Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 156956

October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as

Insurance Commissioner,petitioner,
vs.
DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.:
The securities required by the Insurance Code to be deposited with the Insurance
Commissioner are intended to answer for the claims of all policy holders in the
event that the depositing insurance company becomes insolvent or otherwise
unable to satisfy their claims. The security deposit must be ratably distributed
among all the insured who are entitled to their respective shares; it cannot be
garnished or levied upon by a single claimant, to the detriment of the others.
The Case
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to
reverse the January 16, 2003 Order of the Regional Court (RTC) of Quezon City
(Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance Commissioner
Eduardo T. Malinis guilty of indirect contempt for refusing to comply with the
December 18, 2002 Resolution of the lower court. The January 16, 2003 Order
states in full:
1

"On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T.

Malinis of the Office of the Insurance Commission in Contempt of Court because of
his failure and refusal to obey the lawful order of this court embodied in a Resolution
dated December 18, 2002 directing him to allow the withdrawal of the security
deposit of Capital Insurance and Surety Co. (CISCO) in the amount
of P11,835,375.50 to be paid to Sheriff Manuel Paguyo in the satisfaction of the
Notice of Garnishment pursuant to a Decision of this Court which has become final
and executory.

"During the hearing of the Motion set last January 10, 2003, Commissioner Malinis
or his counsel or his duly authorized representative failed to appear despite notice
in utter disregard of the order of this Court. However, Commissioner Malinis filed on
January 15, 2003 a written Comment reiterating the same grounds already passed
upon and rejected by this Court. This Court finds no lawful justification or excuse for
Commissioner Malinis' refusal to implement the lawful orders of this Court.
"Wherefore, premises considered and after due hearing, Commissioner Eduardo T.
Malinis is hereby declared guilty of Indirect Contempt of Court pursuant to Section 3
[of] Rule 71 of the 1997 Rules of Civil Procedure for willfully disobeying and refusing
to implement and obey a lawful order of this Court."
4

The Facts
On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412,
finding the defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas) jointly
and severally liable to pay Del Monte Motors, Inc.,P11,835,375.50 representing the
balance of Vilfran Liner's service contracts with respondent. The trial court further
ordered the execution of the Decision against the counterbond posted by Vilfran
Liner on June 10, 1997, and issued by Capital Insurance and Surety Co., Inc.
(CISCO).
On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent,
claiming that the latter had no record or document regarding the alleged issuance
of the counterbond; thus, the bond was not valid and enforceable.
On June 13, 2002, the RTC granted the Motion for Execution and issued the
corresponding Writ. Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to
levy on the properties of CISCO. He also issued a Notice of Garnishment on several
depository banks of the insurance company. Moreover, he served a similar notice on
the Insurance Commission, so as to enforce the Writ on the security deposit filed by
CISCO with the Commission in accordance with Section 203 of the Insurance Code.
On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled
that the Notice of Garnishment served by Sheriff Paguyo on the insurance
commission was valid. The trial court added that the letter and spirit of the law
made the security deposit answerable for contractual obligations incurred by CISCO
under the insurance contracts the latter had entered into. The RTC resolved thus:
"Furthermore, the Commissioner of the Office of the Insurance Commission is
hereby ordered to comply with its obligations under the Insurance Code by
upholding the integrity and efficacy of bonds validly issued by duly accredited
Bonding and Insurance Companies; and to safeguard the public interest by insuring
the faithful performance to enforce contractual obligations under existing bonds.
Accordingly said office is ordered to withdraw from the security deposit of Capital
Insurance & Surety Company, Inc. the amount ofP11,835.50 to be paid to Sheriff

Manuel S. Paguyo in satisfaction of the Notice of Garnishment served on August 16,

2002."
5

On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T.

Malinis in contempt of court for his refusal to obey the December 18, 2002
Resolution of the trial court.
Ruling of the Trial Court
The RTC held Insurance Commissioner Malinis in contempt for his refusal to
implement its Order. It explained that the commissioner had no legal justification for
his refusal to allow the withdrawal of CISCO's security deposit.
Hence, this Petition.

Issues
Petitioner raises this sole issue for the Court's consideration:
"Whether or not the security deposit held by the Insurance Commissioner pursuant
to Section 203 of the Insurance Code may be levied or garnished in favor of only
one insured."
7

The Court's Ruling

The Petition is meritorious.
Preliminary Issue:
Propriety of Review
Before discussing the principal issue, the Court will first dispose of the question of
mootness.
Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the
treasurer of the Philippines a letter dated March 26, 2003, stating that the former
had no objection to the release of the security deposit to Del Monte Motors. Portions
of the fund were consequently released to respondent in July, October, and
December 2003. Thus, the issue arises: whether these circumstances render the
case moot.
Petitioner, however, contends that the partial releases should not be construed as
an abandonment of its stand that security deposits under Section 203 of the
Insurance Code are exempt from levy and garnishment. The Republic claims that
the releases were made pursuant to the commissioner's power of control over the
fund, not to the lower court's Order of garnishment. Petitioner further invokes the
jurisdiction of this Court to put to rest the principal issue of whether security
deposits made with the Insurance Commission may be levied and garnished.

The issue is not totally moot. To stress, only a portion of respondent's claim was
satisfied, and the Insurance Commission has required CISCO to replenish the latter's
security deposit. Respondent, therefore, may one day decide to further garnish the
security deposit, once replenished. Moreover, after the questioned Order of the
lower court was issued, similar claims on the security deposits of various insurance
companies have been made before the Insurance Commission. To set aside the
resolution of the issue will only postpone a task that is certain to crop up in the
future.
Besides, the business of insurance is imbued with public interest. It is subject to
regulation by the State, with respect not only to the relations between the insurer
and the insured, but also to the internal affairs of insurance companies. As this case
is undeniably endowed with public interest and involves a matter of public policy,
this Court shall not shirk from its duty to educate the bench and the bar by
formulating guiding and controlling principles, precepts, doctrines and rules.
8

Principal Issue:
Exemption of Security Deposit from Levy or Garnishment
Section 203 of the Insurance Code provides as follows:
"Sec. 203. Every domestic insurance company shall, to the extent of an amount
equal in value to twenty-five per centum of the minimum paid-up capital required
under section one hundred eighty-eight, invest its funds only in securities,
satisfactory to the Commissioner, consisting of bonds or other evidences of debt of
the Government of the Philippines or its political subdivisions or instrumentalities, or
of government-owned or controlled corporations and entities, including the Central
Bank of the Philippines: Provided, That such investments shall at all times be
maintained free from any lien or encumbrance; and Provided, further, That such
securities shall be deposited with and held by the Commissioner for the faithful
performance by the depositing insurer of all its obligations under its insurance
contracts. The provisions of section one hundred ninety-two shall, so far as
practicable, apply to the securities deposited under this section.
"Except as otherwise provided in this Code, no judgment creditor or other
claimant shall have the right to levy upon any of the securities of the
insurer held on deposit pursuant to the requirement of the Commissioner."
(Emphasis supplied)
Respondent notes that Section 203 does not provide for an absolute prohibition on
the levy and garnishment of the security deposit. It contends that the law requires
the deposit, precisely to ensure faithful performance of all the obligations of the
depositing insurer under the latter's various insurance contracts. Hence, respondent
claims that the security deposit should be answerable for the counterbond issued by
CISCO.

The Court is not convinced. As worded, the law expressly and clearly states that the
security deposit shall be (1) answerable for all the obligations of the depositing
insurer under its insurance contracts; (2) at all times free from any liens or
encumbrance; and (3) exempt from levy by any claimant.
To be sure, CISCO, though presently under conservatorship, has valid outstanding
policies. Its policy holders have a right under the law to be equally protected by its
security deposit. To allow the garnishment of that deposit would impair the fund by
decreasing it to less than the percentage of paid-up capital that the law requires to
be maintained. Further, this move would create, in favor of respondent, a
preference of credit over the other policy holders and beneficiaries.
Our Insurance Code is patterned after that of California. Thus, the ruling of the
state's Supreme Court on a similar concept as that of the security deposit is
instructive. Engwicht v. Pacific States Life Assurance Co. held that the money
required to be deposited by a mutual assessment insurance company with the state
treasurer was "a trust fund to be ratably distributed amongst all the claimants
entitled to share in it. Such a distribution cannot be had except in an action in the
nature of a creditors' bill, upon the hearing of which, and with all the parties
interested in the fund before it, the court may make equitable distribution of the
fund, and appoint a receiver to carry that distribution into effect."
10

11

12

Basic is the statutory construction rule that provisions of a statute should be

construed in accordance with the purpose for which it was enacted. That is, the
securities are held as a contingency fund to answer for the claims against the
insurance company by all its policy holders and their beneficiaries. This step is
taken in the event that the company becomes insolvent or otherwise unable to
satisfy the claims against it. Thus, a single claimant may not lay stake on the
securities to the exclusion of all others. The other parties may have their own claims
against the insurance company under other insurance contracts it has entered into.
13

Respondent's Inchoate Right

The right to lay claim on the fund is dependent on the solvency of the insurer and is
subject to all other obligations of the company arising from its insurance contracts.
Thus, respondent's interest is merely inchoate. Being a mere expectancy, it has no
attribute of property. At this time, it is nonexistent and may never exist. Hence, it
would be premature to make the security deposit answerable for CISCO's present
obligation to Del Monte Motors.
14

Moreover, since insolvency proceedings against CISCO have yet to be conducted, it

would be impossible to establish at this time which claimants are entitled to the
security deposit and in what pro-rated amounts. Only after all other claimants under
subsisting policies issued by CISCO have been heard can respondent's share be
determined.

Powers of the Commissioner

The Insurance Code has vested the Office of the Insurance Commission with
both regulatory and adjudicatoryauthority over insurance matters.
15

The general regulatory authority of the insurance commissioner is described in

Section 414 of the Code as follows:
"Sec. 414. The Insurance Commissioner shall have the duty to see that all laws
relating to insurance, insurance companies and other insurance matters, mutual
benefit associations, and trusts for charitable uses are faithfully executed and to
perform the duties imposed upon him by this Code, and shall, notwithstanding any
existing laws to the contrary, have sole and exclusive authority to regulate the
issuance and sale of variable contracts as defined in section two hundred thirty-two
and to provide for the licensing of persons selling such contracts, and to issue such
reasonable rules and regulations governing the same.
"The Commissioner may issue such rulings, instructions, circulars, orders and
decisions as he may deem necessary to secure the enforcement of the provisions of
this Code, subject to the approval of the Secretary of Finance. Except as otherwise
specified, decisions made by the Commissioner shall be appealable to the Secretary
of Finance." (Emphasis supplied)
Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or
to refuse to issue) certificates of authority to persons or entities desiring to engage
in insurance business in the Philippines; (2) revoke or suspend these certificates of
authority upon finding grounds for the revocation or suspension; (3) impose upon
insurance companies, their directors and/or officers and/or agents appropriate
penalties -- fines, suspension or removal from office -- for failing to comply with the
Code or with any of the commissioner's orders, instructions, regulations or rulings,
or for otherwise conducting business in an unsafe or unsound manner.
16

17

18

Included in the above regulatory responsibilities is the duty to hold the security
deposits under Sections 191 and 203 of the Code, for the benefit and security of all
policy holders. In relation to these provisions, Section 192 of the Insurance Code
states:
19

"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for
the benefit and security of all the policyholders of the company depositing the
same, but shall as long as the company is solvent, permit the company to collect
the interest or dividends on the securities so deposited, and, from time to time, with
his assent, to withdraw any of such securities, upon depositing with said
Commissioner other like securities, the market value of which shall be equal to the
market value of such as may be withdrawn. In the event of any company ceasing to
do business in the Philippines the securities deposited as aforesaid shall be
returned upon the company's making application therefor and proving to the

satisfaction of the Commissioner that it has no further liability under any of its
policies in the Philippines." (Emphasis supplied)
Undeniably, the insurance commissioner has been given a wide latitude of
discretion to regulate the insurance industry so as to protect the insuring public.
The law specifically confers custody over the securities upon the commissioner, with
whom these investments are required to be deposited. An implied trust is created
by the law for the benefit of all claimants under subsisting insurance contracts
issued by the insurance company.
20

21

As the officer vested with custody of the security deposit, the insurance
commissioner is in the best position to determine if and when it may be released
without prejudicing the rights of other policy holders. Before allowing the withdrawal
or the release of the deposit, the commissioner must be satisfied that the conditions
contemplated by the law are met and all policy holders protected.
Commissioner's Actions
Entitled to Great Respect
In this case, Commissioner Malinis refused to release the security deposit of CISCO.
Believing that the funds were exempt from execution as provided by law, he sought
to protect other policy holders. His interpretation of the provisions of the law carries
great weight and consideration, as he is the head of a specialized body tasked with
the regulation of insurance matters and primarily charged with the implementation
of the Insurance Code.
22

The emergence of the multifarious needs of modern society necessitates the

establishment of diverse administrative agencies. In addressing these needs, the
administrative agencies charged with applying and implementing particular statutes
have accumulated experience and specialized capabilities. Thus, in a long line of
cases, this Court has recognized that their construction of a statute is entitled to
great respect and should ordinarily be controlling, unless clearly shown to be in
sharp conflict with the governing statute or the Constitution and other laws.
23

Clearly, then, the trial court erred in issuing the Writ of Garnishment against the
security deposit of CISCO. It follows that without the issuance of a valid order, the
insurance commissioner could not have been in contempt of court.
24

WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No
costs.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 76452 July 26, 1994

PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS
REYES, petitioners,
vs.
HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and
RAMON MONTILLA PATERNO, JR., respondents.
Ponce Enrile, Cayetano, Reyes and Manalastas for petitioners.
Oscar Z. Benares for private respondent.

