurance Policy and that the warehouse, where UMC’s stocks in trade were stored, was gutted by fire on 3 July
1996, within the duration of the fire insurance. However, since CBIC alleged an excepted risk, then the burden of
evidence shifted to CBIC to prove such exception. 1âwphi1

An insurer who seeks to defeat a claim because of an exception or limitation in the policy has the burden of
establishing that the loss comes within the purview of the exception or limitation. If loss is proved apparently within
23 

a contract of insurance, the burden is upon the insurer to establish that the loss arose from a cause of loss which is
excepted or for which it is not liable, or from a cause which limits its liability. In the present case, CBIC failed to
24 

discharge its primordial burden of establishing that the damage or loss was caused by arson, a limitation in the
policy.

In prosecutions for arson, proof of the crime charged is complete where the evidence establishes: (1) the corpus
delicti, that is, a fire caused by a criminal act; and (2) the identity of the defendants as the one responsible for the
crime. Corpus delicti means the substance of the crime, the fact that a crime has actually been committed. This is
25  26 

satisfied by proof of the bare occurrence of the fire and of its having been intentionally caused. 27

In the present case, CBIC’s evidence did not prove that the fire was intentionally caused by the insured. First, the
findings of CBIC’s witnesses, Cabrera and Lazaro, were based on an investigation conducted more than four
months after the fire. The testimonies of Cabrera and Lazaro, as to the boxes doused with kerosene as told to them
by barangay officials, are hearsay because the barangay officials were not presented in court. Cabrera and Lazaro
even admitted that they did not conduct a forensic investigation of the warehouse nor did they file a case for
arson. Second, the Sworn Statement of Formal Claim submitted by UMC, through CRM, states that the cause of
28 

the fire was "faulty electrical wiring/accidental in nature." CBIC is bound by this evidence because in its Answer, it
admitted that it designated CRM to evaluate UMC’s loss. Third, the Certification by the Bureau of Fire Protection
states that the fire was accidental in origin. This Certification enjoys the presumption of regularity, which CBIC failed
to rebut.

Contrary to UMC’s allegation, CBIC’s failure to prove arson does not mean that it also failed to prove fraud. Qua
Chee Gan v. Law Union does not apply in the present case. In Qua Chee Gan, the Court dismissed the allegation
29  30 

of fraud based on the dismissal of the arson case against the insured, because the evidence was identical in both
cases, thus:

While the acquittal of the insured in the arson case is not res judicata on the present civil action, the insurer’s
evidence, to judge from the decision in the criminal case, is practically identical in both cases and must lead to the
same result, since the proof to establish the defense of connivance at the fire in order to defraud the insurer "cannot
be materially less convincing than that required in order to convict the insured of the crime of arson" (Bachrach vs.
British American Assurance Co., 17 Phil. 536).  31

In the present case, arson and fraud are two separate grounds based on two different sets of evidence, either of
which can void the insurance claim of UMC. The absence of one does not necessarily result in the absence of the

other. Thus, on the allegation of fraud, we affirm the findings of the Court of Appeals.
Condition No. 15 of the Insurance Policy provides that all the benefits under the policy shall be forfeited, if the claim
be in any respect fraudulent, or if any false declaration be made or used in support thereof, to wit:

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

In Uy Hu & Co. v. The Prudential Assurance Co., Ltd., the Court held that where a fire insurance policy provides
32 

that "if the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any
fraudulent means or devices are used by the Insured or anyone acting on his behalf to obtain any benefit under this
Policy," and the evidence is conclusive that the proof of claim which the insured submitted was false and fraudulent
both as to the kind, quality and amount of the goods and their value destroyed by the fire, such a proof of claim is a
bar against the insured from recovering on the policy even for the amount of his actual loss.

In the present case, as proof of its loss of stocks in trade amounting to ₱50,000,000.00, UMC submitted its Sworn
Statement of Formal Claim together with the following documents: (1) letters of credit and invoices for raw materials,
Christmas lights and cartons purchased; (2) charges for assembling the Christmas lights; and (3) delivery receipts of
the raw materials. However, the charges for assembling the Christmas lights and delivery receipts could not support
its insurance claim. The Insurance Policy provides that CBIC agreed to insure UMC’s stocks in trade. UMC defined
stock in trade as tangible personal property kept for sale or traffic. Applying UMC’s definition, only the letters of
33 

credit and invoices for raw materials, Christmas lights and cartons may be considered.

The invoices, however, cannot be taken as genuine. The invoices reveal that the stocks in trade purchased for 1996
amounts to ₱20,000,000.00 which were purchased in one month. Thus, UMC needs to prove purchases amounting
to ₱30,000,000.00 worth of stocks in trade for 1995 and prior years. However, in the Statement of Inventory it
submitted to the BIR, which is considered an entry in official records, UMC stated that it had no stocks in trade as of
34 

31 December 1995. In its defense, UMC alleged that it did not include as stocks in trade the raw materials to be
assembled as Christmas lights, which it had on 31 December 1995. However, as proof of its loss, UMC submitted
invoices for raw materials, knowing that the insurance covers only stocks in trade.

Equally important, the invoices (Exhibits "P"-"DD") from Fuze Industries Manufacturer Phils. were suspicious. The
purchases, based on the invoices and without any supporting contract, amounted to ₱19,550,400.00 worth of
Christmas lights from 20 January 1996 to 23 February 1996. The uncontroverted testimony of Cabrera revealed that
there was no Fuze Industries Manufacturer Phils. located at "55 Mahinhin St., Teacher’s Village, Quezon City," the
business address appearing in the invoices and the records of the Department of Trade & Industry. Cabrera testified
that:

A: Then we went personally to the address as I stated a while ago appearing in the record furnished by the United
Merchants Corporation to the adjuster, and the adjuster in turn now, gave us our basis in conducting investigation,
so we went to this place which according to the records, the address of this company but there was no office of this
company.

Q: You mentioned Atty. Cabrera that you went to Diliman, Quezon City and discover the address indicated by the
United Merchants as the place of business of Fuze Industries Manufacturer, Phils. was a residential place, what
then did you do after determining that it was a residential place?

A: We went to the owner of the alleged company as appearing in the Department of Trade & Industry record, and as
appearing a certain Chinese name Mr. Huang, and the address as appearing there is somewhere in Binondo. We
went personally there together with the NBI Agent and I am with them when the subpoena was served to them, but
a male person approached us and according to him, there was no Fuze Industries Manufacturer, Phils., company in
that building sir.
35

In Yu Ban Chuan v. Fieldmen’s Insurance, Co., Inc., the Court ruled that the submission of false invoices to the
36 

adjusters establishes a clear case of fraud and misrepresentation which voids the insurer’s liability as per condition
of the policy. Their falsity is the best evidence of the fraudulent character of plaintiff’s claim. In Verendia v. Court of
37 

Appeals, where the insured presented a fraudulent lease contract to support his claim for insurance benefits, the
38 
Court held that by its false declaration, the insured forfeited all benefits under the policy provision similar to
Condition No. 15 of the Insurance Policy in this case.

Furthermore, UMC’s Income Statement indicated that the purchases or costs of sales are ₱827,670.00 for 1995 and
₱1,109,190.00 for 1996 or a total of ₱1,936,860.00. To corroborate this fact, Ebora testified that:
39 

Q: Based on your 1995 purchases, how much were the purchases made in 1995?

A: The purchases made by United Merchants Corporation for the last year 1995 is ₱827,670.[00] sir

Q: And how about in 1994?

A: In 1994, it’s ₱608,986.00 sir.

Q: These purchases were made for the entire year of 1995 and 1994 respectively, am I correct?

A: Yes sir, for the year 1994 and 1995. (Emphasis supplied)
40 

In its 1996 Financial Report, which UMC admitted as existing, authentic and duly executed during the 4 December
2002 hearing, it had ₱1,050,862.71 as total assets and ₱167,058.47 as total liabilities. 41

Thus, either amount in UMC’s Income Statement or Financial Reports is twenty-five times the claim UMC seeks to
enforce. The RTC itself recognized that UMC padded its claim when it only allowed ₱43,930,230.00 as insurance
claim. UMC supported its claim of ₱50,000,000.00 with the Certification from the Bureau of Fire Protection stating
that "x x x a fire broke out at United Merchants Corporation located at 19-B Dag[o]t Street, Brgy. Manresa, Quezon
City incurring an estimated damage of Fifty- Five Million Pesos (₱55,000,000.00) to the building and contents x x x."
However, this Certification only proved that the estimated damage of ₱55,000,000.00 is shared by both the building
and the stocks in trade.

It has long been settled that a false and material statement made with an intent to deceive or defraud voids an
insurance policy. In Yu Cua v. South British Insurance Co., the claim was fourteen times bigger than the real loss;
42  43 

in Go Lu v. Yorkshire Insurance Co, eight times; and in Tuason v. North China Insurance Co., six times. In the
44  45 

present case, the claim is twenty five times the actual claim proved.

The most liberal human judgment cannot attribute such difference to mere innocent error in estimating or counting
but to a deliberate intent to demand from insurance companies payment for indemnity of goods not existing at the
time of the fire. This constitutes the so-called "fraudulent claim" which, by express agreement between the insurers
46 

and the insured, is a ground for the exemption of insurers from civil liability.47

In its Reply, UMC admitted the discrepancies when it stated that "discrepancies in its statements were not covered
by the warranty such that any discrepancy in the declaration in other instruments or documents as to matters that
may have some relation to the insurance coverage voids the policy." 48

On UMC’s allegation that it did not breach any warranty, it may be argued that the discrepancies do not, by
themselves, amount to a breach of warranty. However, the Insurance Code provides that "a policy may declare that
a violation of specified provisions thereof shall avoid it." Thus, in fire insurance policies, which contain provisions
49 

such as Condition No. 15 of the Insurance Policy, a fraudulent discrepancy between the actual loss and that claimed
in the proof of loss voids the insurance policy. Mere filing of such a claim will exonerate the insurer. 50

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

While it is a cardinal principle of insurance law that a contract of insurance is to be construed liberally in favor of the
insured and strictly against the insurer company, contracts of insurance, like other contracts, are to be construed
51 

according to the sense and meaning of the terms which the parties themselves have used. If such terms are clear
52 

and unambiguous, they must be taken and understood in their plain, ordinary and popular sense. Courts are not
permitted to make contracts for the parties; the function and duty of the courts is simply to enforce and carry out the
contracts actually made. 53

WHEREFORE, we DENY the petition. We AFFIRM the 16 June 2011 Decision and the 8 September 2011
Resolution of the Court of Appeals in CA-G.R. CV No. 85777.

SO ORDERED

G.R. No. 124050 June 19, 1997

MAYER STEEL PIPE CORPORATION and HONGKONG GOVERNMENT SUPPLIES DEPARTMENT, petitioners,

vs.
COURT OF APPEALS, SOUTH SEA SURETY AND INSURANCE CO., INC. and the CHARTER INSURANCE
CORPORATION, respondents.

PUNO, J.:

This is a petition for review on certiorari to annul and set aside the Decision of respondent Court of Appeals dated
December 14, 1995   and its Resolution dated February 22, 1996   in CA-G.R. CV No. 45805 entitled Mayer Steel
1 2

Pipe Corporation and Hongkong Government Supplies Department v. South Sea Surety Insurance Co., Inc. and
The Charter Insurance Corporation.  3

In 1983, petitioner Hongkong Government Supplies Department (Hongkong) contracted petitioner Mayer Steel Pipe
Corporation (Mayer) to manufacture and supply various steel pipes and fittings. From August to October, 1983,
Mayer shipped the pipes and fittings to Hongkong as evidenced by Invoice Nos. MSPC-1014, MSPC-1015, MSPC-
1025, MSPC-1020, MSPC-1017 and MSPC-1022.  4

Prior to the shipping, petitioner Mayer insured the pipes and fittings against all risks with private respondents South
Sea Surety and Insurance Co., Inc. (South Sea) and Charter Insurance Corp. (Charter). The pipes and fittings
covered by Invoice Nos. MSPC-1014, 1015 and 1025 with a total amount of US$212,772.09 were insured with
respondent South Sea, while those covered by Invoice Nos. 1020, 1017 and 1022 with a total amount of
US$149,470.00 were insured with respondent Charter.

Petitioners Mayer and Hongkong jointly appointed Industrial Inspection (International) Inc. as third-party inspector to
examine whether the pipes and fittings are manufactured in accordance with the specifications in the contract.
Industrial Inspection certified all the pipes and fittings to be in good order condition before they were loaded in the
vessel. Nonetheless, when the goods reached Hongkong, it was discovered that a substantial portion thereof was
damaged.

Petitioners filed a claim against private respondents for indemnity under the insurance contract. Respondent Charter
paid petitioner Hongkong the amount of HK$64,904.75. Petitioners demanded payment of the balance of
HK$299,345.30 representing the cost of repair of the damaged pipes. Private respondents refused to pay because
the insurance surveyor's report allegedly showed that the damage is a factory defect.

On April 17, 1986, petitioners filed an action against private respondents to recover the sum of HK$299,345.30. For
their defense, private respondents averred that they have no obligation to pay the amount claimed by petitioners
because the damage to the goods is due to factory defects which are not covered by the insurance policies.

The trial court ruled in favor of petitioners. It found that the damage to the goods is not due to manufacturing
defects. It also noted that the insurance contracts executed by petitioner Mayer and private respondents are "all
risks" policies which insure against all causes of conceivable loss or damage. The only exceptions are those
excluded in the policy, or those sustained due to fraud or intentional misconduct on the part of the insured. The
dispositive portion of the decision states:
 WHEREFORE, judgment is hereby rendered ordering the defendants jointly and severally, to pay
the plaintiffs the following:

1. the sum equivalent in Philippine currency of HK$299,345.30, with legal rate of interest as of the
filing of the complaint;

2. P100,000.00 as and for attorney's fees; and

3. costs of suit.

SO ORDERED.  5

Private respondents elevated the case to respondent Court of Appeals.

Respondent court affirmed the finding of the trial court that the damage is not due to factory defect and that it was
covered by the "all risks" insurance policies issued by private respondents to petitioner Mayer. However, it set aside
the decision of the trial court and dismissed the complaint on the ground of prescription. It held that the action is
barred under Section 3(6) of the Carriage of Goods by Sea Act since it was filed only on April 17, 1986, more than
two years from the time the goods were unloaded from the vessel. Section 3(6) of the Carriage of Goods by Sea Act
provides that "the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is
brought within one year after delivery of the goods or the date when the goods should have been delivered."
Respondent court ruled that this provision applies not only to the carrier but also to the insurer, citing Filipino
Merchants Insurance Co., Inc. v. Alejandro.  6

Hence this petition with the following assignments of error:

1. The respondent Court of Appeals erred in holding that petitioners' cause of action had already
prescribed on the mistaken application of the Carriage of Goods by Sea Act and the doctrine of
Filipino Merchants Co., Inc. v. Alejandro (145 SCRA 42); and

2. The respondent Court of Appeals committed an error in dismissing the complaint.  7

The petition is impressed with merit. Respondent court erred in applying Section 3(6) of the Carriage of Goods by
Sea Act.

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall be discharged from all
liability for loss or damage to the goods if no suit is filed within one year after delivery of the goods or the date when
they should have been delivered. Under this provision, only the carrier's liability is extinguished if no suit is brought
within one year. But the liability of the insurer is not extinguished because the insurer's liability is based not on the
contract of carriage but on the contract of insurance. A close reading of the law reveals that the Carriage of Goods
by Sea Act governs the relationship between the carrier on the one hand and the shipper, the consignee and/or the
insurer on the other hand. It defines the obligations of the carrier under the contract of carriage. It does not,
however, affect the relationship between the shipper and the insurer. The latter case is governed by the Insurance
Code.

Our ruling in Filipino Merchants Insurance Co., Inc. v. Alejandro   and the other cases   cited therein does not
8 9

support respondent court's view that the insurer's liability prescribes after one year if no action for indemnity is filed
against the carrier or the insurer. In that case, the shipper filed a complaint against the insurer for recovery of a sum
of money as indemnity for the loss and damage sustained by the insured goods. The insurer, in turn, filed a third-
party complaint against the carrier for reimbursement of the amount it paid to the shipper. The insurer filed the third-
party complaint on January 9, 1978, more than one year after delivery of the goods on December 17, 1977. The
court held that the insurer was already barred from filing a claim against the carrier because under the Carriage of
Goods by Sea Act, the suit against the carrier must be filed within one year after delivery of the goods or the date
when the goods should have been delivered. The court said that "the coverage of the Act includes the insurer of the
goods." 10
The Filipino Merchants case is different from the case at bar. In Filipino Merchants, it was the insurer which filed a
claim against the carrier for reimbursement of the amount it paid to the shipper. In the case at bar, it was the shipper
which filed a claim against the insurer. The basis of the shipper's claim is the "all risks" insurance policies issued by
private respondents to petitioner Mayer.

The ruling in Filipino Merchants should apply only to suits against the carrier filed either by the shipper, the
consignee or the insurer. When the court said in Filipino Merchants that Section 3(6) of the Carriage of Goods by
Sea Act applies to the insurer, it meant that the insurer, like the shipper, may no longer file a claim against the
carrier beyond the one-year period provided in the law. But it does not mean that the shipper may no longer file a
claim against the insurer because the basis of the insurer's liability is the insurance contract. An insurance contract
is a contract whereby one party, for a consideration known as the premium, agrees to indemnify another for loss or
damage which he may suffer from a specified peril.   An "all risks" insurance policy covers all kinds of loss other
11

than those due to willful and fraudulent act of the insured.   Thus, when private respondents issued the "all risks"
12

policies to petitioner Mayer, they bound themselves to indemnify the latter in case of loss or damage to the goods
insured. Such obligation prescribes in ten years, in accordance with Article 1144 of the New Civil Code.  13

IN VIEW WHEREOF, the petition is GRANTED. The Decision of respondent Court of Appeals dated December 14,
1995 and its Resolution dated February 22, 1996 are hereby SET ASIDE and the Decision of the Regional Trial
Court is hereby REINSTATED. No costs.

SO ORDERED.
Right to Subrogation

G.R. No. 193629               August 17, 2011

RCJ BUS LINES, INCORPORATED, Petitioner,

vs.
STANDARD INSURANCE COMPANY, INCORPORATED, Respondent.

DECISION

CARPIO, J.:

The Case

G.R. No. 193629 is a petition for review1 assailing the Decision2 promulgated on 11 March 2010 as well as the
Resolution3 promulgated on 3 September 2010 by the Court of Appeals (appellate court) in CA-G.R. SP No. 105338.
The appellate court affirmed with modification the 27 May 2008 Decision4 of Branch 37 of the Regional Trial Court of
Manila (RTC) in Civil Case No. 00-99410. The RTC dismissed RCJ Bus Lines’ appeal from the 12 July 2000
Decision5 of the Metropolitan Trial Court of Manila (MeTC) in Civil Case No. 153566. The MeTC rendered judgment
in favor of Standard Insurance Company, Incorporated (Standard) and ordered Flor Bola Mangoba (Mangoba) and
RCJ Bus Lines, Incorporated (RCJ) to pay damages.

The Facts

The appellate court narrated the facts as follows:

On 01 December 2000, respondent Standard Insurance Co., Inc. (STANDARD) filed an amended complaint
against the petitioners Flor Bola Mangoba and RCJ Bus Lines, Inc. (docketed as Civil Case No. 153566-CV
before the Metropolitan Trial Court of Manila, Branch 29). Said amended complaint alleged, among others:

"2. On June 19, 1994 along the National Highway at Brgy. Amlang, Rosario, La Union, defendant Flor B.
Mangoba while driving [sic] an RCJ HINO BLUE RIBBON PASSENGER BUS bearing Plate No. NYG-363 in
a reckless and imprudent manner, bumped and hit a 1991 Mitsubishi Lancer GLX bearing Plate No. TAJ-
796, a photocopy of the police report is attached hereto and made an integral part hereof as Annex ‘A.’

3. The subject Mitsubishi Lancer which is owned by Rodelene Valentino was insured for loss and damage
with plaintiff [Standard Insurance Co. Inc.] for ₱450,000.00, a photocopy of the insurance policy is attached
hereto and made an integral part hereof as Annex ‘B.’

4. Defendant RCJ Bus Lines, Inc. is the registered owner of the Passenger Bus bearing Plate No. NYG-363
while defendant Flor Mangoba was the driver of the subject Passenger Bus when the accident took place.
 5. As a direct and proximate cause of the vehicular accident, the Mitsubishi Lancer was extensively
damaged, the costs of repairs of which were borne by the plaintiff [Standard Insurance Co. Inc.] at a cost of
₱162,151.22.

6. By virtue of the insurance contract, plaintiff [Standard Insurance Co. Inc.] paid Rodelene Valentino the
amount of ₱162,151.22 for the repair of the Mitsubishi Lancer car.

7. After plaintiff [Standard Insurance Co. Inc.] has complied with its obligation under the policy mentioned
above, plaintiff’s assured executed in plaintiff’s favor a Release of Claim thereby subrogating the latter to all
his rights of recovery on all claims, demands and rights of action on account of loss, damage or injury as a
consequence of the accident from any person liable therefor.

8. Despite demands, defendants have failed and refused and still continue to fail and refuse to reimburse
plaintiff the sum of ₱162,151.22. A photocopy of the demand letter is attached hereto and made an integral
part hereof as Annex ‘C.’

9. As a consequence, plaintiff [Standard Insurance Co. Inc.] has been compelled to resort to court action
and thereby hire the services of counsel as well as incur expenses of litigation for all of which it should be
indemnified by the defendant in the amount of at least ₱30,000.00.

10. In order that it may serve as a deterrent for others and by way of example for the public good,
defendants should be adjudged to pay plaintiff [Standard Insurance Co. Inc.] exemplary damages in the
amount of ₱20,000.00."

Thus, STANDARD prayed:

"WHEREFORE, plaintiff respectfully prays that after due trial on the issues, this court render judgment against the
defendants adjudging them jointly and severally liable to pay plaintiff the following amounts:

1. The principal claim of ₱162,151.22 with interest at 12% per annum from September 1, 1995 until fully
paid.

2. ₱30,000.00 as and by way of indemnification for attorney’s fees.

3. ₱25,000.00 as exemplary damages.

Plaintiff prays for such further or other reliefs as may be deemed just and equitable under the premises."

In its answer, RCJ Bus Lines, Inc. maintained:

"1. That the complaint states no cause of action against it;

2. That venue was improperly laid; and,

3. That the direct, immediate and proximate cause of the accident was the negligence of the driver of the
Mitsubishi Lancer when, for no reason at all, it made a sudden stop along the National Highway, as if to
initiate and/or create an accident."

Flor Bola Mangoba, in his own answer to the complaint, also pointed his finger at the driver of the Mitsubishi Lancer
as the one who caused the vehicular accident on the time, date and place in question.

For his failure to appear at the pre-trial despite notice, Flor Bola Mangoba was declared in default on 14 November
1997. Accordingly, trial proceeded sans his participation.

At the trial, the evidence adduced by the parties established the following facts:
In the evening of 19 June 1994, at around 7:00 o’clock, a Toyota Corolla with Plate No. PHU-185 driven by Rodel
Chua, cruised along the National Highway at Barangay Amlang, Rosario, La Union, heading towards the general
direction of Bauan, La Union. The Toyota Corolla travelled at a speed of 50 kilometers per hour as it traversed the
downward slope of the road, which curved towards the right.

The Mitsubishi Lancer GLX with Plate No. TAJ-796, driven by Teodoro Goki, and owned by Rodelene Valentino,
was then following the Toyota Corolla along the said highway. Behind the Mitsubishi Lancer GLX was the
passenger bus with Plate No. NYG-363, driven by Flor Bola Mangoba and owned by RCJ Bus Lines, Inc. The bus
followed the Mitsubishi Lancer GLX at a distance of ten (10) meters and traveled at the speed of 60 to 75 kilometers
per hour.

Upon seeing a pile of gravel and sand on the road, the Toyota Corolla stopped on its tracks. The Mitsubishi Lancer
followed suit and also halted. At this point, the bus hit and bumped the rear portion of the Mitsubishi Lancer causing
it to move forward and hit the Toyota Corolla in front of it.

As a result of the incident, the Mitsubishi Lancer sustained damages amounting to ₱162,151.22, representing the
costs of its repairs. Under the comprehensive insurance policy secured by Rodelene Valentino, owner of the
Mitsubishi Lancer, STANDARD reimbursed to the former the amount she expended for the repairs of her vehicle.
Rodelene then executed a Release of Claim and Subrogation Receipt, subrogating STANDARD to all rights, claims
and actions she may have against RCJ Bus Lines, Inc. and its driver, Flor Bola Mangoba.6

The MeTC’s Ruling

On 12 July 2000, the MeTC rendered its decision in favor of Standard, the dispositive portion of which reads:

WHEREFORE, consistent with Section 1, Rule 131 and Section 1, Rule 133 of the Revised Rules on Evidence,
judgment is hereby rendered in favor of the plaintiff, ordering defendants Flor Bola Mangoba and RCJ Bus Lines,
Inc.:

1. To pay the principal sum of ONE HUNDRED SIXTY TWO THOUSAND ONE HUNDRED FIFTY ONE
PESOS and 22/100 (₱162,151.22), with legal rate of interest at 12% per annum from September 1, 1995
until full payment;

2. To pay the sum of TWENTY THOUSAND PESOS (₱20,000.00) as exemplary damages;

3. To pay the sum of TWENTY THOUSAND PESOS (₱20,000.00) as reasonable attorney’s fees; and

4. To pay the costs of suit.

For want of merit, the separate Counterclaim is hereby DISMISSED.7

In an Order8 dated 2 May 2002, the RTC dismissed Mangoba and RCJ’s appeal for filing their pleading beyond the
reglementary period. The appellate court, however, in a Decision9 in CA-G.R. SP No. 77598 dated 23 April 2004,
granted RCJ’s petition and remanded the case to the RTC for further proceedings.