QUIASON, J.:
This is a petition for certiorari and prohibition under Rule 65 of the Revised Rules of
Court, with preliminary injunction or temporary restraining order, to annul and set
aside the Order dated November 6, 1986 of the Insurance Commissioner and the
entire proceedings taken in I.C. Special Case No. 1-86.
We grant the petition.
The instant case arose from a letter-complaint of private respondent Ramon M.
Paterno, Jr. dated April 17, 1986, to respondent Commissioner, alleging certain
problems encountered by agents, supervisors, managers and public consumers of
the Philippine American Life Insurance Company (Philamlife) as a result of certain
practices by said company.
In a letter dated April 23, 1986, respondent Commissioner requested petitioner
Rodrigo de los Reyes, in his capacity as Philamlife's president, to comment on
respondent Paterno's letter.
In a letter dated April 29, 1986 to respondent Commissioner, petitioner De los Reyes
suggested that private respondent "submit some sort of a 'bill of particulars' listing
and citing actual cases, facts, dates, figures, provisions of law, rules and
regulations, and all other pertinent data which are necessary to enable him to
prepare an intelligent reply" (Rollo, p. 37). A copy of this letter was sent by the
Insurance Commissioner to private respondent for his comments thereon.

On May 16, 1986, respondent Commissioner received a letter from private

respondent maintaining that his letter-complaint of April 17, 1986 was sufficient in
form and substance, and requested that a hearing thereon be conducted.
Petitioner De los Reyes, in his letter to respondent Commissioner dated June 6,
1986, reiterated his claim that private respondent's letter of May 16, 1986 did not
supply the information he needed to enable him to answer the letter-complaint.
On July 14, a hearing on the letter-complaint was held by respondent Commissioner
on the validity of the Contract of Agency complained of by private respondent.
In said hearing, private respondent was required by respondent Commissioner to
specify the provisions of the agency contract which he claimed to be illegal.
On August 4, private respondent submitted a letter of specification to respondent
Commissioner dated July 31, 1986, reiterating his letter of April 17, 1986 and
praying that the provisions on charges and fees stated in the Contract of Agency
executed between Philamlife and its agents, as well as the implementing provisions
as published in the agents' handbook, agency bulletins and circulars, be declared as
null and void. He also asked that the amounts of such charges and fees already
deducted and collected by Philamlife in connection therewith be reimbursed to the
agents, with interest at the prevailing rate reckoned from the date when they were
deducted.
Respondent Commissioner furnished petitioner De los Reyes with a copy of private
respondent's letter of July 31, 1986, and requested his answer thereto.
Petitioner De los Reyes submitted an Answer dated September 8, 1986, stating inter
alia that:
(1) Private respondent's letter of August 11, 1986 does not contain any of the
particular information which Philamlife was seeking from him and which he
promised to submit.
(2) That since the Commission's quasi-judicial power was being invoked with regard
to the complaint, private respondent must file a verified formal complaint before
any further proceedings.
In his letter dated September 9, 1986, private respondent asked for the resumption
of the hearings on his complaint.
On October 1, private respondent executed an affidavit, verifying his letters of April
17, 1986, and July 31, 1986.
In a letter dated October 14, 1986, Manuel Ortega, Philamlife's Senior Assistant
Vice-President and Executive Assistant to the President, asked that respondent
Commission first rule on the questions of the jurisdiction of the Insurance

Commissioner over the subject matter of the letters-complaint and the legal
standing of private respondent.
On October 27, respondent Commissioner notified both parties of the hearing of the
case on November 5, 1986.
On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the
following grounds;
1. The Subpoena/Notice has no legal basis and is premature because:
(1) No complaint sufficient in form and contents has been filed;
(2) No summons has been issued nor received by the respondent De los Reyes, and
hence, no jurisdiction has been acquired over his person;
(3) No answer has been filed, and hence, the hearing scheduled on November 5,
1986 in the Subpoena/Notice, and wherein the respondent is required to appear, is
premature and lacks legal basis.
II. The Insurance Commission has no jurisdiction over;
(1) the subject matter or nature of the action; and
(2) over the parties involved (Rollo, p. 102).
In the Order dated November 6, 1986, respondent Commissioner denied the Motion
to Quash. The dispositive portion of said Order reads:
NOW, THEREFORE, finding the position of complainant thru counsel tenable and
considering the fact that the instant case is an informal administrative litigation
falling outside the operation of the aforecited memorandum circular but cognizable
by this Commission, the hearing officer, in open session ruled as it is hereby ruled to
deny the Motion to Quash Subpoena/Notice for lack of merit (Rollo, p. 109).
Hence, this petition.
II
The main issue to be resolved is whether or not the resolution of the legality of the
Contract of Agency falls within the jurisdiction of the Insurance Commissioner.
Private respondent contends that the Insurance Commissioner has jurisdiction to
take cognizance of the complaint in the exercise of its quasi-judicial powers. The
Solicitor General, upholding the jurisdiction of the Insurance Commissioner, claims
that under Sections 414 and 415 of the Insurance Code, the Commissioner has
authority to nullify the alleged illegal provisions of the Contract of Agency.
III

The general regulatory authority of the Insurance Commissioner is described in

Section 414 of the Insurance Code, to wit:
The Insurance Commissioner shall have the duty to see that all laws relating to
insurance, insurance companies and other insurance matters, mutual benefit
associations and trusts for charitable uses are faithfully executed and to perform
the duties imposed upon him by this Code, . . .
On the other hand, Section 415 provides:
In addition to the administrative sanctions provided elsewhere in this Code, the
Insurance Commissioner is hereby authorized, at his discretion, to impose upon
insurance companies, their directors and/or officers and/or agents, for any willful
failure or refusal to comply with, or violation of any provision of this Code, or any
order, instruction, regulation or ruling of the Insurance Commissioner, or any
commission of irregularities, and/or conducting business in an unsafe and unsound
manner as may be determined by the the Insurance Commissioner, the following:
(a) fines not in excess of five hundred pesos a day; and
(b) suspension, or after due hearing, removal of directors and/or officers and/or
agents.
A plain reading of the above-quoted provisions show that the Insurance
Commissioner has the authority to regulate the business of insurance, which is
defined as follows:
(2) The term "doing an insurance business" or "transacting an insurance business,"
within the meaning of this Code, shall include
(a) making or proposing to make, as insurer, any insurance contract;
(b) making, or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or activity of
the surety; (c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance business within the
meaning of this Code; (d) doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed to evade the provisions of
this Code. (Insurance Code, Sec. 2[2]; Emphasis supplied).
Since the contract of agency entered into between Philamlife and its agents is not
included within the meaning of an insurance business, Section 2 of the Insurance
Code cannot be invoked to give jurisdiction over the same to the Insurance
Commissioner. Expressio unius est exclusio alterius.
With regard to private respondent's contention that the quasi-judicial power of the
Insurance Commissioner under Section 416 of the Insurance Code applies in his
case, we likewise rule in the negative. Section 416 of the Code in pertinent part,
provides:

The Commissioner shall have the power to adjudicate claims and complaints
involving any loss, damage or liability for which an insurer may be answerable
under any kind of policy or contract of insurance, or for which such insurer may be
liable under a contract of suretyship, or for which a reinsurer may be used under
any contract or reinsurance it may have entered into, or for which a mutual benefit
association may be held liable under the membership certificates it has issued to its
members, where the amount of any such loss, damage or liability, excluding
interest, costs and attorney's fees, being claimed or sued upon any kind of
insurance, bond, reinsurance contract, or membership certificate does not exceed in
any single claim one hundred thousand pesos.
A reading of the said section shows that the quasi-judicial power of the Insurance
Commissioner is limited by law "to claims and complaints involving any loss,
damage or liability for which an insurer may be answerable under any kind of policy
or contract of insurance, . . ." Hence, this power does not cover the relationship
affecting the insurance company and its agents but is limited to adjudicating claims
and complaints filed by the insured against the insurance company.
While the subject of Insurance Agents and Brokers is discussed under Chapter IV,
Title I of the Insurance Code, the provisions of said Chapter speak only of the
licensing requirements and limitations imposed on insurance agents and brokers.
The Insurance Code does not have provisions governing the relations between
insurance companies and their agents. It follows that the Insurance Commissioner
cannot, in the exercise of its quasi-judicial powers, assume jurisdiction over
controversies between the insurance companies and their agents.
We have held in the cases of Great Pacific Life Assurance Corporation v. Judico, 180
SCRA 445 (1989), andInvestment Planning Corporation of the Philippines v. Social
Security Commission, 21 SCRA 904 (1962), that an insurance company may have
two classes of agents who sell its insurance policies: (1) salaried employees who
keep definite hours and work under the control and supervision of the company;
and (2) registered representatives, who work on commission basis.
Under the first category, the relationship between the insurance company and its
agents is governed by the Contract of Employment and the provisions of the Labor
Code, while under the second category, the same is governed by the Contract of
Agency and the provisions of the Civil Code on the Agency. Disputes involving the
latter are cognizable by the regular courts.
WHEREFORE, the petition is GRANTED. The Order dated November 6, 1986 of the
Insurance Commission is SET ASIDE.
SO ORDERED.
Cruz, Davide, Jr. and Kapunan, JJ., concur.

Bellosillo, J,. is on leave.

FIRST DIVISION
[G. R. No. 141658. March 18, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE

PHILIPPINE AMERICAN ACCIDENT INSURANCE COMPANY,
INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY,
INC., and THE PHILIPPINE AMERICAN GENERAL INSURANCE
CO., INC., respondents.
DECISION
CARPIO, J.:

The Case
Before the Court is a petition for review[1] assailing the Decision[2] of 7
January 2000 of the Court of Appeals in CA-G.R. SP No. 36816. The
Court of Appeals affirmed the Decision[3] of 5 January 1995 of the
Court of Tax Appeals (CTA) in CTA Cases Nos. 2514, 2515 and
2516. The CTA ordered the Commissioner of Internal Revenue
(petitioner) to refund a total of P29,575.02 to respondent
companies (respondents).
Antecedent Facts
Respondents are domestic corporations licensed to transact
insurance business in the country. From August 1971 to September
1972, respondents paid the Bureau of Internal Revenue under
protest the 3% tax imposed on lending investors by Section 195A[4] of Commonwealth Act No. 466 (CA 466), as amended by
Republic Act No. 6110 (RA 6110) and other laws. CA 466 was the
National Internal Revenue Code (NIRC) applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine
American (PHILAM) Accident Insurance Company; P7,047.80 from
PHILAM Assurance Company; andP14,541.97 from PHILAM General
Insurance Company. These amounts represented 3% of each
companys interest income from mortgage and other loans.

Respondents also paid the taxes required of insurance companies

under CA 466.
On 31 January 1973, respondents sent a letter-claim to petitioner
seeking a refund of the taxes paid under protest. When respondents
did not receive a response, each respondent filed on 26 April 1973 a
petition for review with the CTA. These three petitions, which were
later consolidated, argued that respondents were not lending
investors and as such were not subject to the 3% lending investors
tax under Section 195-A.
The CTA archived respondents case for several years while another
case with a similar issue was pending before the higher courts.
When respondents case was reinstated, the CTA ruled that
respondents were entitled to their refund.
The Ruling of the Court of Tax Appeals
The CTA held that respondents are not taxable as lending investors
because the term lending investors does not embrace insurance
companies. The CTA traced the history of the tax on lending
investors, as follows:
Originally, a person who was engaged in lending money at interest
was taxed as a money lender. [Sec. 1464(x), Rev. Adm. Code] The
term money lenders was defined as including all persons who make
a practice of lending money for themselves or others at interest.
[Sec. 1465(v), id.] Under this law, an insurance company was not
considered a money lender and was not taxable as such. To quote
from an old BIR Ruling:
The lending of money at interest by insurance companies
constitutes a necessary incident of their regular business. For this
reason, insurance companies are not liable to tax as money lenders
or real estate brokers for making or negotiating loans secured by
real property. (Ruling, February 28, 1920; BIR 135.2) (The Internal
Revenue Law, Annotated, 2nd ed., 1929, by B.L. Meer, page 143)
The same rule has been applied to banks.