The RTC’s Ruling

In its Decision dated 27 May 2008, the RTC affirmed with modification the MeTC’s Decision dated 12 July 2000. The
RTC deleted the award for exemplary damages.

RCJ failed to convince the RTC that it observed the diligence of a good father of a family to prevent damages
sustained by the Mitsubishi Lancer. The RTC ruled that the testimony of Conrado Magno, RCJ’s Operations
Manager, who declared that all applicants for employment in RCJ were required to submit clearances from the
barangay, the courts and the National Bureau of Investigation, is insufficient to show that RCJ exercised due
diligence in the selection and supervision of its drivers. The allegation of the conduct of seminars and training for
RCJ’s drivers is not proof that RCJ examined Mangoba’s qualifications, experience and driving history. Moreover,
the testimony of Noel Oalog, the bus conductor, confirmed that the bus was travelling at a speed of 60 to 75
kilometers per hour, which was beyond the maximum allowable speed of 50 kilometers per hour for a bus on an
open country road. The RTC, however, deleted the award of exemplary damages because it found no evidence that
Mangoba acted with gross negligence.

In an Order10 dated 27 August 2008, the RTC partially reconsidered its 27 May 2008 Decision and modified the
MeTC’s Decision to read as follows:

WHEREFORE, the Decision dated May 27, 2008 is partially reconsidered and the Decision of the court a quo dated
July 12, 2000 is MODIFIED. Appellant RCJ Bus Lines, Inc. and defendant Flor Bola Mangoba are ordered to pay
jointly and severally the appellee [Standard Insurance Co., Inc.] the following:

1. ONE HUNDRED SIXTY TWO THOUSAND ONE FIFTY ONE PESOS and 22/100 (₱162,151.22), with
legal rate of interest at 6% per annum from September 1, 1995 until full payment;

2. TWENTY THOUSAND PESOS (₱20,000.00) as reasonable attorney’s fees; and

3. Cost of suit.

SO ORDERED.11

The Appellate Court’s Ruling

Mangoba and RCJ filed a petition for review before the appellate court. The appellate court found that the RTC
committed no reversible error in affirming RCJ’s liability as registered owner of the bus and employer of Mangoba,
as well as Mangoba’s negligence in driving the passenger bus. The appellate court, however, deleted the award for
attorney’s fees and modified the legal interest imposed by the MeTC.

The dispositive portion of the appellate court’s decision reads:

WHEREFORE, the instant petition for review is DENIED. The assailed Decision of the Regional Trial Court of
Manila, Branch 37, in Civil Case No. 00-99410 is hereby AFFIRMED with MODIFICATION that the legal interest that
should be imposed on the actual damages awarded in favor of respondent Standard Insurance, Co., Inc. should be
at the rate of 6% per annum computed from the time of extra judicial demand until the finality of the 12 July 2000
Decision of the MeTC and thereafter, the legal interest shall be at the rate of 12% per annum until the full payment
of the actual damages. The award of attorney’s fees is DELETED.

SO ORDERED.12

The appellate court denied RCJ’s Motion for Reconsideration13 for lack of merit.14

The Issues

RCJ assigns the following as errors of the appellate court:

1. The Court of Appeals erroneously awarded the amount of ₱162,151.22 representing actual damages
based merely on the proof of payment of policy/insurance claim and not on an official receipt of payment of
actual cost of repair;

2. The Court of Appeals erroneously disregarded the point that petitioner RCJ’s defense of extraordinary
diligence in the selection and supervision of its driver was made as an alternative defense;

3. The Court of Appeals erroneously disregarded the legal principle that the supposed violation of Sec. 35 of
R.A. 4136 merely results in a disputable presumption; and

4. The Court of Appeals erroneously held that petitioner RCJ is vicariously liable for the claim of supposed
actual damages incurred by respondent Standard Insurance.15
 The Court’s Ruling

The petition has no merit. We see no reason to overturn the findings of the lower courts. We affirm the ruling of the
appellate court.

RCJ’s Liability

RCJ argues that its defense of extraordinary diligence in the selection and supervision of its employees is a mere
alternative defense. RCJ’s initial claim was that Standard’s complaint failed to state a cause of action against RCJ.

Standard may hold RCJ liable for two reasons, both of which rely upon facts uncontroverted by RCJ. One, RCJ is
the registered owner of the bus driven by Mangoba. Two, RCJ is Mangoba’s employer.

Standard’s allegation in its amended complaint that RCJ is the registered owner of the passenger bus with plate
number NYG 363 was sufficient to state a cause of action against RCJ. The registered owner of a vehicle should be
primarily responsible to the public for injuries caused while the vehicle is in use.16 The main aim of motor vehicle
registration is to identify the owner so that if any accident happens, or that any damage or injury is caused by the
vehicle on the public highways, responsibility therefor can be fixed on a definite individual, the registered owner.17

Moreover, in its efforts to extricate itself from liability, RCJ proffered the defense of the exercise of the diligence of a
good father of a family. The MeTC characterized RCJ’s defense against negligence in this manner:

To repel the idea of negligence, defendant [RCJ] bus company’s operations manager at the Laoag City Terminal
was presented on the witness stand on January 5, 2000 in regard to the company’s seminars and dialogues with
respect to its employees, and the absence of any record of a vehicular accident involving the co-defendant driver
[Mangoba] (TSN, January 5, 2000, pp. 2-17; TSN, February 16, 2000, pp. 2-9). As the last witness of defendant
[RCJ] bus company, Noel Oalog, bus conductor who was allegedly seated to the right side of the bus driver during
the incident, was presented on March 22, 2000 (TSN, March 22, 2000, page 2). He confirmed on direct examination
and cross examination that it was defendant’s bus, then running at 60-75 [kph] and at a distance of 10 meters,
which bumped a Mitsubishi Lancer without a tail light. According to him, the incident occurred when the driver of the
Toyota Corolla, which was ahead of the Lancer, stepped on the brakes due to the pile of gravel and sand in sight
(TSN, Vide at pp. 3-11). Subsequent to the proffer of exhibits (TSN, Vide, at page 14), and in default of any rebuttal,
the parties were directed to file the Memoranda within thirty days from March 23, 2000.18

RCJ, by presenting witnesses to testify on its exercise of diligence of a good father of a family in the selection and
supervision of its bus drivers, admitted that Mangoba is its employee. Article 218019 of the Civil Code, in relation to
Article 2176,20 makes the employer vicariously liable for the acts of its employees. When the employee causes
damage due to his own negligence while performing his own duties, there arises the juris tantum presumption that
the employer is negligent, rebuttable only by proof of observance of the diligence of a good father of a family. For
failure to rebut such legal presumption of negligence in the selection and supervision of employees, the employer is
likewise responsible for damages, the basis of the liability being the relationship of pater familias or on the
employer’s own negligence.21  1avvphi1

Mangoba, per testimony of his conductor, was ten meters away from the Mitsubishi Lancer before the collision and
was driving 60 to 75 kilometers per hour when the speed limit was 50 kilometers per hour.22 The presumption under
Article 218523 of the Civil Code was thus proven true: Mangoba, as driver of the bus which collided with the
Mitsubishi Lancer, was negligent since he violated a traffic regulation at the time of the mishap. We see no reason to
depart from the findings of the MeTC, RTC and appellate court that Mangoba was negligent. The appellate court
stated:

To be sure, had not the passenger bus been speeding while traversing the downward sloping road, it would not
have hit and bumped the Mitsubishi Lancer in front of it, causing the latter vehicle to move forward and hit and
bump, in turn, the Toyota Corolla. Had the bus been moving at a reasonable speed, it could have avoided hitting
and bumping the Mitsubishi Lancer upon spotting the same, taking into account that the distance between the two
vehicles was ten (10) meters. As fittingly opined by the MeTC, the driver of the passenger bus, being the rear
vehicle, had full control of the situation as he was in a position to observe the vehicle in front of him. Had he
observed the diligence required under the circumstances, the accident would not have occurred.24
 Subrogation

In the present case, it cannot be denied that the Mitsubishi Lancer sustained damages. Moreover, it cannot also be
denied that Standard paid Rodelene Valentino ₱162,151.22 for the repair of the Mitsubishi Lancer pursuant to a
Release of Claim and Subrogation Receipt. Neither RCJ nor Mangoba cross-examined Standard’s claims evaluator
when he testified on his duties, the insurance contract between Rodelene Valentino and Standard, Standard’s
payment of insurance proceeds, and RCJ and Mangoba’s refusal to pay despite demands. After being lackadaisical
during trial, RCJ cannot escape liability now. Standard’s right of subrogation accrues simply upon its payment of the
insurance claim.25

Article 2207 of the Civil Code reads:

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. If the
amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to
recover the deficiency from the person causing the loss or injury.

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who
substitutes another succeeds to the rights of the other in relation to a debt or claim, including its remedies or
securities. The principle covers a situation wherein an insurer who has paid a loss under an insurance policy is
entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered
by the policy.26

WHEREFORE, we DENY the petition. We AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No. 105338
promulgated on 11 March 2010 as well as the Resolution promulgated on 3 September 2010.

SO ORDERED.
G.R. No. 150094             August 18, 2004

FEDERAL EXPRESS CORPORATION, petitioner,

vs.
AMERICAN HOME ASSURANCE COMPANY and PHILAM INSURANCE COMPANY, INC., respondents.

DECISION

PANGANIBAN, J.:

Basic is the requirement that before suing to recover loss of or damage to transported goods, the plaintiff must give
the carrier notice of the loss or damage, within the period prescribed by the Warsaw Convention and/or the airway
bill.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, challenging the June 4, 2001 Decision and
1  2 

the September 21, 2001 Resolution of the Court of Appeals (CA) in CA-GR CV No. 58208. The assailed Decision
3 

disposed as follows:

"WHEREFORE, premises considered, the present appeal is hereby DISMISSED for lack of merit. The
appealed Decision of Branch 149 of the Regional Trial Court of Makati City in Civil Case No. 95-
1219, entitled 'American Home Assurance Co. and PHILAM Insurance Co., Inc. v. FEDERAL EXPRESS
CORPORATION and/or CARGOHAUS, INC. (formerly U-WAREHOUSE, INC.),' is
hereby AFFIRMED and REITERATED.

"Costs against the [petitioner and Cargohaus, Inc.]." 4

The assailed Resolution denied petitioner's Motion for Reconsideration.

The Facts

The antecedent facts are summarized by the appellate court as follows:

"On January 26, 1994, SMITHKLINE Beecham (SMITHKLINE for brevity) of Nebraska, USA delivered to
Burlington Air Express (BURLINGTON), an agent of [Petitioner] Federal Express Corporation, a shipment of
109 cartons of veterinary biologicals for delivery to consignee SMITHKLINE and French Overseas Company
in Makati City, Metro Manila. The shipment was covered by Burlington Airway Bill No. 11263825 with the
words, 'REFRIGERATE WHEN NOT IN TRANSIT' and 'PERISHABLE' stamp marked on its face. That same
 day, Burlington insured the cargoes in the amount of $39,339.00 with American Home Assurance Company
(AHAC). The following day, Burlington turned over the custody of said cargoes to Federal Express which
transported the same to Manila. The first shipment, consisting of 92 cartons arrived in Manila on January 29,
1994 in Flight No. 0071-28NRT and was immediately stored at [Cargohaus Inc.'s] warehouse. While the
second, consisting of 17 cartons, came in two (2) days later, or on January 31, 1994, in Flight No. 0071-
30NRT which was likewise immediately stored at Cargohaus' warehouse. Prior to the arrival of the cargoes,
Federal Express informed GETC Cargo International Corporation, the customs broker hired by the
consignee to facilitate the release of its cargoes from the Bureau of Customs, of the impending arrival of its
client's cargoes.