For making investments on salary loans, banks will not be required

to pay the money lenders tax imposed by this subsection, for the
reason that money lending is considered a mere incident of the
banking business. [See Ruling No. 43, (October 8, 1926) 25 Off.
Gaz. 1326) (The Internal Revenue Law, Annotated, id.)
The term money lenders was later changed to lending investors
but the definition of the term remains the same. [Sec. 1464(x), Rev.
Adm. Code, as finally amended by Com. Act No. 215, and Sec.
1465(v) of the same Code, as finally amended by Act No. 3963] The
same law is embodied in the present National Internal Revenue
Code (Com. Act No. 466) without change, except in the amount of
the tax. [See Secs. 182(A) (3) (dd) and 194(u), National Internal
Revenue Code.]
It is a well-settled rule that an administrative interpretation of a law
which has been followed and applied for a long time, and thereafter
the law is re-enacted without substantial change, such
administrative interpretation is deemed to have received legislative
approval. In short, the administrative interpretation becomes part of
the law as it is presumed to carry out the legislative purpose.[5]
The CTA held that the practice of lending money at interest is part of
the insurance business. CA 466 already taxes the insurance
business. The CTA pointed out that the law recognizes and even
regulates this practice of lending money by insurance companies.
The CTA observed that CA 466 also treated differently insurance
companies from lending investors in regard to fixed taxes. Under
Section 182(A)(3)(gg), insurance companies were subject to the
same fixed tax as banks and finance companies. The CTA reasoned
that insurance companies were grouped with banks and finance
companies because the latters lending activities were also integral
to their business. In contrast, lending investors were taxed at a
different fixed tax under Section 182(A)(3)(dd) of CA 466. The CTA
stated that insurance companies xxx had never been required by

respondent [CIR] to pay the fixed tax imposed on lending investors

xxx.[6]
The dispositive portion of the Decision of 5 January 1995 of the
Court of Tax Appeals (CTA Decision) reads:
WHEREFORE, premises considered, petitioners Philippine American
Accident Insurance Co., Philippine American Assurance Co., and
Philippine American General Insurance Co., Inc. are not taxable on
their lending transactions independently of their insurance
business. Accordingly, respondent is hereby ordered to refund to
petitioner[s] the sum of P7,985.25, P7,047.80 and P14,541.97 in CTA
Cases No. 2514, 2515 and 2516, respectively representing the fixed
and percentage taxes when (sic) paid by petitioners as lending
investor from August 1971 to September 1972.
No pronouncement as to cost.
SO ORDERED.[7]
Dissatisfied, petitioner elevated the matter to the Court of Appeals. [8]
The Ruling of the Court of Appeals
The Court of Appeals ruled that respondents are not taxable as
lending investors. In its Decision of 7 January 2000 (CA Decision),
the Court of Appeals affirmed the ruling of the CTA, thus:
WHEREFORE, premises considered, the petition is DISMISSED,
hereby AFFIRMING the decision, dated January 5, 1995, of the Court
of Tax Appeals in CTA Cases Nos. 2514, 2515 and 2516.
SO ORDERED.[9]
Petitioner appealed the CA Decision to this Court.
The Issues
Petitioner raises the sole issue:

WHETHER RESPONDENT INSURANCE COMPANIES ARE SUBJECT TO

THE 3% PERCENTAGE TAX AS LENDING INVESTORS UNDER
SECTIONS 182(A)(3)(DD) AND 195-A, RESPECTIVELY IN RELATION TO
SECTION 194(U), ALL OF THE NIRC.[10]
The Ruling of the Court
The petition lacks merit.
On the Additional Issue Raised by Petitioner
Section 182(A)(3)(dd) of CA 466 imposes an annual fixed tax on
lending investors, depending on their location.[11] The sole question
before the CTA was whether respondents were subject to
the percentage tax on lending investors under Section 195-A.
Petitioner raised for the first time the issue of the fixed tax in the
Petition for Review[12] petitioner filed before the Court of Appeals.
Ordinarily, a party cannot raise for the first time on appeal an issue
not raised in the trial court.[13] The Court of Appeals should not have
taken cognizance of the issue on respondents supposed liability
under Section 182(A)(3)(dd). However, we cannot entirely fault the
Court of Appeals or petitioner. Even if the percentage tax on lending
investors was the sole issue before it, the CTA ordered petitioner to
refund to the PHILAM companies the fixed and percentage taxes
[t]hen paid by petitioners as lending investor.[14] Although the
amounts for refund consisted only of what respondents paid as
percentage taxes, the CTA Decision also ordered the refund to
respondents of the fixed tax on lending investors. Respondents in
their pleadings deny any liability under Section 182(A)(3)(dd), on the
same ground that they are not lending investors.
The question of whether respondents should pay the fixed tax under
Section 182(A)(3)(dd) revolves around the same issue of whether
respondents are taxable as lending investors. In similar
circumstances, the Court has held that an appellate court may
consider an unassigned error if it is closely related to an error that
was properly assigned.[15] This rule properly applies to the present

case. Thus, we shall consider and rule on the issue of whether

respondents are subject to the fixed tax under Section 182(A)(3)
(dd).
Whether Insurance Companies are
Taxable as Lending Investors
Invoking Sections 195-A and 182(A)(3)(dd) in relation to Section
194(u) of CA 466, petitioner argues that insurance companies are
subject to two fixed taxes and two percentage taxes. Petitioner
alleges that:
As a lending investor, an insurance company is subject to an annual
fixed tax of P500.00 and another P500.00 under Section 182 (A)(3)
(dd) and (gg) of the Tax Code. As an underwriter, an insurance
company is subject to the 3% tax of the total premiums collected
and another 3% on the gross receipts as a lending investor under
Sections 255 and 195-A, respectively of the same Code. xxx[16]
Petitioner also contends that the refund granted to respondents is in
the nature of a tax exemption, and cannot be allowed unless
granted explicitly and categorically.
The rule that tax exemptions should be construed strictly against
the taxpayer presupposes that the taxpayer is clearly subject to the
tax being levied against him. Unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally wellsettled rule that the imposition of a tax cannot be presumed.
[17]
Where there is doubt, tax laws must be construed strictly against
the government and in favor of the taxpayer.[18] This is because taxes
are burdens on the taxpayer, and should not be unduly imposed or
presumed beyond what the statutes expressly and clearly import. [19]
Section 182(A)(3)(dd) of CA 466 also provides:
Sec. 182. Fixed taxes. (A) On business xxx
xxx

(3) Other fixed taxes. The following fixed taxes shall be collected
as follows, the amount stated being for the whole year, when not
otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred
pesos;
2. In second and third class municipalities, two hundred and fifty
pesos;
3. In fourth and fifth class municipalities and municipal districts, one
hundred and twenty-five pesos; Provided, That lending investors
who do business as such in more than one province shall pay a tax
of five hundred pesos.
Section 195-A of CA 466 provides:
Sec. 195-A. Percentage tax on dealers in securities; lending
investors. Dealers in securities and lending investors shall pay a
tax equivalent to three per centum on their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance
companies. Section 182(A)(3)(dd) provides for the taxation of
lending investors in different localities. Section 195-A refers to
dealers in securities and lending investors. The burden is thus on
petitioner to show that insurance companies are lending investors
for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the
insurance business. Petitioner merely alleges that the definition of
lending investors under CA 466 is broad enough to encompass
insurance companies. Petitioner insists that because of Section
194(u), the two principal activities of the insurance business,
namely, underwriting and investment, are separately taxable. [20]
Section 194(u) of CA 466 states:

(u) Lending investor includes all persons who make a practice of

lending money for themselves or others at interest.
xxx
As can be seen, Section 194(u) does not tax the practice of lending
per se. It merely defines what lending investors are. The question
is whether the lending activities of insurance companies make them
lending investors for purposes of taxation.
We agree with the CTA and Court of Appeals that it does not.
Insurance companies cannot be considered lending investors under
CA 466, as amended.
Definition of Lending
Investors under CA 466 Does
Not Include Insurance
Companies.
The definition in Section 194(u) of CA 466 is not broad enough to
include the business of insurance companies. The Insurance Code
of 1978[21] is very clear on what constitutes an insurance company. It
provides that an insurer or insurance company shall include all
individuals, partnerships, associations or corporations xxx engaged
as principals in the insurance business, excepting mutual benefit
associations.[22] More specifically, respondents fall under the
category of insurance corporations as defined in Section 185 of the
Insurance Code, thus:
SECTION 185. Corporations formed or organized to save any person
or persons or other corporations harmless from loss, damage, or
liability arising from any unknown or future or contingent event, or
to indemnify or to compensate any person or persons or other
corporations for any such loss, damage, or liability, or to guarantee
the performance of or compliance with contractual obligations or the

payment of debts of others shall be known as insurance

corporations.
Plainly, insurance companies and lending investors are different
enterprises in the eyes of the law. Lending investors cannot, for a
consideration, hold anyone harmless from loss, damage or liability,
nor provide compensation or indemnity for loss. The underwriting of
risks is the prerogative of insurers, the great majority of which are
incorporated insurance companies[23] like respondents.
Granting of Mortgage and
other Loans are Investment
Practices that are Part of the
Insurance Business.
True, respondents granted mortgage and other kinds of loans.
However, this was not done independently of respondents
insurance business. The granting of certain loans is one of several
means of investment allowed to insurance companies. No less than
the Insurance Code mandates and regulates this practice. [24]
Unlike the practice of lending investors, the lending activities of
insurance companies are circumscribed and strictly regulated by the
State. Insurance companies cannot freely lend to themselves or
others as lending investors can,[25] nor can insurance companies
grant simply any kind of loan. Even prior to 1978, the Insurance
Code prescribed strict rules for the granting of loans by insurance
companies.[26] These provisions on mortgage, collateral and policy
loans were reiterated in the Insurance Code of 1978 and are still in
force today.
Petitioner concedes that respondents investment practices are as
much a part of the insurance business as the task of underwriting.
Nevertheless, petitioner argues that such investment practices are
separately taxable under CA 466.

The CTA and the Court of Appeals found that the investment of
premiums and other funds received by respondents through the
granting of mortgage and other loans was necessary to
respondents business and hence, should not be taxed separately.
Insurance companies are required by law to possess and maintain
substantial legal reserves to meet their obligations to policyholders.
[27]
This obviously cannot be accomplished through the collection of
premiums alone, as the legal reserves and capital and surplus
insurance companies are obligated to maintain run into millions of
pesos. As such, the creation of investment income has long been
held to be generally, if not necessarily, essential to the business of
insurance.[28]
The creation of investment income in the manner sanctioned by the
laws on insurance is thus part of the business of insurance, and the
fruits of these investments are essentially income from the
insurance business. This is particularly true if the invested assets
are held either as reserved funds to provide for policy obligations or
as capital and surplus to provide an extra margin of safety which will
be attractive to insurance buyers.[29]
The Court has also held that when a company is taxed on its main
business, it is no longer taxable further for engaging in an activity or
work which is merely a part of, incidental to and is necessary to its
main business.[30] Respondents already paid percentage and fixed
taxes on their insurance business. To require them to pay
percentage and fixed taxes again for an activity which is necessarily
a part of the same business, the law must expressly require such
additional payment of tax. There is, however, no provision of law
requiring such additional payment of tax.
Sections 195-A and 182(A)(3)(dd) of CA 466 do not require insurance
companies to pay double percentage and fixed taxes. They merely
tax lending investors, not lending activities. Respondents were not
transformed into lending investors by the mere fact that they

granted loans, as these investments were part of, incidental and

necessary to their insurance business.
Different Tax Treatment of
Insurance Companies and
Lending Investors.
Section 182(A)(3) of CA 466 accorded different tax treatments to
lending investors and insurance companies. The relevant portions
of Section 182 state:
Sec. 182. Fixed taxes. (A) On business xxx
(3) Other fixed taxes. The following fixed taxes shall be collected
as follows, the amount stated being for the whole year, when not
otherwise specified;
xxx
(dd) Lending investors
1. In chartered cities and first class municipalities, five hundred
pesos;
2. In second and third class municipalities, two hundred and fifty
pesos;
3. In fourth and fifth class municipalities and municipal districts, one
hundred and twenty-five pesos; Provided, That lending investors
who do business as such in more than one province shall pay a tax
of five hundred pesos.
xxx
(gg) Banks, insurance companies, finance and investment
companies doing business in the Philippines and franchise grantees,
five hundred pesos.
xxx (Emphasis supplied.)

The separate provisions on lending investors and insurance

companies demonstrate an intention to treat these businesses
differently. If Congress intended insurance companies to be taxed
as lending investors, there would be no need for Section 182(A)(3)
(gg). Section 182(A)(3)(dd) would have been sufficient. That
insurance companies were included with banks, finance and
investment companies also supports the CTAs conclusion that
insurance companies had more in common with the latter
enterprises than with lending investors. As the CTA pointed out,
banks also regularly lend money at interest, but are not taxable as
lending investors.
We find no merit in petitioners contention that Congress intended to
subject respondents to two percentage taxes and two fixed taxes.
Petitioners argument goes against the doctrine of strict
interpretation of tax impositions.
Petitioners argument is likewise not in accord with existing
jurisprudence. In Commissioner of Internal Revenue v. Michel J.
Lhuillier Pawnshop, Inc.,[31] the Court ruled that the different tax
treatment accorded to pawnshops and lending investors in the NIRC
of 1977 and the NIRC of 1986 showed the intent of Congress to
deal with both subjects differently. The same reasoning applies
squarely to the present case.
Even the current tax law does not treat insurance companies as
lending investors. Under Section 108(A)[32] of the NIRC of 1997,
lending investors and non-life insurance companies, except for their
crop insurances, are subject to value-added tax (VAT). Life
insurance companies are exempt from VAT, but are subject to
percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466
failed to mention insurance companies already implies the latters
exclusion from the coverage of these provisions. When a statute
enumerates the things upon which it is to operate, everything else
by implication must be excluded from its operation and effect. [33]

Definition of Lending
Investors in CA 466 is Not
New.
Petitioner does not dispute that it issued a ruling in 1920 to the
effect that the lending of money at interest was a necessary incident
of the insurance business, and that insurance companies were thus
not subject to the tax on money lenders. Petitioner argues only that
the 1920 ruling does not apply to the instant case because RA 6110
introduced the definition of lending investors to CA 466 only in 1969.
The subject definition was actually introduced much earlier, at a
time when lending investors were still referred to as money lenders.
Sections 45 and 46 of the Internal Revenue Law of 1914[34] (1914 Tax
Code) state:
SECTION 45. Amount of Tax on Business. Fixed taxes on business
shall be collected as follows, the amount stated being for the whole
year, when not otherwise specified:
xxx
(x) Money lenders, eighty pesos;
xxx
SECTION 46. Words and Phrases Defined. In applying the
provisions of the preceding section words and phrases shall be taken
in the sense and extension indicated below:
xxx
Money lender includes all persons who make a practice of
lending money for themselves or others at interest.
(Emphasis supplied)
As can be seen, the definitions of money lender under the 1914
Tax Code and lending investor under CA 466 are identical. The
term money lender was merely changed to lending investor

when Act No. 3963 amended the Revised Administrative Code in

1932.[35] This same definition of lending investor has since appeared
in Section 194(u) of CA 466 and later tax laws.
Note that insurance companies were not included among the
businesses subject to an annual fixed tax under the 1914 Tax Code.
[36]
That Congress later saw the need to introduce Section 182(A)(3)
(gg) in CA 466 bolsters our view that there was no legislative intent
to tax insurance companies as lending investors. If insurance
companies were already taxed as lending investors, there would
have been no need for a separate provision specifically requiring
insurance companies to pay fixed taxes.
The Court Accords Great
Weight to the Factual Findings
of the CTA.
Dedicated exclusively to the study and consideration of tax
problems, the CTA has necessarily developed an expertise in the
subject of taxation that this Court has recognized time and again.
For this reason, the findings of fact of the CTA, particularly when
affirmed by the Court of Appeals, are generally conclusive on this
Court absent grave abuse of discretion or palpable error, [37] which are
not present in this case.
WHEREFORE, we DENY the instant petition and AFFIRM the
Decision of 7 January 2000 of the Court of Appeals in CA-G.R. SP No.
36816.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, YnaresSantiago, and Azcuna, JJ., concur.

FIRST DIVISION
[G.R. No. 154514. July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., petitioner, vs.

PIONEER INSURANCE AND SURETY CORPORATION AND THE
STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION
(BERMUDA) LTD., respondents.
DECISION
QUISUMBING, J.:

This petition for review assails the Decision[1] dated July 30, 2002 of
the Court of Appeals in CA-G.R. SP No. 60144, affirming
the Decision[2] dated May 3, 2000 of the Insurance Commission in
I.C. Adm. Case No. RD-277. Both decisions held that there was no
violation of the Insurance Code and the respondents do not need
license as insurer and insurance agent/broker.
The facts are undisputed.
White Gold Marine Services, Inc. (White Gold) procured a protection
and indemnity coverage for its vessels from The Steamship Mutual
Underwriting Association (Bermuda) Limited (Steamship Mutual)
through Pioneer Insurance and Surety Corporation (Pioneer).
Subsequently, White Gold was issued a Certificate of Entry and
Acceptance.[3] Pioneer also issued receipts evidencing payments for
the coverage. When White Gold failed to fully pay its accounts,
Steamship Mutual refused to renew the coverage.
Steamship Mutual thereafter filed a case against White Gold for
collection of sum of money to recover the latters unpaid balance.
White Gold on the other hand, filed a complaint before the Insurance
Commission claiming that Steamship Mutual violated Sections
186[4] and 187[5] of the Insurance Code, while Pioneer violated
Sections 299,[6] 300[7] and 301[8] in relation to Sections 302 and 303,
thereof.

The Insurance Commission dismissed the complaint. It said that

there was no need for Steamship Mutual to secure a license because
it was not engaged in the insurance business. It explained that
Steamship Mutual was a Protection and Indemnity Club (P & I Club).
Likewise, Pioneer need not obtain another license as insurance
agent and/or a broker for Steamship Mutual because Steamship
Mutual was not engaged in the insurance business. Moreover,
Pioneer was already licensed, hence, a separate license solely as
agent/broker of Steamship Mutual was already superfluous.
The Court of Appeals affirmed the decision of the Insurance
Commissioner. In its decision, the appellate court distinguished
between P & I Clubs vis--vis conventional insurance. The appellate
court also held that Pioneer merely acted as a collection agent of
Steamship Mutual.
In this petition, petitioner assigns the following errors allegedly
committed by the appellate court,
FIRST ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT
STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE
GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS
AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT
SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.
SECOND ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS
BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS
ENGAGED IN INSURANCE BUSINESS.
THIRD ASSIGNMENT OF ERROR
THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT
PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS
AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF
RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND
DIRECTORS OF RESPONDENT PIONEER.[9]
Simply, the basic issues before us are (1) Is Steamship Mutual, a P &
I Club, engaged in the insurance business in the Philippines? (2)
Does Pioneer need a license as an insurance agent/broker for
Steamship Mutual?
The parties admit that Steamship Mutual is a P & I Club. Steamship
Mutual admits it does not have a license to do business in the
Philippines although Pioneer is its resident agent. This relationship
is reflected in the certifications issued by the Insurance Commission.
Petitioner insists that Steamship Mutual as a P & I Club is engaged in
the insurance business. To buttress its assertion, it cites the
definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of
Appeals[10] as an association composed of shipowners in general
who band together for the specific purpose of providing insurance
cover on a mutual basis against liabilities incidental to shipowning
that the members incur in favor of third parties. It stresses that as
a P & I Club, Steamship Mutuals primary purpose is to solicit and
provide protection and indemnity coverage and for this purpose, it
has engaged the services of Pioneer to act as its agent.
Respondents contend that although Steamship Mutual is a P & I
Club, it is not engaged in the insurance business in the Philippines.
It is merely an association of vessel owners who have come together
to provide mutual protection against liabilities incidental to
shipowning.[11] Respondents aver Hyopsung is inapplicable in this
case because the issue in Hyopsungwas the jurisdiction of the court
over Hyopsung.
Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes

doing an insurance business or transacting an insurance
business. These are:
(a) making or proposing to make, as insurer, any insurance
contract;
(b) making, or proposing to make, as surety, any contract of
suretyship as a vocation and not as merely incidental to any other
legitimate business or activity of the surety;
(c) doing any kind of business, including a reinsurance business,
specifically recognized as constituting the doing of an insurance
business within the meaning of this Code;
(d) doing or proposing to do any business in substance equivalent
to any of the foregoing in a manner designed to evade the
provisions of this Code.
. . .
The same provision also provides, the fact that no profit is derived
from the making of insurance contracts, agreements or transactions,
or that no separate or direct consideration is received therefor, shall
not preclude the existence of an insurance business.[12]
The test to determine if a contract is an insurance contract or not,
depends on the nature of the promise, the act required to be
performed, and the exact nature of the agreement in the light of the
occurrence, contingency, or circumstances under which the
performance becomes requisite. It is not by what it is called.[13]
Basically, an insurance contract is a contract of indemnity. In it, one
undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event. [14]
In particular, a marine insurance undertakes to indemnify the
assured against marine losses, such as the losses incident to a

marine adventure.[15] Section 99[16] of the Insurance Code enumerates

the coverage of marine insurance.
Relatedly, a mutual insurance company is a cooperative enterprise
where the members are both the insurer and insured. In it, the
members all contribute, by a system of premiums or assessments,
to the creation of a fund from which all losses and liabilities are paid,
and where the profits are divided among themselves, in proportion
to their interest.[17] Additionally, mutual insurance associations, or
clubs, provide three types of coverage, namely, protection and
indemnity, war risks, and defense costs.[18]
A P & I Club is a form of insurance against third party liability,
where the third party is anyone other than the P & I Club and the
members.[19] By definition then, Steamship Mutual as a P & I Club is
a mutual insurance association engaged in the marine insurance
business.
The records reveal Steamship Mutual is doing business in the
country albeit without the requisite certificate of authority mandated
by Section 187[20] of the Insurance Code. It maintains a resident
agent in the Philippines to solicit insurance and to collect payments
in its behalf. We note that Steamship Mutual even renewed its P & I
Club cover until it was cancelled due to non-payment of the calls.
Thus, to continue doing business here, Steamship Mutual or through
its agent Pioneer, must secure a license from the Insurance
Commission.
Since a contract of insurance involves public interest, regulation by
the State is necessary. Thus, no insurer or insurance company is
allowed to engage in the insurance business without a license or a
certificate of authority from the Insurance Commission. [21]
Does Pioneer, as agent/broker of Steamship Mutual, need a special
license?
Pioneer is the resident agent of Steamship Mutual as evidenced by
the certificate of registration[22] issued by the Insurance Commission.

It has been licensed to do or transact insurance business by virtue of

the certificate of authority[23] issued by the same agency. However, a
Certification from the Commission states that Pioneer does not have
a separate license to be an agent/broker of Steamship Mutual.[24]
Although Pioneer is already licensed as an insurance company, it
needs a separate license to act as insurance agent for Steamship
Mutual. Section 299 of the Insurance Code clearly states:
SEC. 299 . . .
No person shall act as an insurance agent or as an insurance broker
in the solicitation or procurement of applications for insurance, or
receive for services in obtaining insurance, any commission or other
compensation from any insurance company doing business in the
Philippines or any agent thereof, without first procuring a license so
to act from the Commissioner, which must be renewed annually on
the first day of January, or within six months thereafter. . .
Finally, White Gold seeks revocation of Pioneers certificate of
authority and removal of its directors and officers. Regrettably, we
are not the forum for these issues.
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision
dated July 30, 2002 of the Court of Appeals affirming the Decision
dated May 3, 2000 of the Insurance Commission is hereby
REVERSED AND SET ASIDE. The Steamship Mutual Underwriting
Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper
authorizations to do business as insurer and insurance agent,
respectively. The petitioners prayer for the revocation of Pioneers
Certificate of Authority and removal of its directors and officers, is
DENIED. Costs against respondents.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,
JJ., concur.

G.R. No. L-109937 March 21, 1994

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and the ESTATE OF THE LATE JUAN B. DANS,
represented by CANDIDA G. DANS, and the DBP MORTGAGE REDEMPTION
INSURANCE POOL, respondents.
Office of the Legal Counsel for petitioner.
Reyes, Santayana, Molo & Alegre for DBP Mortgage Redemption Insurance Pool.