"On February 10, 1994, DARIO C. DIONEDA ('DIONEDA'), twelve (12) days after the cargoes arrived in
Manila, a non-licensed custom's broker who was assigned by GETC to facilitate the release of the subject
cargoes, found out, while he was about to cause the release of the said cargoes, that the same [were]
stored only in a room with two (2) air conditioners running, to cool the place instead of a refrigerator. When
he asked an employee of Cargohaus why the cargoes were stored in the 'cool room' only, the latter told him
that the cartons where the vaccines were contained specifically indicated therein that it should not be
subjected to hot or cold temperature. Thereafter, DIONEDA, upon instructions from GETC, did not proceed
with the withdrawal of the vaccines and instead, samples of the same were taken and brought to the Bureau
of Animal Industry of the Department of Agriculture in the Philippines by SMITHKLINE for examination
wherein it was discovered that the 'ELISA reading of vaccinates sera are below the positive reference
serum.'

"As a consequence of the foregoing result of the veterinary biologics test, SMITHKLINE abandoned the
shipment and, declaring 'total loss' for the unusable shipment, filed a claim with AHAC through its
representative in the Philippines, the Philam Insurance Co., Inc. ('PHILAM') which recompensed
SMITHKLINE for the whole insured amount of THIRTY NINE THOUSAND THREE HUNDRED THIRTY
NINE DOLLARS ($39,339.00). Thereafter, [respondents] filed an action for damages against the [petitioner]
imputing negligence on either or both of them in the handling of the cargo.

"Trial ensued and ultimately concluded on March 18, 1997 with the [petitioner] being held solidarily liable for
the loss as follows:

'WHEREFORE, judgment is hereby rendered in favor of [respondents] and [petitioner and its Co-
Defendant Cargohaus] are directed to pay [respondents], jointly and severally, the following:

1. Actual damages in the amount of the peso equivalent of US$39,339.00 with interest from
the time of the filing of the complaint to the time the same is fully paid.

2. Attorney's fees in the amount of P50,000.00 and

3. Costs of suit.

'SO ORDERED.'

"Aggrieved, [petitioner] appealed to [the CA]." 5

Ruling of the Court of Appeals

The Test Report issued by the United States Department of Agriculture (Animal and Plant Health Inspection
Service) was found by the CA to be inadmissible in evidence. Despite this ruling, the appellate court held that the
shipping Receipts were a prima facie proof that the goods had indeed been delivered to the carrier in good
condition. We quote from the ruling as follows:

"Where the plaintiff introduces evidence which shows prima facie that the goods were delivered to the
carrier in good condition [i.e., the shipping receipts], and that the carrier delivered the goods in a damaged
condition, a presumption is raised that the damage occurred through the fault or negligence of the
carrier, and this casts upon the carrier the burden of showing that the goods were not in good condition
 when delivered to the carrier, or that the damage was occasioned by some cause excepting the carrier from
absolute liability. This the [petitioner] failed to discharge. x x x."
6

Found devoid of merit was petitioner's claim that respondents had no personality to sue. This argument was
supposedly not raised in the Answer or during trial.

Hence, this Petition. 7

The Issues

In its Memorandum, petitioner raises the following issues for our consideration:

"I.

Are the decision and resolution of the Honorable Court of Appeals proper subject for review by the
Honorable Court under Rule 45 of the 1997 Rules of Civil Procedure?

"II.

Is the conclusion of the Honorable Court of Appeals – petitioner's claim that respondents have no
personality to sue because the payment was made by the respondents to Smithkline when the insured
under the policy is Burlington Air Express is devoid of merit – correct or not?

"III.

Is the conclusion of the Honorable Court of Appeals that the goods were received in good condition, correct
or not?

"IV.

Are Exhibits 'F' and 'G' hearsay evidence, and therefore, not admissible?

"V.

Is the Honorable Court of Appeals correct in ignoring and disregarding respondents' own admission that
petitioner is not liable? and

"VI.

Is the Honorable Court of Appeals correct in ignoring the Warsaw Convention?" 8

Simply stated, the issues are as follows: (1) Is the Petition proper for review by the Supreme Court? (2) Is Federal
Express liable for damage to or loss of the insured goods?

This Court's Ruling

The Petition has merit.

Preliminary Issue:
Propriety of Review

The correctness of legal conclusions drawn by the Court of Appeals from undisputed facts is a question of law
cognizable by the Supreme Court. 9

In the present case, the facts are undisputed. As will be shown shortly, petitioner is questioning the conclusions
drawn from such facts. Hence, this case is a proper subject for review by this Court.
 Main Issue:
Liability for Damages

Petitioner contends that respondents have no personality to sue -- thus, no cause of action against it -- because the
payment made to Smithkline was erroneous.

Pertinent to this issue is the Certificate of Insurance ("Certificate") that both opposing parties cite in support of their
10 

respective positions. They differ only in their interpretation of what their rights are under its terms. The determination
of those rights involves a question of law, not a question of fact. "As distinguished from a question of law which
exists 'when the doubt or difference arises as to what the law is on a certain state of facts' -- 'there is a question of
fact when the doubt or difference arises as to the truth or the falsehood of alleged facts'; or when the 'query
necessarily invites calibration of the whole evidence considering mainly the credibility of witnesses, existence and
relevancy of specific surrounding circumstance, their relation to each other and to the whole and the probabilities of
the situation.'"
11

Proper Payee

The Certificate specifies that loss of or damage to the insured cargo is "payable to order x x x upon surrender of this
Certificate." Such wording conveys the right of collecting on any such damage or loss, as fully as if the property
were covered by a special policy in the name of the holder itself. At the back of the Certificate appears the signature
of the representative of Burlington. This document has thus been duly indorsed in blank and is deemed a bearer
instrument.

Since the Certificate was in the possession of Smithkline, the latter had the right of collecting or of being indemnified
for loss of or damage to the insured shipment, as fully as if the property were covered by a special policy in the
name of the holder. Hence, being the holder of the Certificate and having an insurable interest in the goods,
Smithkline was the proper payee of the insurance proceeds.

Subrogation

Upon receipt of the insurance proceeds, the consignee (Smithkline) executed a subrogation Receipt in favor of
12 

respondents. The latter were thus authorized "to file claims and begin suit against any such carrier, vessel, person,
corporation or government." Undeniably, the consignee had a legal right to receive the goods in the same condition
it was delivered for transport to petitioner. If that right was violated, the consignee would have a cause of action
against the person responsible therefor.

Upon payment to the consignee of an indemnity for the loss of or damage to the insured goods, the insurer's
entitlement to subrogation pro tanto -- being of the highest equity -- equips it with a cause of action in case of a
contractual breach or negligence. "Further, the insurer's subrogatory right to sue for recovery under the bill of lading
13 

in case of loss of or damage to the cargo is jurisprudentially upheld." 14

In the exercise of its subrogatory right, an insurer may proceed against an erring carrier. To all intents and purposes,
it stands in the place and in substitution of the consignee. A fortiori, both the insurer and the consignee are bound
by the contractual stipulations under the bill of lading. 15

Prescription of Claim

From the initial proceedings in the trial court up to the present, petitioner has tirelessly pointed out that respondents'
claim and right of action are already barred. The latter, and even the consignee, never filed with the carrier any
written notice or complaint regarding its claim for damage of or loss to the subject cargo within the period required
by the Warsaw Convention and/or in the airway bill. Indeed, this fact has never been denied by respondents and is
plainly evident from the records.

Airway Bill No. 11263825, issued by Burlington as agent of petitioner, states:

"6. No action shall be maintained in the case of damage to or partial loss of the shipment unless a written
notice, sufficiently describing the goods concerned, the approximate date of the damage or loss, and the
 details of the claim, is presented by shipper or consignee to an office of Burlington within (14) days from the
date the goods are placed at the disposal of the person entitled to delivery, or in the case of total loss
(including non-delivery) unless presented within (120) days from the date of issue of the [Airway Bill]." 16

Relevantly, petitioner's airway bill states:

"12./12.1 The person entitled to delivery must make a complaint to the carrier in writing in the case:

12.1.1 of visible damage to the goods, immediately after discovery of the damage and at the latest within
fourteen (14) days from receipt of the goods;

12.1.2 of other damage to the goods, within fourteen (14) days from the date of receipt of the goods;

12.1.3 delay, within twenty-one (21) days of the date the goods are placed at his disposal; and

12.1.4 of non-delivery of the goods, within one hundred and twenty (120) days from the date of the issue of
the air waybill.

12.2 For the purpose of 12.1 complaint in writing may be made to the carrier whose air waybill was used, or
to the first carrier or to the last carrier or to the carrier who performed the transportation during which the
loss, damage or delay took place." 17

Article 26 of the Warsaw Convention, on the other hand, provides:

"ART. 26. (1) Receipt by the person entitled to the delivery of baggage or goods without complaint shall be
prima facie evidence that the same have been delivered in good condition and in accordance with the
document of transportation.

(2) In case of damage, the person entitled to delivery must complain to the carrier forthwith after the
discovery of the damage, and, at the latest, within 3 days from the date of receipt in the case of baggage
and 7 days from the date of receipt in the case of goods. In case of delay the complaint must be made at the
latest within 14 days from the date on which the baggage or goods have been placed at his disposal.

(3) Every complaint must be made in writing upon the document of transportation or by separate notice in
writing dispatched within the times aforesaid.

(4) Failing complaint within the times aforesaid, no action shall lie against the carrier, save in the case of
fraud on his part."18

Condition Precedent

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor actually constitutes a
condition precedent to the accrual of a right of action against a carrier for loss of or damage to the goods. The
19 

shipper or consignee must allege and prove the fulfillment of the condition. If it fails to do so, no right of action
against the carrier can accrue in favor of the former. The aforementioned requirement is a reasonable condition
precedent; it does not constitute a limitation of action.20

The requirement of giving notice of loss of or injury to the goods is not an empty formalism. The fundamental
reasons for such a stipulation are (1) to inform the carrier that the cargo has been damaged, and that it is being
charged with liability therefor; and (2) to give it an opportunity to examine the nature and extent of the injury. "This
protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is fresh and
easily investigated so as to safeguard itself from false and fraudulent claims." 21

When an airway bill -- or any contract of carriage for that matter -- has a stipulation that requires a notice of claim for
loss of or damage to goods shipped and the stipulation is not complied with, its enforcement can be prevented and
the liability cannot be imposed on the carrier. To stress, notice is a condition precedent, and the carrier is not liable if
notice is not given in accordance with the stipulation. Failure to comply with such a stipulation bars recovery for the
22 

loss or damage suffered. 23

Being a condition precedent, the notice must precede a suit for enforcement. In the present case, there is neither
24 

an allegation nor a showing of respondents' compliance with this requirement within the prescribed period. While
respondents may have had a cause of action then, they cannot now enforce it for their failure to comply with the
aforesaid condition precedent.

In view of the foregoing, we find no more necessity to pass upon the other issues raised by petitioner.

We note that respondents are not without recourse. Cargohaus, Inc. -- petitioner's co-defendant in respondents'
Complaint below -- has been adjudged by the trial court as liable for, inter alia, "actual damages in the amount of the
peso equivalent of US $39,339." This judgment was affirmed by the Court of Appeals and is already final and
25 

executory.26

WHEREFORE, the Petition is GRANTED, and the assailed Decision REVERSED insofar as it pertains to Petitioner

Federal Express Corporation. No pronouncement as to costs.

SO ORDERED.
G.R. No. 127897      November 15, 2001

DELSAN TRANSPORT LINES, INC., petitioner,

vs.
THE HON. COURT OF APPEALS and AMERICAN HOME ASSURANCE CORPORATION, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals in CA-G.R. CV No. 39836
promulgated on June 17, 1996, reversing the decision of the Regional Trial Court of Makati City, Branch 137,
ordering petitioner to pay private respondent the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five
Pesos and Fifty-Seven Centavos (P5,096,635.57) and costs and the Resolution2 dated January 21, 1997 which
denied the subsequent motion for reconsideration.

The facts show that Caltex Philippines (Caltex for brevity) entered into a contract of affreightment with the petitioner,
Delsan Transport Lines, Inc., for a period of one year whereby the said common carrier agreed to transport Caltex’s
industrial fuel oil from the Batangas-Bataan Refinery to different parts of the country. Under the contract, petitioner
took on board its vessel, MT Maysun 2,277.314 kiloliters of industrial fuel oil of Caltex to be delivered to the Caltex
Oil Terminal in Zamboanga City. The shipment was insured with the private respondent, American Home Assurance
Corporation.

On August 14, 1986, MT Maysum set sail from Batangas for Zamboanga City. Unfortunately, the vessel sank in the
early morning of August 16, 1986 near Panay Gulf in the Visayas taking with it the entire cargo of fuel oil.

Subsequently, private respondent paid Caltex the sum of Five Million Ninety-Six Thousand Six Hundred Thirty-Five
Pesos and Fifty-Seven Centavos (P5,096,635.67) representing the insured value of the lost cargo. Exercising its
right of subrogation under Article 2207 of the New Civil Code, the private respondent demanded of the petitioner the
same amount it paid to Caltex. 1âwphi1.nêt

Due to its failure to collect from the petitioner despite prior demand, private respondent filed a complaint with the
Regional Trial Court of Makati City, Branch 137, for collection of a sum of money. After the trial and upon analyzing
the evidence adduced, the trial court rendered a decision on November 29, 1990 dismissing the complaint against
herein petitioner without pronouncement as to cost. The trial court found that the vessel, MT Maysum, was
seaworthy to undertake the voyage as determined by the Philippine Coast Guard per Survey Certificate Report No.
M5-016-MH upon inspection during its annual dry-docking and that the incident was caused by unexpected
inclement weather condition or force majeure, thus exempting the common carrier (herein petitioner) from liability for
the loss of its cargo.3

The decision of the trial court, however, was reversed, on appeal, by the Court of Appeals. The appellate court gave
credence to the weather report issued by the Philippine Atmospheric, Geophysical and Astronomical Services
Administration (PAGASA for brevity) which showed that from 2:00 o’clock to 8:oo o’clock in the morning on August
16, 1986, the wind speed remained at 10 to 20 knots per hour while the waves measured from .7 to two (2) meters
in height only in the vicinity of the Panay Gulf where the subject vessel sank, in contrast to herein petitioner’s
allegation that the waves were twenty (20) feet high. In the absence of any explanation as to what may have caused
the sinking of the vessel coupled with the finding that the same was improperly manned, the appellate court ruled
that the petitioner is liable on its obligation as common carrier4 to herein private respondent insurance company as
subrogee of Caltex. The subsequent motion for reconsideration of herein petitioner was denied by the appellate
court.

Petitioner raised the following assignments of error in support of the instant petition,5 to wit:

THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE REGIONAL TRIAL COURT.

II

THE COURT OF APPEALS ERRED AND WAS NOT JUSTIFIED IN REBUTTING THE LEGAL
PRESUMPTION THAT THE VESSEL MT "MAYSUN" WAS SEAWORTHY.

III

THE COURT OF APPEALS ERRED IN NOT APPLYING THE DOCTRINE OF THE SUPREME COURT IN
THE CASE OF HOME INSURANCE CORPORATION V. COURT OF APPEALS.

Petitioner Delsan Transport Lines, Inc. invokes the provision of Section 113 of the Insurance Code of the
Philippines, which states that in every marine insurance upon a ship or freight, or freightage, or upon any thin which
is the subject of marine insurance there is an implied warranty by the shipper that the ship is seaworthy.
Consequently, the insurer will not be liable to the assured for any loss under the policy in case the vessel would later
on be found as not seaworthy at the inception of the insurance. It theorized that when private respondent paid
Caltex the value of its lost cargo, the act of the private respondent is equivalent to a tacit recognition that the ill-fated
vessel was seaworthy; otherwise, private respondent was not legally liable to Caltex due to the latter’s breach of
implied warranty under the marine insurance policy that the vessel was seaworthy.

The petitioner also alleges that the Court of Appeals erred in ruling that MT Maysun was not seaworthy on the
ground that the marine officer who served as the chief mate of the vessel, Francisco Berina, was allegedly not
qualified. Under Section 116 of the Insurance Code of the Philippines, the implied warranty of seaworthiness of the
vessel, which the private respondent admitted as having been fulfilled by its payment of the insurance proceeds to
Caltex of its lost cargo, extends to the vessel’s complement. Besides, petitioner avers that although Berina had
merely a 2nd officer’s license, he was qualified to act as the vessel’s chief officer under Chapter IV(403), Category
III(a)(3)(ii)(aa) of the Philippine Merchant Marine Rules and Regulations. In fact, all the crew and officers of MT
Maysun were exonerated in the administrative investigation conducted by the Board of Marine Inquiry after the
subject accident.6

In any event, petitioner further avers that private respondent failed, for unknown reason, to present in evidence
during the trial of the instant case the subject marine cargo insurance policy it entered into with Caltex. By virtue of
the doctrine laid down in the case of Home Insurance Corporation vs. CA,7 the failure of the private respondent to
present the insurance policy in evidence is allegedly fatal to its claim inasmuch as there is no way to determine the
rights of the parties thereto.

Hence, the legal issues posed before the Court are:

Whether or not the payment made by the private respondent to Caltex for the insured value of the lost cargo
amounted to an admission that the vessel was seaworthy, thus precluding any action for recovery against
the petitioner.

II

Whether or not the non-presentation of the marine insurance policy bars the complaint for recovery of sum
of money for lack of cause of action.
We rule in the negative on both issues.

The payment made by the private respondent for the insured value of the lost cargo operates as waiver of its
(private respondent) right to enforce the term of the implied warranty against Caltex under the marine insurance
policy. However, the same cannot be validly interpreted as an automatic admission of the vessel’s seaworthiness by
the private respondent as to foreclose recourse against the petitioner for any liability under its contractual obligation
as a common carrier. The fact of payment grants the private respondent subrogatory right which enables it to
exercise legal remedies that would otherwise be available to Caltex as owner of the lost cargo against the petitioner
common carrier.8 Article 2207 of the New civil Code provides that:

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. If the amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

The right of subrogation has its roots in equity. It is designed to promote and to accomplish justice and is the mode
which equity adopts to compel the ultimate payment of a debt by one who in justice and good conscience ought to
pay.9 It is not dependent upon, nor does it grow out of, any privity of contract or upon written assignment of claim. It
accrues simply upon payment by the insurance company of the insurance claim.10 Consequently, the payment made
by the private respondent (insurer) to Caltex (assured) operates as an equitable assignment to the former of all the
remedies which the latter may have against the petitioner.

From the nature of their business and for reasons of public policy, common carriers are bound to observe
extraordinary diligence in the vigilance over the goods and for the safety of passengers transported by them,
according to all the circumstance of each case.11 In the event of loss, destruction or deterioration of the insured
goods, common carriers shall be responsible unless the same is brought about, among others, by flood, storm,
earthquake, lightning or other natural disaster or calamity.12 In all other cases, if the goods are lost, destroyed or
deteriorated, common carriers are presumed to have been at fault or to have acted negligently, unless they prove
that they observed extraordinary diligence.13

In order to escape liability for the loss of its cargo of industrial fuel oil belonging to Caltex, petitioner attributes the
sinking of MT Maysun to fortuitous even or force majeure. From the testimonies of Jaime Jarabe and Francisco
Berina, captain and chief mate, respectively of the ill-fated vessel, it appears that a sudden and unexpected change
of weather condition occurred in the early morning of August 16, 1986; that at around 3:15 o’clock in the morning a
squall ("unos") carrying strong winds with an approximate velocity of 30 knots per hour and big waves averaging
eighteen (18) to twenty (20) feet high, repeatedly buffeted MT Maysun causing it to tilt, take in water and eventually
sink with its cargo.14 This tale of strong winds and big waves by the said officers of the petitioner however, was
effectively rebutted and belied by the weather report15 from the Philippine Atmospheric, Geophysical and
Astronomical Services Administration (PAGASA), the independent government agency charged with monitoring
weather and sea conditions, showing that from 2:00 o’clock to 8:00 o’clock in the morning on August 16, 1986, the
wind speed remained at ten (10) to twenty (20) knots per hour while the height of the waves ranged from .7 to two
(2) meters in the vicinity of Cuyo East Pass and Panay Gulf where the subject vessel sank. Thus, as the appellate
court correctly ruled, petitioner’s vessel, MT Maysun, sank with its entire cargo for the reason that it was not
seaworthy. There was no squall or bad weather or extremely poor sea condition in the vicinity when the said vessel
sank.

The appellate court also correctly opined that the petitioner’s witnesses, Jaime Jarabe and Francisco Berina, ship
captain and chief mate, respectively, of the said vessel, could not be expected to testify against the interest of their
employer, the herein petitioner common carrier.

Neither may petitioner escape liability by presenting in evidence certificates16 that tend to show that at the time of
dry-docking and inspection by the Philippine Coast Guard, the vessel MT Maysun, was fit for voyage. These pieces
of evidence do not necessarily take into account the actual condition of the vessel at the time of the commencement
of the voyage. As correctly observed by the Court of appeals:
 At the time of dry-docking and inspection, the ship may have appeared fit. The certificates issued, however,
do not negate the presumption of unseaworthiness triggered by an unexplained sinking. Of certificates
issued in this regard, authorities are likewise clear as to their probative value, (thus):

Seaworthiness relates to a vessel’s actual condition. Neither the granting of classification or the
issuance of certificates established seaworthiness. (2-A Benedict on Admiralty, 7-3, Sec. 62).

And also:

Authorities are clear that diligence in securing certificates of seaworthiness does not satisfy the
vessel owner’s obligation. Also securing the approval of the shipper of the cargo, or his surveyor, of
the condition of the vessel or her stowage does not establish due diligence if the vessel was in fact
unseaworthy, for the cargo owner has no obligation in relation to seaworthiness. (Ibid.)17

Additionally, the exoneration of MT Maysun’s officers and crew by the Board of Marine Inquiry merely concerns their
respective administrative liabilities. It does not in any way operate to absolve the petitioner common carrier from its
civil liabilities. It does not in any way operate to absolve the petitioner common carrier from its civil liability arising
from its failure to observe extraordinary diligence in the vigilance over the goods it was transporting and for the
negligent acts or omissions of its employees, the determination of which properly belongs to the courts.18 In the case
at bar, petitioner is liable for the insured value of the lost cargo of industrial fuel oil belonging to Caltex for its failure
to rebut the presumption of fault or negligence as common carrier19 occasioned by the unexplained sinking of its
vessel, MT Maysun, while in transit.

Anent the second issue, it is our view and so hold that the presentation in evidence of the marine insurance policy is
not indispensable in this case before the insurer may recover from the common carrier the insured value of the lost
cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is sufficient to establish not only the
relationship of herein private respondent as insurer and Caltex, as the assured shipper of the lost cargo of industrial
fuel oil, but also the amount paid to settle the insurance claim. The right of subrogation accrues simply upon
payment by the insurance company of the insurance claim.20

The presentation of the insurance policy was necessary in the case of Home Insurance Corporation v. CA21 (a case
cited by petitioner) because the shipment therein (hydraulic engines) passed through several stages with different
parties involved in each stage. First, from the shipper to the port of departure; second, from the port of departure to
the M/S Oriental Statesman; third, from the M/S Oriental Statesman to the M/S Pacific Conveyor; fourth, from the
M/S Pacific Conveyor to the port or arrival; fifth, from the port of arrival to the arrastre operator; sixth, from the
arrastre operator to the hauler, Mabuhay Brokerage Co., Inc. (private respondent therein); and lastly, from the
hauler to the consignee. We emphasized in that case that in the absence of proof of stipulations to the contrary, the
hauler can be liable only for any damage that occurred from the time it received the cargo until it finally delivered it
to the consignee. Ordinarily, it cannot be held responsible for the handling of the cargo before it actually received it.
The insurance contract, which was not presented in evidence in that case would have indicated the scope of the
insurer’s liability, if any, since no evidence was adduced indicating at what stage in the handling process the
damage to the cargo was sustained.

Hence, our ruling on the presentation of the insurance policy in the said case of Home Insurance Corporation is not
applicable to the case at bar. In contrast, there is no doubt that the cargo of industrial fuel oil belonging to Caltex, in
the case at bar, was lost while on board petitioner’s vessel, MT Maysun, which sank while in transit in the vicinity of
Panay Gulf and Cuyo East Pass in the early morning of August 16, 1986.

WHEREFORE, the instant petition is DENIED. The Decision dated June 17, 1996 of the Court of Appeals in CA-
G.R. CV No. 39836 is AFFIRMED. Costs against the petitioner.

SO ORDERED
G.R. No. 138060             September 1, 2004

WILLIAM TIU, doing business under the name and style of "D’ Rough Riders," and VIRGILIO TE LAS
PIÑAS petitioners,
vs.
PEDRO A. ARRIESGADO, BENJAMIN CONDOR, SERGIO PEDRANO and PHILIPPINE PHOENIX SURETY
AND INSURANCE, INC., respondents.

DECISION

CALLEJO, SR., J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court from the Decision1 of the Court of
Appeals in CA-G.R. CV No. 54354 affirming with modification the Decision2 of the Regional Trial Court, 7th Judicial
Region, Cebu City, Branch 20, in Civil Case No. CEB-5963 for breach of contract of carriage, damages and
attorney’s fees, and the Resolution dated February 26, 1999 denying the motion for reconsideration thereof.