QUIASON, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court
to reverse and set aside the decision of the Court of Appeals in CA-G.R CV No.
26434 and its resolution denying reconsideration thereof.
We affirm the decision of the Court of Appeals with modification.
I
In May 1987, Juan B. Dans, together with his wife Candida, his son and daughter-inlaw, applied for a loan of P500,000.00 with the Development Bank of the Philippines
(DBP), Basilan Branch. As the principal mortgagor, Dans, then 76 years of age, was
advised by DBP to obtain a mortgage redemption insurance (MRI) with the DBP
Mortgage Redemption Insurance Pool (DBP MRI Pool).
A loan, in the reduced amount of P300,000.00, was approved by DBP on August 4,
1987 and released on August 11, 1987. From the proceeds of the loan, DBP
deducted the amount of P1,476.00 as payment for the MRI premium. On August 15,
1987, Dans accomplished and submitted the "MRI Application for Insurance" and
the "Health Statement for DBP MRI Pool."
On August 20, 1987, the MRI premium of Dans, less the DBP service fee of 10
percent, was credited by DBP to the savings account of the DBP MRI Pool.
Accordingly, the DBP MRI Pool was advised of the credit.
On September 3, 1987, Dans died of cardiac arrest. The DBP, upon notice, relayed
this information to the DBP MRI Pool. On September 23, 1987, the DBP MRI Pool
notified DBP that Dans was not eligible for MRI coverage, being over the acceptance
age limit of 60 years at the time of application.
On October 21, 1987, DBP apprised Candida Dans of the disapproval of her late
husband's MRI application. The DBP offered to refund the premium of P1,476.00
which the deceased had paid, but Candida Dans refused to accept the same,

demanding payment of the face value of the MRI or an amount equivalent to the
loan. She, likewise, refused to accept an ex gratia settlement of P30,000.00, which
the DBP later offered.
On February 10, 1989, respondent Estate, through Candida Dans as administratrix,
filed a complaint with the Regional Trial Court, Branch I, Basilan, against DBP and
the insurance pool for "Collection of Sum of Money with Damages." Respondent
Estate alleged that Dans became insured by the DBP MRI Pool when DBP, with full
knowledge of Dans' age at the time of application, required him to apply for MRI,
and later collected the insurance premium thereon. Respondent Estate therefore
prayed: (1) that the sum of P139,500.00, which it paid under protest for the loan, be
reimbursed; (2) that the mortgage debt of the deceased be declared fully paid; and
(3) that damages be awarded.
The DBP and the DBP MRI Pool separately filed their answers, with the former
asserting a cross-claim against the latter.
At the pre-trial, DBP and the DBP MRI Pool admitted all the documents and exhibits
submitted by respondent Estate. As a result of these admissions, the trial court
narrowed down the issues and, without opposition from the parties, found the case
ripe for summary judgment. Consequently, the trial court ordered the parties to
submit their respective position papers and documentary evidence, which may
serve as basis for the judgment.
On March 10, 1990, the trial court rendered a decision in favor of respondent Estate
and against DBP. The DBP MRI Pool, however, was absolved from liability, after the
trial court found no privity of contract between it and the deceased. The trial court
declared DBP in estoppel for having led Dans into applying for MRI and actually
collecting the premium and the service fee, despite knowledge of his age
ineligibility. The dispositive portion of the decision read as follows:
WHEREFORE, in view of the foregoing consideration and in the furtherance of justice
and equity, the Court finds judgment for the plaintiff and against Defendant DBP,
ordering the latter:
1. To return and reimburse plaintiff the amount of P139,500.00 plus legal rate of
interest as amortization payment paid under protest;
2. To consider the mortgage loan of P300,000.00 including all interest accumulated
or otherwise to have been settled, satisfied or set-off by virtue of the insurance
coverage of the late Juan B. Dans;
3. To pay plaintiff the amount of P10,000.00 as attorney's fees;
4. To pay plaintiff in the amount of P10,000.00 as costs of litigation and other
expenses, and other relief just and equitable.

The Counterclaims of Defendants DBP and DBP MRI POOL are hereby dismissed. The
Cross-claim of Defendant DBP is likewise dismissed (Rollo, p. 79)
The DBP appealed to the Court of Appeals. In a decision dated September 7, 1992,
the appellate court affirmedin toto the decision of the trial court. The DBP's motion
for reconsideration was denied in a resolution dated April 20, 1993.
Hence, this recourse.
II
When Dans applied for MRI, he filled up and personally signed a "Health Statement
for DBP MRI Pool" (Exh. "5-Bank") with the following declaration:
I hereby declare and agree that all the statements and answers contained herein
are true, complete and correct to the best of my knowledge and belief and form part
of my application for insurance. It is understood and agreed that no insurance
coverage shall be effected unless and until this application is approved and the full
premium is paid during my continued good health (Records, p. 40).
Under the aforementioned provisions, the MRI coverage shall take effect: (1) when
the application shall be approved by the insurance pool; and (2) when the full
premium is paid during the continued good health of the applicant. These two
conditions, being joined conjunctively, must concur.
Undisputably, the power to approve MRI applications is lodged with the DBP MRI
Pool. The pool, however, did not approve the application of Dans. There is also no
showing that it accepted the sum of P1,476.00, which DBP credited to its account
with full knowledge that it was payment for Dan's premium. There was, as a result,
no perfected contract of insurance; hence, the DBP MRI Pool cannot be held liable
on a contract that does not exist.
The liability of DBP is another matter.
It was DBP, as a matter of policy and practice, that required Dans, the borrower, to
secure MRI coverage. Instead of allowing Dans to look for his own insurance carrier
or some other form of insurance policy, DBP compelled him to apply with the DBP
MRI Pool for MRI coverage. When Dan's loan was released on August 11, 1987, DBP
already deducted from the proceeds thereof the MRI premium. Four days latter, DBP
made Dans fill up and sign his application for MRI, as well as his health statement.
The DBP later submitted both the application form and health statement to the DBP
MRI Pool at the DBP Main Building, Makati Metro Manila. As service fee, DBP
deducted 10 percent of the premium collected by it from Dans.
In dealing with Dans, DBP was wearing two legal hats: the first as a lender, and the
second as an insurance agent.

As an insurance agent, DBP made Dans go through the motion of applying for said
insurance, thereby leading him and his family to believe that they had already
fulfilled all the requirements for the MRI and that the issuance of their policy was
forthcoming. Apparently, DBP had full knowledge that Dan's application was never
going to be approved. The maximum age for MRI acceptance is 60 years as clearly
and specifically provided in Article 1 of the Group Mortgage Redemption Insurance
Policy signed in 1984 by all the insurance companies concerned (Exh. "1-Pool").
Under Article 1987 of the Civil Code of the Philippines, "the agent who acts as such
is not personally liable to the party with whom he contracts, unless he expressly
binds himself or exceeds the limits of his authority without giving such party
sufficient notice of his powers."
The DBP is not authorized to accept applications for MRI when its clients are more
than 60 years of age (Exh. "1-Pool"). Knowing all the while that Dans was ineligible
for MRI coverage because of his advanced age, DBP exceeded the scope of its
authority when it accepted Dan's application for MRI by collecting the insurance
premium, and deducting its agent's commission and service fee.
The liability of an agent who exceeds the scope of his authority depends upon
whether the third person is aware of the limits of the agent's powers. There is no
showing that Dans knew of the limitation on DBP's authority to solicit applications
for MRI.
If the third person dealing with an agent is unaware of the limits of the authority
conferred by the principal on the agent and he (third person) has been deceived by
the non-disclosure thereof by the agent, then the latter is liable for damages to him
(V Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines,
p. 422 [1992], citing Sentencia [Cuba] of September 25, 1907). The rule that the
agent is liable when he acts without authority is founded upon the supposition that
there has been some wrong or omission on his part either in misrepresenting, or in
affirming, or concealing the authority under which he assumes to act (Francisco, V.,
Agency 307 [1952], citing Hall v. Lauderdale, 46 N.Y. 70, 75). Inasmuch as the nondisclosure of the limits of the agency carries with it the implication that a deception
was perpetrated on the unsuspecting client, the provisions of Articles 19, 20 and 21
of the Civil Code of the Philippines come into play.
Article 19 provides:
Every person must, in the exercise of his rights and in the performance of his duties,
act with justice give everyone his due and observe honesty and good faith.
Article 20 provides:
Every person who, contrary to law, willfully or negligently causes damage to
another, shall indemnify the latter for the same.

Article 21 provides:
Any person, who willfully causes loss or injury to another in a manner that is
contrary to morals, good customs or public policy shall compensate the latter for
the damage.
The DBP's liability, however, cannot be for the entire value of the insurance policy.
To assume that were it not for DBP's concealment of the limits of its authority, Dans
would have secured an MRI from another insurance company, and therefore would
have been fully insured by the time he died, is highly speculative. Considering his
advanced age, there is no absolute certainty that Dans could obtain an insurance
coverage from another company. It must also be noted that Dans died almost
immediately, i.e., on the nineteenth day after applying for the MRI, and on the
twenty-third day from the date of release of his loan.
One is entitled to an adequate compensation only for such pecuniary loss suffered
by him as he has duly proved (Civil Code of the Philippines, Art. 2199). Damages, to
be recoverable, must not only be capable of proof, but must be actually proved with
a reasonable degree of certainty (Refractories Corporation v. Intermediate Appellate
Court, 176 SCRA 539 [1989]; Choa Tek Hee v. Philippine Publishing Co., 34 Phil. 447
[1916]). Speculative damages are too remote to be included in an accurate
estimate of damages (Sun Life Assurance v. Rueda Hermanos, 37 Phil. 844 [1918]).
While Dans is not entitled to compensatory damages, he is entitled to moral
damages. No proof of pecuniary loss is required in the assessment of said kind of
damages (Civil Code of Philippines, Art. 2216). The same may be recovered in acts
referred to in Article 2219 of the Civil Code.
The assessment of moral damages is left to the discretion of the court according to
the circumstances of each case (Civil Code of the Philippines, Art. 2216).
Considering that DBP had offered to pay P30,000.00 to respondent Estate in ex
gratia settlement of its claim and that DBP's non-disclosure of the limits of its
authority amounted to a deception to its client, an award of moral damages in the
amount of P50,000.00 would be reasonable.
The award of attorney's fees is also just and equitable under the circumstances
(Civil Code of the Philippines, Article 2208 [11]).
WHEREFORE, the decision of the Court of Appeals in CA G.R.-CV
No. 26434 is MODIFIED and petitioner DBP is ORDERED: (1) to REIMBURSE
respondent Estate of Juan B. Dans the amount of P1,476.00 with legal interest from
the date of the filing of the complaint until fully paid; and (2) to PAY said Estate the
amount of Fifty Thousand Pesos (P50,000.00) as moral damages and the amount of
Ten Thousand Pesos (P10,000.00) as attorney's fees. With costs against petitioner.
SO ORDERED.

Cruz, Davide, Jr., Bellosillo and Kapunan, JJ., concur.

EN BANC
[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[1] of the Court of 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
Respondents 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 courts declaration that three of the policies were in force from August 1991 to
August 1992; and (2) reduction of the award of the attorneys 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, plaintiff's 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 Petitioners stand that Respondents 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 "V1"). 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 "FF1").
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 plaintiffs

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 plaintiffs 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[2]; South Sea Surety and Insurance Co., Inc. v.
Court of Appeals[3]; and Tibay v. Court of Appeals.[4] Accordingly, we reversed and set
aside the decision of the 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 Respondents 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 Respondents 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. Respondents
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 Petitioners 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 Petitioners
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:

SEC. 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:

SEC. 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.
(Underscoring 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:

SEC. 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 insurers 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:

ART. 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.

G.R. No. L-24833

September 23, 1968

FIELDMEN'S INSURANCE CO., INC., petitioner,

vs.
MERCEDES VARGAS VDA. DE SONGCO, ET AL. and COURT OF
APPEALS, respondents.
Jose S. Suarez for petitioner.
Eligio G. Lagman for respondents.

FERNANDO, J.:
An insurance firm, petitioner Fieldmen's Insurance Co., Inc., was not allowed to
escape liability under a common carrier insurance policy on the pretext that what
was insured, not once but twice, was a private vehicle and not a common carrier,
the policy being issued upon the insistence of its agent who discounted fears of the
insured that his privately owned vehicle might not fall within its terms, the insured
moreover being "a man of scant education," finishing only the first grade. So it was
held in a decision of the lower court thereafter affirmed by respondent Court of
Appeals. Petitioner in seeking the review of the above decision of respondent Court
of Appeals cannot be so sanguine as to entertain the belief that a different outcome
could be expected. To be more explicit, we sustain the Court of Appeals.
The facts as found by respondent Court of Appeals, binding upon us, follow: "This is
a peculiar case. Federico Songco of Floridablanca, Pampanga, a man of scant
education being only a first grader ..., owned a private jeepney with Plate No. 41289 for the year 1960. On September 15, 1960, as such private vehicle owner, he
was induced by Fieldmen's Insurance Company Pampanga agent Benjamin Sambat
to apply for a Common Carrier's Liability Insurance Policy covering his motor vehicle
... Upon paying an annual premium of P16.50, defendant Fieldmen's Insurance
Company, Inc. issued on September 19, 1960, Common Carriers Accident Insurance
Policy No. 45-HO- 4254 ... the duration of which will be for one (1) year, effective
September 15, 1960 to September 15, 1961. On September 22, 1961, the
defendant company, upon payment of the corresponding premium, renewed the
policy by extending the coverage from October 15, 1961 to October 15, 1962. This
time Federico Songco's private jeepney carried Plate No. J-68136-Pampanga1961. ... On October 29, 1961, during the effectivity of the renewed policy, the
insured vehicle while being driven by Rodolfo Songco, a duly licensed driver and son
of Federico (the vehicle owner) collided with a car in the municipality of Calumpit,
province of Bulacan, as a result of which mishap Federico Songco (father) and
Rodolfo Songco (son) died, Carlos Songco (another son), the latter's wife, Angelita
Songco, and a family friend by the name of Jose Manuel sustained physical injuries
of varying degree."
1