The following facts are undisputed:

At about 10:00 p.m. of March 15, 1987, the cargo truck marked "Condor Hollow Blocks and General
Merchandise" bearing plate number GBP-675 was loaded with firewood in Bogo, Cebu and left for Cebu
City. Upon reaching Sitio Aggies, Poblacion, Compostela, Cebu, just as the truck passed over a bridge, one
of its rear tires exploded. The driver, Sergio Pedrano, then parked along the right side of the national
highway and removed the damaged tire to have it vulcanized at a nearby shop, about 700 meters
away.3 Pedrano left his helper, Jose Mitante, Jr. to keep watch over the stalled vehicle, and instructed the
latter to place a spare tire six fathoms away4 behind the stalled truck to serve as a warning for oncoming
vehicles. The truck’s tail lights were also left on. It was about 12:00 a.m., March 16, 1987.

At about 4:45 a.m., D’ Rough Riders passenger bus with plate number PBP-724 driven by Virgilio Te Laspiñas was
cruising along the national highway of Sitio Aggies, Poblacion, Compostela, Cebu. The passenger bus was also
bound for Cebu City, and had come from Maya, Daanbantayan, Cebu. Among its passengers were the Spouses
Pedro A. Arriesgado and Felisa Pepito Arriesgado, who were seated at the right side of the bus, about three (3) or
four (4) places from the front seat.

As the bus was approaching the bridge, Laspiñas saw the stalled truck, which was then about 25 meters away.5 He
applied the breaks and tried to swerve to the left to avoid hitting the truck. But it was too late; the bus rammed into
the truck’s left rear. The impact damaged the right side of the bus and left several passengers injured. Pedro
Arriesgado lost consciousness and suffered a fracture in his right colles.6 His wife, Felisa, was brought to the Danao
City Hospital. She was later transferred to the Southern Island Medical Center where she died shortly thereafter.7

Respondent Pedro A. Arriesgado then filed a complaint for breach of contract of carriage, damages and attorney’s
fees before the Regional Trial Court of Cebu City, Branch 20, against the petitioners, D’ Rough Riders bus operator
William Tiu and his driver, Virgilio Te Laspiñas on May 27, 1987. The respondent alleged that the passenger bus in
question was cruising at a fast and high speed along the national road, and that petitioner Laspiñas did not take
precautionary measures to avoid the accident.8 Thus:
 6. That the accident resulted to the death of the plaintiff’s wife, Felisa Pepito Arriesgado, as evidenced by a
Certificate of Death, a xerox copy of which is hereto attached as integral part hereof and marked as ANNEX
– "A", and physical injuries to several of its passengers, including plaintiff himself who suffered a "COLLES
FRACTURE RIGHT," per Medical Certificate, a xerox copy of which is hereto attached as integral part
hereof and marked as ANNEX – "B" hereof.

7. That due to the reckless and imprudent driving by defendant Virgilio Te Laspiñas of the said Rough
Riders passenger bus, plaintiff and his wife, Felisa Pepito Arriesgado, failed to safely reach their destination
which was Cebu City, the proximate cause of which was defendant-driver’s failure to observe utmost
diligence required of a very cautious person under all circumstances.

8. That defendant William Tiu, being the owner and operator of the said Rough Riders passenger bus which
figured in the said accident, wherein plaintiff and his wife were riding at the time of the accident, is therefore
directly liable for the breach of contract of carriage for his failure to transport plaintiff and his wife safely to
their place of destination which was Cebu City, and which failure in his obligation to transport safely his
passengers was due to and in consequence of his failure to exercise the diligence of a good father of the
family in the selection and supervision of his employees, particularly defendant-driver Virgilio Te Laspiñas.9

The respondent prayed that judgment be rendered in his favor and that the petitioners be condemned to pay the
following damages:

1). To pay to plaintiff, jointly and severally, the amount of ₱30,000.00 for the death and untimely demise of
plaintiff’s wife, Felisa Pepito Arriesgado;

2). To pay to plaintiff, jointly and severally, the amount of ₱38,441.50, representing actual expenses incurred
by the plaintiff in connection with the death/burial of plaintiff’s wife;

3). To pay to plaintiff, jointly and severally, the amount of ₱1,113.80, representing medical/hospitalization
expenses incurred by plaintiff for the injuries sustained by him;

4). To pay to plaintiff, jointly and severally, the amount of ₱50,000.00 for moral damages;

5). To pay to plaintiff, jointly and severally, the amount of ₱50,000.00 by way of exemplary damages;

6). To pay to plaintiff, jointly and severally, the amount of ₱20,000.00 for attorney’s fees;

7). To pay to plaintiff, jointly and severally, the amount of ₱5,000.00 for litigation expenses.

PLAINTIFF FURTHER PRAYS FOR SUCH OTHER RELIEFS AND REMEDIES IN LAW AND EQUITY.10

The petitioners, for their part, filed a Third-Party Complaint11 on August 21, 1987 against the following: respondent
Philippine Phoenix Surety and Insurance, Inc. (PPSII), petitioner Tiu’s insurer; respondent Benjamin Condor, the
registered owner of the cargo truck; and respondent Sergio Pedrano, the driver of the truck. They alleged that
petitioner Laspiñas was negotiating the uphill climb along the national highway of Sitio Aggies, Poblacion,
Compostela, in a moderate and normal speed. It was further alleged that the truck was parked in a slanted manner,
its rear portion almost in the middle of the highway, and that no early warning device was displayed. Petitioner
Laspiñas promptly applied the brakes and swerved to the left to avoid hitting the truck head-on, but despite his
efforts to avoid damage to property and physical injuries on the passengers, the right side portion of the bus hit the
cargo truck’s left rear. The petitioners further alleged, thus:

5. That the cargo truck mentioned in the aforequoted paragraph is owned and registered in the name of the
third-party defendant Benjamin Condor and was left unattended by its driver Sergio Pedrano, one of the
third-party defendants, at the time of the incident;

6. That third-party defendant Sergio Pedrano, as driver of the cargo truck with marked (sic) "Condor Hollow
Blocks & General Merchandise," with Plate No. GBP-675 which was recklessly and imprudently parked
along the national highway of Compostela, Cebu during the vehicular accident in question, and third-party
 defendant Benjamin Condor, as the registered owner of the cargo truck who failed to exercise due diligence
in the selection and supervision of third-party defendant Sergio Pedrano, are jointly and severally liable to
the third-party plaintiffs for whatever liability that may be adjudged against said third-party plaintiffs or are
directly liable of (sic) the alleged death of plaintiff’s wife;

7. That in addition to all that are stated above and in the answer which are intended to show reckless
imprudence on the part of the third-party defendants, the third-party plaintiffs hereby declare that during the
vehicular accident in question, third-party defendant was clearly violating Section 34, par. (g) of the Land
Transportation and Traffic Code…

10. That the aforesaid passenger bus, owned and operated by third-party plaintiff William Tiu, is covered by
a common carrier liability insurance with Certificate of Cover No. 054940 issued by Philippine Phoenix
Surety and Insurance, Inc., Cebu City Branch, in favor of third-party plaintiff William Tiu which covers the
period from July 22, 1986 to July 22, 1987 and that the said insurance coverage was valid, binding and
subsisting during the time of the aforementioned incident (Annex "A" as part hereof);

11. That after the aforesaid alleged incident, third-party plaintiff notified third-party defendant Philippine
Phoenix Surety and Insurance, Inc., of the alleged incident hereto mentioned, but to no avail;

12. That granting, et arguendo et arguendi, if herein third-party plaintiffs will be adversely adjudged, they
stand to pay damages sought by the plaintiff and therefore could also look up to the Philippine Phoenix
Surety and Insurance, Inc., for contribution, indemnification and/or reimbursement of any liability or
obligation that they might [be] adjudged per insurance coverage duly entered into by and between third-party
plaintiff William Tiu and third-party defendant Philippine Phoenix Surety and Insurance, Inc.;…12

The respondent PPSII, for its part, admitted that it had an existing contract with petitioner Tiu, but averred that it had
already attended to and settled the claims of those who were injured during the incident.13 It could not accede to the
claim of respondent Arriesgado, as such claim was way beyond the scheduled indemnity as contained in the
contract of insurance.14

After the parties presented their respective evidence, the trial court ruled in favor of respondent Arriesgado. The
dispositive portion of the decision reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff as against
defendant William Tiu ordering the latter to pay the plaintiff the following amounts:

1 - The sum of FIFTY THOUSAND PESOS (₱50,000.00) as moral damages;

2 - The sum of FIFTY THOUSAND PESOS (₱50,000.00) as exemplary damages;

3 - The sum of THIRTY-EIGHT THOUSAND FOUR HUNDRED FORTY-ONE PESOS (₱38,441.00)

as actual damages;

4 - The sum of TWENTY THOUSAND PESOS (₱20,000.00) as attorney’s fees;

5 - The sum of FIVE THOUSAND PESOS (₱5,000.00) as costs of suit;

SO ORDERED.15

According to the trial court, there was no dispute that petitioner William Tiu was engaged in business as a common
carrier, in view of his admission that D’ Rough Rider passenger bus which figured in the accident was owned by
him; that he had been engaged in the transportation business for 25 years with a sole proprietorship; and that he
owned 34 buses. The trial court ruled that if petitioner Laspiñas had not been driving at a fast pace, he could have
easily swerved to the left to avoid hitting the truck, thus, averting the unfortunate incident. It then concluded that
petitioner Laspiñas was negligent.
The trial court also ruled that the absence of an early warning device near the place where the truck was parked
was not sufficient to impute negligence on the part of respondent Pedrano, since the tail lights of the truck were fully
on, and the vicinity was well lighted by street lamps.16 It also found that the testimony of petitioner Tiu, that he based
the selection of his driver Laspiñas on efficiency and in-service training, and that the latter had been so far an
efficient and good driver for the past six years of his employment, was insufficient to prove that he observed the
diligence of a good father of a family in the selection and supervision of his employees.

After the petitioner’s motion for reconsideration of the said decision was denied, the petitioners elevated the case to
the Court of Appeals on the following issues:

I WHETHER THIRD PARTY DEFENDANT SERGIO PEDRANO WAS RECKLESS AND IMPRUDENT
WHEN HE PARKED THE CARGO TRUCK IN AN OBLIQUE MANNER;

II WHETHER THE THIRD PARTY DEFENDANTS ARE JOINTLY AND SEVERALLY LIABLE DIRECTLY TO
PLAINTIFF-APPELLEE OR TO DEFENDANTS-APPELLANTS FOR WHATEVER LIABILITY THAT MAY BE
ADJUDGED TO THE SAID DEFENDANTS-APPELLANTS;

III WHETHER DEFENDANT-APPELLANT VIRGILIO TE LASPIÑAS WAS GUILTY OF GROSS

NEGLIGENCE;

IV WHETHER DEFENDANT-APPELLANT WILLIAM TIU HAD EXERCISED THE DUE DILIGENCE OF A

GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF HIS DRIVERS;

V GRANTING FOR THE SAKE OF ARGUMENT THAT DEFENDANT-APPELLANT WILLIAM TIU IS

LIABLE TO PLAINTIFF-APPELLEE, WHETHER THERE IS LEGAL AND FACTUAL BASIS IN AWARDING
EXCESSIVE MORAL DAMAGES, EX[E]MPLARY DAMAGES, ATTORNEY’S FEES AND LITIGATION
EXPENSES TO PLAINTIFF-APPELLEE;

VI WHETHER THIRD PARTY DEFENDANT PHILIPPINE PHOENIX SURETY AND INSURANCE, INC. IS
LIABLE TO DEFENDANT- APPELLANT WILLIAM TIU.17

The appellate court rendered judgment affirming the trial court’s decision with the modification that the awards for
moral and exemplary damages were reduced to ₱25,000. The dispositive portion reads:

WHEREFORE, the appealed Decision dated November 6, 1995 is hereby MODIFIED such that the awards
for moral and exemplary damages are each reduced to ₱25,000.00 or a total of ₱50,000.00 for both. The
judgment is AFFIRMED in all other respects.

SO ORDERED.18

According to the appellate court, the action of respondent Arriesgado was based not on quasi-delict but on breach
of contract of carriage. As a common carrier, it was incumbent upon petitioner Tiu to prove that extraordinary
diligence was observed in ensuring the safety of passengers during transportation. Since the latter failed to do so,
he should be held liable for respondent Arriesgado’s claim. The CA also ruled that no evidence was presented
against the respondent PPSII, and as such, it could not be held liable for respondent Arriesgado’s claim, nor for
contribution, indemnification and/or reimbursement in case the petitioners were adjudged liable.

The petitioners now come to this Court and ascribe the following errors committed by the appellate court:

I. THE HONORABLE COURT OF APPEALS ERRED IN NOT DECLARING RESPONDENTS BENJAMIN

CONDOR AND SERGIO PEDRANO GUILTY OF NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT
PEDRO A. ARRIESGADO OR TO PETITIONERS FOR WHATEVER LIABILITY THAT MAY BE
ADJUDGED AGAINST THEM.

II. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONERS GUILTY OF

NEGLIGENCE AND HENCE, LIABLE TO RESPONDENT PEDRO A. ARRIESGADO.
 III. THE HONORABLE COURT OF APPEALS ERRED IN FINDING PETITIONER WILLIAM TIU LIABLE
FOR EXEMPLARY DAMAGES, ATTORNEY’S FEES AND LITIGATION EXPENSES.

IV. THE HONORABLE COURT OF APPEALS ERRED IN NOT FINDING RESPONDENT PHILIPPINE
PHOENIX SURETY AND INSURANCE, INC. LIABLE TO RESPONDENT PEDRO A. ARRIESGADO OR TO
PETITIONER WILLIAM TIU.19

According to the petitioners, the appellate court erred in failing to appreciate the absence of an early warning device
and/or built-in reflectors at the front and back of the cargo truck, in clear violation of Section 34, par. (g) of the Land
Transportation and Traffic Code. They aver that such violation is only a proof of respondent Pedrano’s negligence,
as provided under Article 2185 of the New Civil Code. They also question the appellate court’s failure to take into
account that the truck was parked in an oblique manner, its rear portion almost at the center of the road. As such,
the proximate cause of the incident was the gross recklessness and imprudence of respondent Pedrano, creating
the presumption of negligence on the part of respondent Condor in supervising his employees, which presumption
was not rebutted. The petitioners then contend that respondents Condor and Pedrano should be held jointly and
severally liable to respondent Arriesgado for the payment of the latter’s claim.

The petitioners, likewise, aver that expert evidence should have been presented to prove that petitioner Laspiñas
was driving at a very fast speed, and that the CA could not reach such conclusion by merely considering the
damages on the cargo truck. It was also pointed out that petitioner Tiu presented evidence that he had exercised
the diligence of a good father of a family in the selection and supervision of his drivers.

The petitioners further allege that there is no legal and factual basis to require petitioner Tiu to pay exemplary
damages as no evidence was presented to show that the latter acted in a fraudulent, reckless and oppressive
manner, or that he had an active participation in the negligent act of petitioner Laspiñas.

Finally, the petitioners contend that respondent PPSII admitted in its answer that while it had attended to and settled
the claims of the other injured passengers, respondent Arriesgado’s claim remained unsettled as it was beyond the
scheduled indemnity under the insurance contract. The petitioners argue that said respondent PPSII should have
settled the said claim in accordance with the scheduled indemnity instead of just denying the same.

On the other hand, respondent Arriesgado argues that two of the issues raised by the petitioners involved questions
of fact, not reviewable by the Supreme Court: the finding of negligence on the part of the petitioners and their liability
to him; and the award of exemplary damages, attorney’s fees and litigation expenses in his favor. Invoking the
principle of equity and justice, respondent Arriesgado pointed out that if there was an error to be reviewed in the CA
decision, it should be geared towards the restoration of the moral and exemplary damages to ₱50,000 each, or a
total of ₱100,000 which was reduced by the Court of Appeals to ₱25,000 each, or a total of only ₱50,000.

Respondent Arriesgado also alleged that respondents Condor and Pedrano, and respondent Phoenix Surety, are
parties with whom he had no contract of carriage, and had no cause of action against. It was pointed out that only
the petitioners needed to be sued, as driver and operator of the ill-fated bus, on account of their failure to bring the
Arriesgado Spouses to their place of destination as agreed upon in the contract of carriage, using the utmost
diligence of very cautious persons with due regard for all circumstances.

Respondents Condor and Pedrano point out that, as correctly ruled by the Court of Appeals, the proximate cause of
the unfortunate incident was the fast speed at which petitioner Laspiñas was driving the bus owned by petitioner
Tiu. According to the respondents, the allegation that the truck was not equipped with an early warning device could
not in any way have prevented the incident from happening. It was also pointed out that respondent Condor had
always exercised the due diligence required in the selection and supervision of his employees, and that he was not
a party to the contract of carriage between the petitioners and respondent Arriesgado.

Respondent PPSII, for its part, alleges that contrary to the allegation of petitioner Tiu, it settled all the claims of
those injured in accordance with the insurance contract. It further avers that it did not deny respondent Arriesgado’s
claim, and emphasizes that its liability should be within the scheduled limits of indemnity under the said contract.
The respondent concludes that while it is true that insurance contracts are contracts of indemnity, the measure of
the insurer’s liability is determined by the insured’s compliance with the terms thereof.
 The Court’s Ruling

At the outset, it must be stressed that this Court is not a trier of facts.20 Factual findings of the Court of Appeals are
final and may not be reviewed on appeal by this Court, except when the lower court and the CA arrived at diverse
factual findings.21 The petitioners in this case assail the finding of both the trial and the appellate courts that
petitioner Laspiñas was driving at a very fast speed before the bus owned by petitioner Tiu collided with respondent
Condor’s stalled truck. This is clearly one of fact, not reviewable by the Court in a petition for review under Rule 45.22

On this ground alone, the petition is destined to fail.

However, considering that novel questions of law are likewise involved, the Court resolves to examine and rule on
the merits of the case.

Petitioner Laspiñas
Was negligent in driving
The Ill-fated bus

In his testimony before the trial court, petitioner Laspiñas claimed that he was traversing the two-lane road at
Compostela, Cebu at a speed of only forty (40) to fifty (50) kilometers per hour before the incident occurred.23 He
also admitted that he saw the truck which was parked in an "oblique position" at about 25 meters before
impact,24 and tried to avoid hitting it by swerving to the left. However, even in the absence of expert evidence, the
damage sustained by the truck25 itself supports the finding of both the trial court and the appellate court, that the D’
Rough Rider bus driven by petitioner Laspiñas was traveling at a fast pace. Since he saw the stalled truck at a
distance of 25 meters, petitioner Laspiñas had more than enough time to swerve to his left to avoid hitting it; that is,
if the speed of the bus was only 40 to 50 kilometers per hour as he claimed. As found by the Court of Appeals, it is
easier to believe that petitioner Laspiñas was driving at a very fast speed, since at 4:45 a.m., the hour of the
accident, there were no oncoming vehicles at the opposite direction. Petitioner Laspiñas could have swerved to the
left lane with proper clearance, and, thus, could have avoided the truck.26 Instinct, at the very least, would have
prompted him to apply the breaks to avert the impending disaster which he must have foreseen when he caught
sight of the stalled truck. As we had occasion to reiterate:

A man must use common sense, and exercise due reflection in all his acts; it is his duty to be cautious,
careful and prudent, if not from instinct, then through fear of recurring punishment. He is responsible for
such results as anyone might foresee and for acts which no one would have performed except through
culpable abandon. Otherwise, his own person, rights and property, and those of his fellow beings, would
ever be exposed to all manner of danger and injury.27

We agree with the following findings of the trial court, which were affirmed by the CA on appeal:

A close study and evaluation of the testimonies and the documentary proofs submitted by the parties which
have direct bearing on the issue of negligence, this Court as shown by preponderance of evidence that
defendant Virgilio Te Laspiñas failed to observe extraordinary diligence as a driver of the common carrier in
this case. It is quite hard to accept his version of the incident that he did not see at a reasonable distance
ahead the cargo truck that was parked when the Rough Rider [Bus] just came out of the bridge which is on
an (sic) [more] elevated position than the place where the cargo truck was parked. With its headlights fully
on, defendant driver of the Rough Rider was in a vantage position to see the cargo truck ahead which was
parked and he could just easily have avoided hitting and bumping the same by maneuvering to the left
without hitting the said cargo truck. Besides, it is (sic) shown that there was still much room or space for the
Rough Rider to pass at the left lane of the said national highway even if the cargo truck had occupied the
entire right lane thereof. It is not true that if the Rough Rider would proceed to pass through the left lane it
would fall into a canal considering that there was much space for it to pass without hitting and bumping the
cargo truck at the left lane of said national highway. The records, further, showed that there was no
incoming vehicle at the opposite lane of the national highway which would have prevented the Rough Rider
from not swerving to its left in order to avoid hitting and bumping the parked cargo truck. But the evidence
showed that the Rough Rider instead of swerving to the still spacious left lane of the national highway
plowed directly into the parked cargo truck hitting the latter at its rear portion; and thus, the (sic) causing
damages not only to herein plaintiff but to the cargo truck as well.28
Indeed, petitioner Laspiñas’ negligence in driving the bus is apparent in the records. By his own admission, he had
just passed a bridge and was traversing the highway of Compostela, Cebu at a speed of 40 to 50 kilometers per
hour before the collision occurred. The maximum speed allowed by law on a bridge is only 30 kilometers per
hour.29 And, as correctly pointed out by the trial court, petitioner Laspiñas also violated Section 35 of the Land
Transportation and Traffic Code, Republic Act No. 4136, as amended: 1avvphil.net

Sec. 35. Restriction as to speed. – (a) Any person driving a motor vehicle on a highway shall drive the same
at a careful and prudent speed, not greater nor less than is reasonable and proper, having due regard for
the traffic, the width of the highway, and or any other condition then and there existing; and no person shall
drive any motor vehicle upon a highway at such speed as to endanger the life, limb and property of any
person, nor at a speed greater than will permit him to bring the vehicle to a stop within the assured clear
distance ahead.30

Under Article 2185 of the Civil Code, a person driving a vehicle is presumed negligent if at the time of the mishap,
he was violating any traffic regulation.31

Petitioner Tiu failed to

Overcome the presumption
Of negligence against him as
One engaged in the business
Of common carriage

The rules which common carriers should observe as to the safety of their passengers are set forth in the Civil Code,
Articles 1733,32 175533 and 1756.34 In this case, respondent Arriesgado and his deceased wife contracted with
petitioner Tiu, as owner and operator of D’ Rough Riders bus service, for transportation from Maya, Daanbantayan,
Cebu, to Cebu City for the price of ₱18.00.35 It is undisputed that the respondent and his wife were not safely
transported to the destination agreed upon. In actions for breach of contract, only the existence of such contract,
and the fact that the obligor, in this case the common carrier, failed to transport his passenger safely to his
destination are the matters that need to be proved.36 This is because under the said contract of carriage, the
petitioners assumed the express obligation to transport the respondent and his wife to their destination safely and to
observe extraordinary diligence with due regard for all circumstances.37 Any injury suffered by the passengers in the
course thereof is immediately attributable to the negligence of the carrier.38 Upon the happening of the accident, the
presumption of negligence at once arises, and it becomes the duty of a common carrier to prove that he observed
extraordinary diligence in the care of his passengers.39 It must be stressed that in requiring the highest possible
degree of diligence from common carriers and in creating a presumption of negligence against them, the law
compels them to curb the recklessness of their drivers.40

While evidence may be submitted to overcome such presumption of negligence, it must be shown that the carrier
observed the required extraordinary diligence, which means that the carrier must show the utmost diligence of very
cautious persons as far as human care and foresight can provide, or that the accident was caused by fortuitous
event.41 As correctly found by the trial court, petitioner Tiu failed to conclusively rebut such presumption. The
negligence of petitioner Laspiñas as driver of the passenger bus is, thus, binding against petitioner Tiu, as the
owner of the passenger bus engaged as a common carrier.42

The Doctrine of
Last Clear Chance
Is Inapplicable in the
Case at Bar

Contrary to the petitioner’s contention, the principle of last clear chance is inapplicable in the instant case, as it only
applies in a suit between the owners and drivers of two colliding vehicles. It does not arise where a passenger
demands responsibility from the carrier to enforce its contractual obligations, for it would be inequitable to exempt
the negligent driver and its owner on the ground that the other driver was likewise guilty of negligence.43 The
common law notion of last clear chance permitted courts to grant recovery to a plaintiff who has also been negligent
provided that the defendant had the last clear chance to avoid the casualty and failed to do so. Accordingly, it is
difficult to see what role, if any, the common law of last clear chance doctrine has to play in a jurisdiction where the
common law concept of contributory negligence as an absolute bar to recovery by the plaintiff, has itself been
rejected, as it has been in Article 2179 of the Civil Code.44
Thus, petitioner Tiu cannot escape liability for the death of respondent Arriesgado’s wife due to the negligence of
petitioner Laspiñas, his employee, on this score.