It was further shown according to the decision of respondent Court of Appeals:

"Amor Songco, 42-year-old son of deceased Federico Songco, testifying as witness,
declared that when insurance agent Benjamin Sambat was inducing his father to
insure his vehicle, he butted in saying: 'That cannot be, Mr. Sambat, because our
vehicle is an "owner" private vehicle and not for passengers,' to which agent
Sambat replied: 'whether our vehicle was an "owner" type or for passengers it could
be insured because their company is not owned by the Government and the
Government has nothing to do with their company. So they could do what they
please whenever they believe a vehicle is insurable' ... In spite of the fact that the
present case was filed and tried in the CFI of Pampanga, the defendant company did
not even care to rebut Amor Songco's testimony by calling on the witness-stand
agent Benjamin Sambat, its Pampanga Field Representative."
2

The plaintiffs in the lower court, likewise respondents here, were the surviving
widow and children of the deceased Federico Songco as well as the injured
passenger Jose Manuel. On the above facts they prevailed, as had been mentioned,
in the lower court and in the respondent Court of Appeals.
1awphl.nt

The basis for the favorable judgment is the doctrine announced in Qua Chee Gan v.
Law Union and Rock Insurance Co., Ltd., with Justice J. B. L. Reyes speaking for the
Court. It is now beyond question that where inequitable conduct is shown by an
insurance firm, it is "estopped from enforcing forfeitures in its favor, in order to
forestall fraud or imposition on the insured."
3

As much, if not much more so than the Qua Chee Gan decision, this is a case where
the doctrine of estoppel undeniably calls for application. After petitioner Fieldmen's
Insurance Co., Inc. had led the insured Federico Songco to believe that he could
qualify under the common carrier liability insurance policy, and to enter into
contract of insurance paying the premiums due, it could not, thereafter, in any
litigation arising out of such representation, be permitted to change its stand to the
detriment of the heirs of the insured. As estoppel is primarily based on the doctrine
of good faith and the avoidance of harm that will befall the innocent party due to its
injurious reliance, the failure to apply it in this case would result in a gross travesty
of justice.
That is all that needs be said insofar as the first alleged error of respondent Court of
Appeals is concerned, petitioner being adamant in its far-from-reasonable plea that
estoppel could not be invoked by the heirs of the insured as a bar to the alleged
breach of warranty and condition in the policy. lt would now rely on the fact that the
insured owned a private vehicle, not a common carrier, something which it knew all
along when not once but twice its agent, no doubt without any objection in its part,
exerted the utmost pressure on the insured, a man of scant education, to enter into
such a contract.

Nor is there any merit to the second alleged error of respondent Court that no legal
liability was incurred under the policy by petitioner. Why liability under the terms of
the policy was inescapable was set forth in the decision of respondent Court of
Appeals. Thus: "Since some of the conditions contained in the policy issued by the
defendant-appellant were impossible to comply with under the existing conditions
at the time and 'inconsistent with the known facts,' the insurer 'is estopped from
asserting breach of such conditions.' From this jurisprudence, we find no valid
reason to deviate and consequently hold that the decision appealed from should be
affirmed. The injured parties, to wit, Carlos Songco, Angelito Songco and Jose
Manuel, for whose hospital and medical expenses the defendant company was
being made liable, were passengers of the jeepney at the time of the occurrence,
and Rodolfo Songco, for whose burial expenses the defendant company was also
being made liable was the driver of the vehicle in question. Except for the fact, that
they were not fare paying passengers, their status as beneficiaries under the policy
is recognized therein."
5

Even if it be assumed that there was an ambiguity, an excerpt from the Qua Chee
Gan decision would reveal anew the weakness of petitioner's contention. Thus:
"Moreover, taking into account the well known rule that ambiguities or obscurities
must be strictly interpreted against the party that caused them, the 'memo of
warranty' invoked by appellant bars the latter from questioning the existence of the
appliances called for in the insured premises, since its initial expression, 'the
undernoted appliances for the extinction of fire being kept on the premises insured
hereby, ... it is hereby warranted ...,' admits of interpretation as an admission of the
existence of such appliances which appellant cannot now contradict, should the
parol evidence rule apply."
7

To the same effect is the following citation from the same leading case: "This rigid
application of the rule on ambiguities has become necessary in view of current
business practices. The courts cannot ignore that nowadays monopolies, cartels and
concentration of capital, endowed with overwhelming economic power, manage to
impose upon parties dealing with them cunningly prepared 'agreements' that the
weaker party may not change one whit, his participation in the 'agreement' being
reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles
'contracts by adherence' (contrats d'adhesion), in contrast to those entered into by
parties bargaining on an equal footing, such contracts (of which policies of
insurance and international bills of lading are prime examples) obviously call for
greater strictness and vigilance on the part of courts of justice with a view to
protecting the weaker party from abuses and imposition, and prevent their
becoming traps for the unwary (New Civil Code. Article 24; Sent. of Supreme Court
of Spain, 13 Dec. 1934, 27 February 1942)."
8

The last error assigned which would find fault with the decision of respondent Court
of Appeals insofar as it affirmed the lower court award for exemplary damages as
well as attorney's fees is, on its face, of no persuasive force at all.

The conclusion that inescapably emerges from the above is the correctness of the
decision of respondent Court of Appeals sought to be reviewed. For, to borrow once
again from the language of the Qua Chee Gan opinion: "The contract of insurance is
one of perfect good faith (uberima fides) not for the insured alone,but equally so for
the insurer; in fact, it is more so for the latter, since its dominant bargaining position
carries with it stricter responsibility."
9

This is merely to stress that while the morality of the business world is not the
morality of institutions of rectitude like the pulpit and the academe, it cannot
descend so low as to be another name for guile or deception. Moreover, should it
happen thus, no court of justice should allow itself to lend its approval and support.
We have no choice but to recognize the monetary responsibility of petitioner
Fieldmen's Insurance Co., Inc. It did not succeed in its persistent effort to avoid
complying with its obligation in the lower court and the Court of Appeals. Much less
should it find any receptivity from us for its unwarranted and unjustified plea to
escape from its liability.
WHEREFORE, the decision of respondent Court of Appeals of July 20, 1965, is
affirmed in its entirety. Costs against petitioner Fieldmen's Insurance Co., Inc.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and
Angeles, JJ., concur.

1awphl.nt

EN BANC
G.R. No. L-16215

June 29, 1963

SIMEON DEL ROSARIO, plaintiff-appellee,

vs.
THE EQUITABLE INSURANCE AND CASUALTY CO., INC., defendant-appellant.
Vicente J. Francisco and Jose R. Francisco for plaintiff-appellee.
K. V. Faylona for defendant-appellant.
PAREDES, J.:
On February 7, 1957, the defendant Equitable Insurance and Casualty Co., Inc.,
issued Personal Accident Policy No. 7136 on the life of Francisco del Rosario, alias
Paquito Bolero, son of herein plaintiff-appellee, binding itself to pay the sum of
P1,000.00 to P3,000.00, as indemnity for the death of the insured. The pertinent
provisions of the Policy, recite:
Part I. Indemnity For Death
If the insured sustains any bodily injury which is effected solely through violent,
external, visible and accidental means, and which shall result, independently of all
other causes and within sixty (60) days from the occurrence thereof, in the Death of
the Insured, the Company shall pay the amount set opposite such injury:
Section 1. Injury sustained other than
those specified below unless
P1,000.
excepted hereinafter. . . . . . . .
00
Section 2. Injury sustained by the
wrecking or disablement of a railroad
passenger car or street railway car in
or on which the Insured is travelling
as a farepaying passenger. . . . . . . .

P1,500.
00

Section 3. Injury sustained by the

burning of a church, theatre, public
library or municipal administration
building while the Insured is therein
at the commencement of the
fire. . . . . . . .

P2,000.
00

Section 4. Injury sustained by the

wrecking or disablement of a regular
passenger elevator car in which the

Insured is being conveyed as a

passenger (Elevator in mines
excluded) P2,500.00
Section 5. Injury sustained by a stroke P3,000.
of lightning or by a cyclone. . . . . . . . 00
xxx

xxx

xxx

Part VI. Exceptions

This policy shall not cover disappearance of the Insured nor shall it cover Death,
Disability, Hospital fees, or Loss of Time, caused to the insured:
. . . (h) By drowning except as a consequence of the wrecking or disablement in the
Philippine waters of a passenger steam or motor vessel in which the Insured is
travelling as a farepaying passenger; . . . .
A rider to the Policy contained the following:
IV. DROWNING
It is hereby declared and agreed that exemption clause Letter (h) embodied in PART
VI of the policy is hereby waived by the company, and to form a part of the
provision covered by the policy.
On February 24, 1957, the insured Francisco del Rosario, alias Paquito Bolero, while
on board the motor launch "ISLAMA" together with 33 others, including his
beneficiary in the Policy, Remedios Jayme, were forced to jump off said launch on
account of fire which broke out on said vessel, resulting in the death of drowning, of
the insured and beneficiary in the waters of Jolo.
1wph1.t

On April 13, 1957, Simeon del Rosario, father of the insured, and as the sole heir,
filed a claim for payment with defendant company, and on September 13, 1957,
defendant company paid to him (plaintiff) the sum of P1,000.00, pursuant to Section
1 of Part I of the policy. The receipt signed by plaintiff reads
RECEIVED of the EQUITABLE INSURANCE & CASUALTY CO., INC., the sum of PESOS
ONE THOUSAND (P1,000.00) Philippine Currency, being settlement in full for all
claims and demands against said Company as a result of an accident which
occurred on February 26, 1957, insured under out ACCIDENT Policy No. 7136,
causing the death of the Assured.
In view of the foregoing, this policy is hereby surrendered and CANCELLED.
LOSS COMPUTATION

Amount of Insurance
__________
vvvvv

P1,000.00

On the same date (September 13, 1957), Atty. Vicente J. Francisco, wrote defendant
company acknowledging receipt by his client (plaintiff herein), of the P1,000.00, but
informing said company that said amount was not the correct one. Atty. Francisco
claimed
The amount payable under the policy, I believe should be P1,500.00 under the
provision of Section 2, part 1 of the policy, based on the rule of pari materia as the
death of the insured occurred under the circumstances similar to that provided
under the aforecited section.
Defendant company, upon receipt of the letter, referred the matter to the Insurance
Commissioner, who rendered an opinion that the liability of the company was only
P1,000.00, pursuant to Section 1, Part I of the Provisions of the policy (Exh. F, or 3).
Because of the above opinion, defendant insurance company refused to pay more
than P1,000.00. In the meantime, Atty. Vicente Francisco, in a subsequent letter to
the insurance company, asked for P3,000.00 which the Company refused, to pay.
Hence, a complaint for the recovery of the balance of P2,000.00 more was instituted
with the Court of First Instance of Rizal (Pasay City, Branch VII), praying for it further
sum of P10,000.00 as attorney's fees, expenses of litigation and costs.
Defendant Insurance Company presented a Motion to Dismiss, alleging that the
demand or claim is set forth in the complaint had already been released, plaintiff
having received the full amount due as appearing in policy and as per opinion of the
Insurance Commissioner. An opposition to the motion to dismiss, was presented by
plaintiff, and other pleadings were subsequently file by the parties. On December
28, 1957, the trial court deferred action on the motion to dismiss until termination
of the trial of the case, it appearing that the ground thereof was not indubitable. In
the Answer to the complaint, defendant company practically admitted all the
allegations therein, denying only those which stated that under the policy its liability
was P3,000.00.
On September 1, 1958, the trial court promulgated an Amended Decision, the
pertinent portions of which read
xxx

xxx

xxx

Since the contemporaneous and subsequent acts of the parties show that it was not
their intention that the payment of P1,000.00 to the plaintiff and the signing of the
loss receipt exhibit "1" would be considered as releasing the defendant completely
from its liability on the policy in question, said intention of the parties should prevail
over the contents of the loss receipt "1" (Articles 1370 and 1371, New Civil Code).