Respondents Pedrano and

Condor were likewise
Negligent

In Phoenix Construction, Inc. v. Intermediate Appellate Court,45 where therein respondent Dionisio sustained injuries
when his vehicle rammed against a dump truck parked askew, the Court ruled that the improper parking of a dump
truck without any warning lights or reflector devices created an unreasonable risk for anyone driving within the
vicinity, and for having created such risk, the truck driver must be held responsible. In ruling against the petitioner
therein, the Court elucidated, thus:

… In our view, Dionisio’s negligence, although later in point of time than the truck driver’s negligence, and
therefore closer to the accident, was not an efficient intervening or independent cause. What the petitioners
describe as an "intervening cause" was no more than a foreseeable consequence of the risk created by the
negligent manner in which the truck driver had parked the dump truck. In other words, the petitioner truck
driver owed a duty to private respondent Dionisio and others similarly situated not to impose upon them the
very risk the truck driver had created. Dionisio’s negligence was not that of an independent and
overpowering nature as to cut, as it were, the chain of causation in fact between the improper parking of the
dump truck and the accident, nor to sever the juris vinculum of liability. …

We hold that private respondent Dionisio’s negligence was "only contributory," that the "immediate and
proximate cause" of the injury remained the truck driver’s "lack of due care."…46

In this case, both the trial and the appellate courts failed to consider that respondent Pedrano was also negligent in
leaving the truck parked askew without any warning lights or reflector devices to alert oncoming vehicles, and that
such failure created the presumption of negligence on the part of his employer, respondent Condor, in supervising
his employees properly and adequately. As we ruled in Poblete v. Fabros:47

It is such a firmly established principle, as to have virtually formed part of the law itself, that the negligence
of the employee gives rise to the presumption of negligence on the part of the employer. This is the
presumed negligence in the selection and supervision of employee. The theory of presumed negligence, in
contrast with the American doctrine of respondeat superior, where the negligence of the employee is
conclusively presumed to be the negligence of the employer, is clearly deducible from the last paragraph of
Article 2180 of the Civil Code which provides that the responsibility therein mentioned shall cease if the
employers prove that they observed all the diligence of a good father of a family to prevent damages. …48

The petitioners were correct in invoking respondent Pedrano’s failure to observe Article IV, Section 34(g) of the Rep.
Act No. 4136, which provides: 1avvphil.net

(g) Lights when parked or disabled. – Appropriate parking lights or flares visible one hundred meters away
shall be displayed at a corner of the vehicle whenever such vehicle is parked on highways or in places that
are not well-lighted or is placed in such manner as to endanger passing traffic.

The manner in which the truck was parked clearly endangered oncoming traffic on both sides, considering that the
tire blowout which stalled the truck in the first place occurred in the wee hours of the morning. The Court can only
now surmise that the unfortunate incident could have been averted had respondent Condor, the owner of the truck,
equipped the said vehicle with lights, flares, or, at the very least, an early warning device.49 Hence, we cannot
subscribe to respondents Condor and Pedrano’s claim that they should be absolved from liability because, as found
by the trial and appellate courts, the proximate cause of the collision was the fast speed at which petitioner Laspiñas
drove the bus. To accept this proposition would be to come too close to wiping out the fundamental principle of law
that a man must respond for the foreseeable consequences of his own negligent act or omission. Indeed, our law on
quasi-delicts seeks to reduce the risks and burdens of living in society and to allocate them among its members. To
accept this proposition would be to weaken the very bonds of society.50
The Liability of
Respondent PPSII
as Insurer

The trial court in this case did not rule on the liability of respondent PPSII, while the appellate court ruled that, as no
evidence was presented against it, the insurance company is not liable.

A perusal of the records will show that when the petitioners filed the Third-Party Complaint against respondent
PPSII, they failed to attach a copy of the terms of the insurance contract itself. Only Certificate of Cover No.
05494051 issued in favor of "Mr. William Tiu, Lahug, Cebu City" signed by Cosme H. Boniel was appended to the
third-party complaint. The date of issuance, July 22, 1986, the period of insurance, from July 22, 1986 to July 22,
1987, as well as the following items, were also indicated therein:

SCHEDULED VEHICLE

MODEL MAKE TYPE OF BODY COLOR BLT FILE NO.

Isuzu Forward Bus blue mixed

PLATE NO. SERIAL/CHASSIS NO. MOTOR NO. AUTHORIZED UNLADEN WEIGHT

PBP-724 SER450-1584124 677836 CAPACITY 6 Cyls. Kgs.
50

SECTION 1/11 *LIMITS OF LIABILITY PREMIUMS PAID

₱50,000.00 ₱540.0052
A. THIRD PARTY LIABILITY

B. PASSENGER LIABILITY Per Person Per Accident

₱12,000.00 ₱50,000

In its Answer53 to the Third-Party Complaint, the respondent PPSII admitted the existence of the contract of
insurance, in view of its failure to specifically deny the same as required under then Section 8(a), Rule 8 of the
Rules of Court,54 which reads:

Sec. 8. How to contest genuineness of such documents. When an action or defense is founded upon a
written instrument copied in or attached to the corresponding pleading as provided in the preceding section,
the genuineness and due execution of the instrument shall be deemed admitted unless the adverse party,
under oath, specifically denies them, and sets forth what he claims to be the facts; but the requirement of an
oath does not apply when the adverse party does not appear to be a party to the instrument or when
compliance with an order for inspection of the original instrument is refused.

In fact, respondent PPSII did not dispute the existence of such contract, and admitted that it was liable thereon. It
claimed, however, that it had attended to and settled the claims of those injured during the incident, and set up the
following as special affirmative defenses:

Third party defendant Philippine Phoenix Surety and Insurance, Inc. hereby reiterates and incorporates by
way of reference the preceding paragraphs and further states THAT:-

8. It has attended to the claims of Vincent Canales, Asuncion Batiancila and Neptali Palces who
sustained injuries during the incident in question. In fact, it settled financially their claims per
vouchers duly signed by them and they duly executed Affidavit[s] of Desistance to that effect, xerox
copies of which are hereto attached as Annexes 1, 2, 3, 4, 5, and 6 respectively;

9. With respect to the claim of plaintiff, herein answering third party defendant through its authorized
insurance adjuster attended to said claim. In fact, there were negotiations to that effect. Only that it
cannot accede to the demand of said claimant considering that the claim was way beyond the
scheduled indemnity as per contract entered into with third party plaintiff William Tiu and third party
defendant (Philippine Phoenix Surety and Insurance, Inc.). Third party Plaintiff William Tiu knew all
along the limitation as earlier stated, he being an old hand in the transportation business;55…
Considering the admissions made by respondent PPSII, the existence of the insurance contract and the salient
terms thereof cannot be dispatched. It must be noted that after filing its answer, respondent PPSII no longer
objected to the presentation of evidence by respondent Arriesgado and the insured petitioner Tiu. Even in its
Memorandum56 before the Court, respondent PPSII admitted the existence of the contract, but averred as follows:

Petitioner Tiu is insisting that PPSII is liable to him for contribution, indemnification and/or reimbursement.
This has no basis under the contract. Under the contract, PPSII will pay all sums necessary to discharge
liability of the insured subject to the limits of liability but not to exceed the limits of liability as so stated in the
contract. Also, it is stated in the contract that in the event of accident involving indemnity to more than one
person, the limits of liability shall not exceed the aggregate amount so specified by law to all persons to be
indemnified.57

As can be gleaned from the Certificate of Cover, such insurance contract was issued pursuant to the Compulsory
Motor Vehicle Liability Insurance Law. It was expressly provided therein that the limit of the insurer’s liability for each
person was ₱12,000, while the limit per accident was pegged at ₱50,000. An insurer in an indemnity contract for
third party liability is directly liable to the injured party up to the extent specified in the agreement but it cannot be
held solidarily liable beyond that amount.58 The respondent PPSII could not then just deny petitioner Tiu’s claim; it
should have paid ₱12,000 for the death of Felisa Arriesgado,59 and respondent Arriesgado’s hospitalization
expenses of ₱1,113.80, which the trial court found to have been duly supported by receipts. The total amount of the
claims, even when added to that of the other injured passengers which the respondent PPSII claimed to have
settled,60 would not exceed the ₱50,000 limit under the insurance agreement.

Indeed, the nature of Compulsory Motor Vehicle Liability Insurance is such that it is primarily intended to provide
compensation for the death or bodily injuries suffered by innocent third parties or passengers as a result of the
negligent operation and use of motor vehicles. The victims and/or their dependents are assured of immediate
financial assistance, regardless of the financial capacity of motor vehicle owners.61 As the Court, speaking through
Associate Justice Leonardo A. Quisumbing, explained in Government Service Insurance System v. Court of
Appeals:62

However, although the victim may proceed directly against the insurer for indemnity, the third party liability is
only up to the extent of the insurance policy and those required by law. While it is true that where the
insurance contract provides for indemnity against liability to third persons, and such persons can directly sue
the insurer, the direct liability of the insurer under indemnity contracts against third party liability does not
mean that the insurer can be held liable in solidum with the insured and/or the other parties found at fault.
For the liability of the insurer is based on contract; that of the insured carrier or vehicle owner is based on
tort. …

Obviously, the insurer could be held liable only up to the extent of what was provided for by the contract of
insurance, in accordance with the CMVLI law. At the time of the incident, the schedule of indemnities for
death and bodily injuries, professional fees and other charges payable under a CMVLI coverage was
provided for under the Insurance Memorandum Circular (IMC) No. 5-78 which was approved on November
10, 1978. As therein provided, the maximum indemnity for death was twelve thousand (₱12,000.00) pesos
per victim. The schedules for medical expenses were also provided by said IMC, specifically in paragraphs
(C) to (G).63

Damages to be
Awarded

The trial court correctly awarded moral damages in the amount of ₱50,000 in favor of respondent Arriesgado. The
award of exemplary damages by way of example or correction of the public good,64 is likewise in order. As the Court
ratiocinated in Kapalaran Bus Line v. Coronado:65

…While the immediate beneficiaries of the standard of extraordinary diligence are, of course, the
passengers and owners of cargo carried by a common carrier, they are not the only persons that the law
seeks to benefit. For if common carriers carefully observed the statutory standard of extraordinary diligence
in respect of their own passengers, they cannot help but simultaneously benefit pedestrians and the
passengers of other vehicles who are equally entitled to the safe and convenient use of our roads and
highways. The law seeks to stop and prevent the slaughter and maiming of people (whether passengers or
 not) on our highways and buses, the very size and power of which seem to inflame the minds of their
drivers. Article 2231 of the Civil Code explicitly authorizes the imposition of exemplary damages in cases of
quasi-delicts "if the defendant acted with gross negligence."…66

The respondent Pedro A. Arriesgado, as the surviving spouse and heir of Felisa Arriesgado, is entitled to indemnity
in the amount of ₱50,000.00.67

The petitioners, as well as the respondents Benjamin Condor and Sergio Pedrano are jointly and severally liable for
said amount, conformably with the following pronouncement of the Court in Fabre, Jr. vs. Court of Appeals:68

The same rule of liability was applied in situations where the negligence of the driver of the bus on which
plaintiff was riding concurred with the negligence of a third party who was the driver of another vehicle, thus
causing an accident. In Anuran v. Buño, Batangas Laguna Tayabas Bus Co. v. Intermediate Appellate
Court, and Metro Manila Transit Corporation v. Court of Appeals, the bus company, its driver, the operator of
the other vehicle and the driver of the vehicle were jointly and severally held liable to the injured passenger
or the latter’s heirs. The basis of this allocation of liability was explained in Viluan v. Court of Appeals, thus:

"Nor should it make difference that the liability of petitioner [bus owner] springs from contract while
that of respondents [owner and driver of other vehicle] arises from quasi-delict. As early as 1913, we
already ruled in Gutierrez vs. Gutierrez, 56 Phil. 177, that in case of injury to a passenger due to the
negligence of the driver of the bus on which he was riding and of the driver of another vehicle, the
drivers as well as the owners of the two vehicles are jointly and severally liable for damages. Some
members of the Court, though, are of the view that under the circumstances they are liable on quasi-
delict."69

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The Decision of the Court of Appeals
is AFFIRMED with MODIFICATIONS:

(1) Respondent Philippine Phoenix Surety and Insurance, Inc. and petitioner William Tiu are ORDERED to
pay, jointly and severally, respondent Pedro A. Arriesgado the total amount of ₱13,113.80;

(2) The petitioners and the respondents Benjamin Condor and Sergio Pedrano are ORDERED to pay, jointly
and severally, respondent Pedro A. Arriesgado ₱50,000.00 as indemnity; ₱26,441.50 as actual damages;
₱50,000.00 as moral damages; ₱50,000.00 as exemplary damages; and ₱20,000.00 as attorney’s fees.

SO ORDERED.