". . . . Under the terms of this policy, defendant company agreed to pay P1,000.00
to P3,000.00 as indemnity for the death of the insured. The insured died of
drowning. Death by drowning is covered by the policy the pertinent provisions of
which reads as follows:
xxx

xxx

xxx

"Part I of the policy fixes specific amounts as indemnities in case of death resulting
from "bodily injury which is effected solely thru violence, external, visible and
accidental means" but, Part I of the Policy is not applicable in case of death by
drowning because death by drowning is not one resulting from "bodily injury which
is affected solely thru violent, external, visible and accidental means" as "Bodily
Injury" means a cut, a bruise, or a wound and drowning is death due to suffocation
and not to any cut, bruise or wound."
xxx

xxx

xxx

Besides, on the face of the policy Exhibit "A" itself, death by drowning is a ground
for recovery apart from the bodily injury because death by bodily injury is covered
by Part I of the policy while death by drowning is covered by Part VI thereof. But
while the policy mentions specific amounts that may be recovered for death for
bodily injury, yet, there is not specific amount mentioned in the policy for death thru
drowning although the latter is, under Part VI of the policy, a ground for recovery
thereunder. Since the defendant has bound itself to pay P1000.00 to P3,000.00 as
indemnity for the death of the insured but the policy does not positively state any
definite amount that may be recovered in case of death by drowning, there is an
ambiguity in this respect in the policy, which ambiguity must be interpreted in favor
of the insured and strictly against the insurer so as to allow greater indemnity.
xxx

xxx

xxx

. . . plaintiff is therefore entitled to recover P3,000.00. The defendant had already

paid the amount of P1,000.00 to the plaintiff so that there still remains a balance of
P2,000.00 of the amount to which plaintiff is entitled to recover under the policy
Exhibit "A".
The plaintiff asks for an award of P10,000.00 as attorney's fees and expenses of
litigation. However, since it is evident that the defendant had not acted in bad faith
in refusing to pay plaintiff's claim, the Court cannot award plaintiff's claim for
attorney's fees and expenses of litigation.
IN VIEW OF THE FOREGOING, the Court hereby reconsiders and sets aside its
decision dated July 21, 1958 and hereby renders judgment, ordering the defendant
to pay plaintiff the sum of Two Thousand (P2,000.00) Pesos and to pay the costs.

The above judgment was appealed to the Court of Appeals on three (3) counts. Said
Court, in a Resolution dated September 29, 1959, elevated the case to this Court,
stating that the genuine issue is purely legal in nature.
All the parties agree that indemnity has to be paid. The conflict centers on how
much should the indemnity be. We believe that under the proven facts and
circumstances, the findings and conclusions of the trial court, are well taken, for
they are supported by the generally accepted principles or rulings on insurance,
which enunciate that where there is an ambiguity with respect to the terms and
conditions of the policy, the same will be resolved against the one responsible
thereof. It should be recalled in this connection, that generally, the insured, has
little, if any, participation in the preparation of the policy, together with the drafting
of its terms and Conditions. The interpretation of obscure stipulations in a contract
should not favor the party who cause the obscurity (Art. 1377, N.C.C.), which, in the
case at bar, is the insurance company.
. . . . And so it has been generally held that the "terms in an insurance policy, which
are ambiguous, equivocal or uncertain . . . are to be construed strictly against, the
insurer, and liberally in favor of the insured so as to effect the dominant purpose of
indemnity or payment to the insured, especially where a forfeiture is involved," (29
Am. Jur. 181) and the reason for this rule is that the "insured usually has no voice in
the selection or arrangement of the words employed and that the language of the
contract is selected with great care and deliberation by expert and legal advisers
employed by, and acting exclusively in the interest of, the insurance company" (44
C.J.S. 1174). Calanoc v. Court of Appeals, et al., G.R. No. L-8151, Dec. 16, 1955.
. . . . Where two interpretations, equally fair, of languages used in an insurance
policy may be made, that which allows the greater indemnity will prevail. (L'Engel v.
Scotish Union & Nat. F. Ins. Co., 48 Fla. 82, 37 So. 462, 67 LRA 581 111 Am. St. Rep.
70, 5 Ann. Cas. 749).
At any event, the policy under consideration, covers death or disability by
accidental means, and the appellant insurance company agreed to pay P1,000.00 to
P3,000.00. is indemnity for death of the insured.
In view of the conclusions reached, it would seem unnecessary to discuss the other
issues raised in the appeal.
The judgment appealed from is hereby affirmed. Without costs.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC

G.R. No. L-28866 March 17, 1972

FE DE JOYA LANDICHO, in her own behalf and as judicial guardian of her
minor children, RAFAEL J. LANDICHO and MA. LOURDES EUGENIA
LANDICHO,plaintiffs-appellees,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM,defendant-appellant. .
Vedasto J. Hernandez for plaintiffs-appellees.Government Corporate Counsel
Leopoldo M. Abellera and Trial Attorney Arsenio J. Magpale defendant-appellant.

CONCEPCION, C.J.:p
Appeal of the Government Service Insurance System hereinafter referred to as
GSIS, for the sake of brevity from a decision of the Court of First Instance of
Manila directing said defendant to pay to the plaintiffs-appellees, Fe de Joya
Landicho and her minor children, Rafael J. and Maria Lourdes Eugenia, both
surnamed Landicho, the sum of P15,800, with interest thereon, at the legal rate,
from September 26, 1967, until fully paid, in addition to the sum of P1,000, as and
for attorney's fees, and the costs.
The facts are not in dispute. On June 1, 1964, the GSIS issued in favor of Flaviano
Landicho, a civil engineer of the Bureau of Public Works, stationed at Mamburao,
Mindoro Occidental, optional additional life insurance policy No. OG-136107 in the
sum of P7,900. The policy states on its face:
This insurance is granted subject to the terms and conditions hereinafter set forth
and in consideration of the "Information" therefor and of the payment on the day
this Policy takes effect of the monthly premiums stated above, due from and
payable by the Insured, and the like payments on the last day of every month
during the lifetime of the Insured until maturity of this Policy or until prior death of
the Insured.
On page 2 of said policy, condition No. 1 provides, in part: .
1. PAYMENT OF PREMIUMS: .

... . Premiums are due and payable at the Office of the System in Manila or at any of
its branches. When any premium or installment thereof remains unpaid after its due
date, such due date is the date of default in payment of premiums. The mere
possession of this Policy does not imply that it is in force unless the premiums due
thereon are paid on time or the policy has sufficient cash value to keep it in force.
Condition No. 18, on page 8 of the policy, is of the following tenor: .
18. ENTIRE CONTRACT IN THIS POLICY: .
This Policy together with the "Information" sheet signed by the Insured, a copy of
which is attached hereto, is issued under the provisions of Commonwealth Act No.
186, as amended, and constitutes the entire contract.
All statements made by the Insured shall, in the absence of fraud, be deemed
representations and no warranties, and no statement shall void the Policy or be
used as a defense to claim hereunder unless it be contained in written information
and a copy of such information be endorsed upon or attached to the Policy when
issued.
Before the issuance of said policy, the insured had filed an application, by filing and
signing a printed form of the GSIS on the basis of which the policy was issued.
Paragraph 7 of said application States:
7. I hereby declare that all the above statements and answers as well as those I
may make to the System's Medical Examiner in continuation of this application, to
be true and co direct to the best of my knowledge and belief, and I hereby agree as
follows: .
a. That this declaration, with the answers to be given by me to the Medical Officer,
shall be made the basis the policy and form part of the same; .
b. That acceptance of my policy issued on this application will constitute a
ratification by me of any correction or addition to this application made by the
System; .
c. That this application serves as a letter of authority to the Collecting Officer of our
Office thru the GSIS to deduct from my salary the monthly premium in the amount
of P33.36, beginning the month of May, 1964, and every month thereafter until
notice of its discontinuance shall have beenreceived from the System; .
d. That the failure to deduct from my salary the month premiums shall not make the
policy lapse, however, the premium account shall be considered as indebtedness
which, I bind myself to pay the System; .
e. That my policy shall be made effective on the first day of the month next
following the month the first premium is paid; provided, that it is not more ninety

(90) days before or after the date of the medical examination,was conducted if
required." .
While still under the employment of the Bureau of Public Works, Mr. Landicho met
his death, on June 29, 1966, in an airplane crash in Mindoro. Thereupon, Mrs.
Landicho, in her own behalf and that of her co-plaintiffs and minor children, Rafael J.
and Maria Lourdes Eugenia, filed with the GSIS a claim for P15,800, as the double
indemnity due under policy No. OG-136107, because of the untimely death of the
insured owing to said accident. The GSIS denied the claim, upon the ground that the
policy had never been in force because, pursuant to subdivision (e) of the abovequoted paragraph 7 of the application, the policy "shall be ... effective on the first
day of the month next following the month the first premium is paid," and no
premium had ever been paid on said policy. Upon refusal of the GSIS to reconsider
its stand, this action was filed, September 22, 1967, in the Court of First Instance of
Manila, in which the GSIS reiterated its aforementioned defense. Thereafter
submitted by both parties for judgment on the pleadings, upon the ground thatthe
case involve purely questions of law, said court rendered, in due course, its
abovementioned decision, from which the GSIS has taken the present appeal.
The main issue therein is whether or not the insurance policy in question has ever
been in force, not a single premium having been paid thereon. In support of the
affirmative, plaintiffs invoke the stipulation in the policy to the effect that the
information contained in the application filed by the insured shall form part of the
contract between him and the GSIS, and, especially, subdivisions (c) and (d) of
paragraph 7 of said application stating that the same shall serve "as a letter of
authority to the Collecting Officer of our Office" the Bureau of Public Works
"thru the GSIS to deduct from my salary the monthly premium in the amount of
P33.36 beginning the month of May, 1964, and every month thereafter," and that
"failure to deduct from my salary the monthly premiums shallnot make the policy
lapse, however, the premium account shall be considered as indebtedness which, I"
the insured "bind myself to pay the System." The GSIS maintains, however, the
1

negative, relying upon subdivision (e) of the same paragraph No. 7, which provides that the
"policy shall be made effective on the first day of the month next following the month the
first premium is paid." Under this theory, subdivisions (c) and (d) of said paragraph 7 would
not apply unless and until the first premium shall have been actually paid, pursuant to
subdivision (e) of the same paragraph.

Although it may not be entirely farfetched, this view is not likely to be in accord with
the understanding of many, if not most, government employees who obtain an
optional additional life insurance policy. As a consequence, the actual receipt by
them of their full pay without any deduction for premiums on their optional
additional life insurance policies may not impart to them the warning which,
otherwise, it would necessarily convey that said policy is not, as yet, in force, for
they are liable to believe "that failure to deduct" from the salary of the insured
"the monthly premiums shall not" in the language of subdivision (d) "make the

policy lapse" and that "the premiums account shall be considered as indebtedness,"
to be paid or deducted later, because, after all, the so called "payment" of
premiums is nothing but a "paper" or "accounting" process, whereby funds are
merely transferred, not physically, but constructively, from one office of the
government to another. In other words, the language, of subdivisions (c), (d) and (e)
is such as to create an ambiguity that should be resolved against the party
responsible therefor defendant GSIS, as the party who prepared and furnished
the application form and in favor of the party misled thereby, the insured
employee.
Indeed, our Civil Code provides:
The interpretation of obscure words or stipulations in a contract shall not favor the
party who caused the obscurity.
2

This is particularly true as regards insurance policies, in respect of which it is settled

that the " "terms in an insurance policy, which are ambiguous, equivocal, or
uncertain ... are to be construed strictly and most strongly against the insurer, and
liberally in favor of the insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where a forfeiture is involved" (29 Am. Jur., 181),
and the reason for this rule is the "insured usually has no voice in the selection or
arrangement of the words employed and that the language of the contract is
selected with great care and deliberation by experts and legal advisers employed
by, and acting exclusively in the interest of, the insurance company." (44 C.J.S., p.
1174.) .
3

The equitable and ethical considerations justifying the foregoing view are bolstered
up by two (2) factors, namely:
(a) The aforementioned subdivision (c) states "that this application serves as a
letter of authority to the Collecting Officer of our Office" the Bureau of Public
Works "thru the GSIS to deduct from my salary the monthly premium in the
amount of P33.36." No such deduction was made and, consequently, not even
the first premium "paid" because the collecting officer of the Bureau of Public
Works was not advised by the GSIS to make it (the deduction) pursuant to said
authority. Surely, this omission of the GSIS should not inure to its benefit. .
(b) The GSIS had impliedly induced the insured to believe that Policy No. OG136107 was in force, he having been paid by the GSIS the dividends corresponding
to said policy. Had the insured had the slightest inkling that the latter was not, as
yet, effective for non-payment of the first premium, he would have, in all
probability, caused the same to be forthwith satisfied.
WHEREFORE, the decision appealed from should be, it is hereby affirmed, with costs
against the defendant-appellant, Government Service Insurance System. It is so
ordered. .

Reyes, J.B.L., Makalintal, Zaldivar, Castro, Fernando, Teehankee, Villamor, Barredo

and Makasiar, JJ., concur.

G.R. No. 166245

April 9, 2008

ETERNAL GARDENS MEMORIAL PARK CORPORATION, petitioner,

vs.
THE PHILIPPINE AMERICAN LIFE INSURANCE COMPANY, respondent.
DECISION
VELASCO, JR., J.:
The Case
Central to this Petition for Review on Certiorari under Rule 45 which seeks to reverse
and set aside the November 26, 2004 Decision of the Court of Appeals (CA) in CAG.R. CV No. 57810 is the query: May the inaction of the insurer on the insurance
application be considered as approval of the application?
1

The Facts
On December 10, 1980, respondent Philippine American Life Insurance Company
(Philamlife) entered into an agreement denominated as Creditor Group Life Policy
No. P-1920 with petitioner Eternal Gardens Memorial Park Corporation (Eternal).
Under the policy, the clients of Eternal who purchased burial lots from it on
installment basis would be insured by Philamlife. The amount of insurance coverage
depended upon the existing balance of the purchased burial lots. The policy was to
be effective for a period of one year, renewable on a yearly basis.
2

The relevant provisions of the policy are:

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

The Life Insurance coverage of any Lot Purchaser at any time shall be the amount of
the unpaid balance of his loan (including arrears up to but not exceeding 2 months)
as reported by the Assured to the Company or the sum of P100,000.00, whichever is
smaller. Such benefit shall be paid to the Assured if the Lot Purchaser dies while
insured under the Policy.
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if the
application of the Lot Purchaser is not approved by the Company.
3

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

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

In reply, Philamlife wrote Eternal a letter on November 12, 1984, requiring Eternal
to submit the following documents relative to its insurance claim for Chuangs
death: (1) Certificate of Claimant (with form attached); (2) Assureds Certificate
(with form attached); (3) Application for Insurance accomplished and signed by the
insured, Chuang, while still living; and (4) Statement of Account showing the unpaid
balance of Chuang before his death.
6

Eternal transmitted the required documents through a letter dated November 14,
1984, which was received by Philamlife on November 15, 1984.
7

After more than a year, Philamlife had not furnished Eternal with any reply to the
latters insurance claim. This prompted Eternal to demand from Philamlife the
payment of the claim for PhP 100,000 on April 25, 1986.
8

In response to Eternals demand, Philamlife denied Eternals insurance claim in a

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

The deceased was 59 years old when he entered into Contract #9558 and 9529
with Eternal Gardens Memorial Park in October 1982 for the total maximum
insurable amount of P100,000.00 each. No application for Group Insurance was
submitted in our office prior to his death on August 2, 1984.

In accordance with our Creditors Group Life Policy No. P-1920, under Evidence of
Insurability provision, "a declaration of good health shall be required for all Lot
Purchasers as party of the application." We cite further the provision on Effective
Date of Coverage under the policy which states that "there shall be no insurance if
the application is not approved by the Company." Since no application had been
submitted by the Insured/Assured, prior to his death, for our approval but was
submitted instead on November 15, 1984, after his death, Mr. John Uy Chuang was
not covered under the Policy. We wish to point out that Eternal Gardens being the
Assured was a party to the Contract and was therefore aware of these pertinent
provisions.
With regard to our acceptance of premiums, these do not connote our approval per
se of the insurance coverage but are held by us in trust for the payor until the
prerequisites for insurance coverage shall have been met. We will however, return
all the premiums which have been paid in behalf of John Uy Chuang.
Consequently, Eternal filed a case before the Makati City Regional Trial Court (RTC)
for a sum of money against Philamlife, docketed as Civil Case No. 14736. The trial
court decided in favor of Eternal, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of Plaintiff
ETERNAL, against Defendant PHILAMLIFE, ordering the Defendant PHILAMLIFE, to
pay the sum of P100,000.00, representing the proceeds of the Policy of John Uy
Chuang, plus legal rate of interest, until fully paid; and, to pay the sum of
P10,000.00 as attorneys fees.
SO ORDERED.
The RTC found that Eternal submitted Chuangs application for insurance which he
accomplished before his death, as testified to by Eternals witness and evidenced by
the letter dated December 29, 1982, stating, among others: "Encl: Phil-Am Life
Insurance Application Forms & Cert." It further ruled that due to Philamlifes
inaction from the submission of the requirements of the group insurance on
December 29, 1982 to Chuangs death on August 2, 1984, as well as Philamlifes
acceptance of the premiums during the same period, Philamlife was deemed to
have approved Chuangs application. The RTC said that since the contract is a group
life insurance, once proof of death is submitted, payment must follow.
10

Philamlife appealed to the CA, which ruled, thus:

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

11

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

accomplishment of the submitted application form violated Section 26 of the

Insurance Code. Thus, the CA concluded, there being no application form, Chuang
was not covered by Philamlifes insurance.
Hence, we have this petition with the following grounds:
The Honorable Court of Appeals has decided a question of substance, not therefore
determined by this Honorable Court, or has decided it in a way not in accord with
law or with the applicable jurisprudence, in holding that:
I. The application for insurance was not duly submitted to respondent PhilamLife
before the death of John Chuang;
II. There was no valid insurance coverage; and
III. Reversing and setting aside the Decision of the Regional Trial Court dated May
29, 1996.
The Courts Ruling
As a general rule, this Court is not a trier of facts and will not re-examine factual
issues raised before the CA and first level courts, considering their findings of facts
are conclusive and binding on this Court. However, such rule is subject to
exceptions, as enunciated in Sampayan v. Court of Appeals:
(1) when the findings are grounded entirely on speculation, surmises or conjectures;
(2) when the inference made is manifestly mistaken, absurd or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of facts are conflicting; (6) when in
making its findings the [CA] went beyond the issues of the case, or its findings are
contrary to the admissions of both the appellant and the appellee; (7) when the
findings [of the CA] are contrary to the trial court; (8) when the findings are
conclusions without citation of specific evidence on which they are based; (9) when
the facts set forth in the petition as well as in the petitioners main and reply briefs
are not disputed by the respondent; (10) when the findings of fact are premised on
the supposed absence of evidence and contradicted by the evidence on record; and
(11) when the Court of Appeals manifestly overlooked certain relevant facts not
disputed by the parties, which, if properly considered, would justify a different
conclusion. (Emphasis supplied.)
12

In the instant case, the factual findings of the RTC were reversed by the CA; thus,
this Court may review them.
Eternal claims that the evidence that it presented before the trial court supports its
contention that it submitted a copy of the insurance application of Chuang before
his death. In Eternals letter dated December 29, 1982, a list of insurable interests
of buyers for October 1982 was attached, including Chuang in the list of new

businesses. Eternal added it was noted at the bottom of said letter that the
corresponding "Phil-Am Life Insurance Application Forms & Cert." were enclosed in
the letter that was apparently received by Philamlife on January 15, 1983. Finally,
Eternal alleged that it provided a copy of the insurance application which was
signed by Chuang himself and executed before his death.
On the other hand, Philamlife claims that the evidence presented by Eternal is
insufficient, arguing that Eternal must present evidence showing that Philamlife
received a copy of Chuangs insurance application.
The evidence on record supports Eternals position.
The fact of the matter is, the letter dated December 29, 1982, which Philamlife
stamped as received, states that the insurance forms for the attached list of burial
lot buyers were attached to the letter. Such stamp of receipt has the effect of
acknowledging receipt of the letter together with the attachments. Such receipt is
an admission by Philamlife against its own interest. The burden of evidence has
shifted to Philamlife, which must prove that the letter did not contain Chuangs
insurance application. However, Philamlife failed to do so; thus, Philamlife is
deemed to have received Chuangs insurance application.
13

To reiterate, it was Philamlifes bounden duty to make sure that before a transmittal
letter is stamped as received, the contents of the letter are correct and accounted
for.
Philamlifes allegation that Eternals witnesses ran out of credibility and reliability
due to inconsistencies is groundless. The trial court is in the best position to
determine the reliability and credibility of the witnesses, because it has the
opportunity to observe firsthand the witnesses demeanor, conduct, and attitude.
Findings of the trial court on such matters are binding and conclusive on the
appellate court, unless some facts or circumstances of weight and substance have
been overlooked, misapprehended, or misinterpreted, that, if considered, might
affect the result of the case.
14

15

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

however, reveals no overlooked facts of substance and value.
Philamlife primarily claims that Eternal did not even know where the original
insurance application of Chuang was, as shown by the testimony of Edilberto
Mendoza:
Atty. Arevalo:
Q Where is the original of the application form which is required in case of new
coverage?
[Mendoza:]

A It is [a] standard operating procedure for the new client to fill up two copies of this
form and the original of this is submitted to Philamlife together with the monthly
remittances and the second copy is remained or retained with the marketing
department of Eternal Gardens.
Atty. Miranda:
We move to strike out the answer as it is not responsive as counsel is merely asking
for the location and does not [ask] for the number of copy.
Atty. Arevalo:
Q Where is the original?
[Mendoza:]
A As far as I remember I do not know where the original but when I submitted with
that payment together with the new clients all the originals I see to it before I sign
the transmittal letter the originals are attached therein.
16

In other words, the witness admitted not knowing where the original insurance
application was, but believed that the application was transmitted to Philamlife as
an attachment to a transmittal letter.
As to the seeming inconsistencies between the testimony of Manuel Cortez on
whether one or two insurance application forms were accomplished and the
testimony of Mendoza on who actually filled out the application form, these are
minor inconsistencies that do not affect the credibility of the witnesses. Thus, we
ruled in People v. Paredes that minor inconsistencies are too trivial to affect the
credibility of witnesses, and these may even serve to strengthen their credibility as
these negate any suspicion that the testimonies have been rehearsed.
17

We reiterated the above ruling in Merencillo v. People:

Minor discrepancies or inconsistencies do not impair the essential integrity of the
prosecutions evidence as a whole or reflect on the witnesses honesty. The test is
whether the testimonies agree on essential facts and whether the respective
versions corroborate and substantially coincide with each other so as to make a
consistent and coherent whole.
18

In the present case, the number of copies of the insurance application that Chuang
executed is not at issue, neither is whether the insurance application presented by
Eternal has been falsified. Thus, the inconsistencies pointed out by Philamlife are
minor and do not affect the credibility of Eternals witnesses.
However, the question arises as to whether Philamlife assumed the risk of loss
without approving the application.

This question must be answered in the affirmative.

As earlier stated, Philamlife and Eternal entered into an agreement denominated as
Creditor Group Life Policy No. P-1920 dated December 10, 1980. In the policy, it is
provided that:
EFFECTIVE DATE OF BENEFIT.
The insurance of any eligible Lot Purchaser shall be effective on the date he
contracts a loan with the Assured. However, there shall be no insurance if the
application of the Lot Purchaser is not approved by the Company.
An examination of the above provision would show ambiguity between its two
sentences. The first sentence appears to state that the insurance coverage of the
clients of Eternal already became effective upon contracting a loan with Eternal
while the second sentence appears to require Philamlife to approve the insurance
contract before the same can become effective.
It must be remembered that an insurance contract is a contract of adhesion which
must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:
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. (Emphasis supplied.)
19

In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with
his obligation. Being a contract of adhesion, the terms of an insurance contract are
to be construed strictly against the party which prepared the contract, the insurer.
By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted
against the insurer and liberally in favor of the insured, especially to avoid
forfeiture.
20

Clearly, the vague contractual provision, in Creditor Group Life Policy No. P-1920
dated December 10, 1980, must be construed in favor of the insured and in favor of
the effectivity of the insurance contract.

On the other hand, the seemingly conflicting provisions must be harmonized to

mean that upon a partys purchase of a memorial lot on installment from Eternal, an
insurance contract covering the lot purchaser is created and the same is effective,
valid, and binding until terminated by Philamlife by disapproving the insurance
application. The second sentence of Creditor Group Life Policy No. P-1920 on the
Effective Date of Benefit is in the nature of a resolutory condition which would lead
to the cessation of the insurance contract. Moreover, the mere inaction of the
insurer on the insurance application must not work to prejudice the insured; it
cannot be interpreted as a termination of the insurance contract. The termination of
the insurance contract by the insurer must be explicit and unambiguous.
As a final note, to characterize the insurer and the insured as contracting parties on
equal footing is inaccurate at best. Insurance contracts are wholly prepared by the
insurer with vast amounts of experience in the industry purposefully used to its
advantage. More often than not, insurance contracts are contracts of adhesion
containing technical terms and conditions of the industry, confusing if at all
understandable to laypersons, that are imposed on those who wish to avail of
insurance. As such, insurance contracts are imbued with public interest that must
be considered whenever the rights and obligations of the insurer and the insured
are to be delineated. Hence, in order to protect the interest of insurance applicants,
insurance companies must be obligated to act with haste upon insurance
applications, to either deny or approve the same, or otherwise be bound to honor
the application as a valid, binding, and effective insurance contract.
21

WHEREFORE, we GRANT the petition. The November 26, 2004 CA Decision in CAG.R. CV No. 57810 isREVERSED and SET ASIDE. The May 29, 1996 Decision of the
Makati City RTC, Branch 138 is MODIFIED. Philamlife is hereby ORDERED:
(1) To pay Eternal the amount of PhP 100,000 representing the proceeds of the Life
Insurance Policy of Chuang;
(2) To pay Eternal legal interest at the rate of six percent (6%) per annum of PhP
100,000 from the time of extra-judicial demand by Eternal until Philamlifes receipt
of the May 29, 1996 RTC Decision on June 17, 1996;
(3) To pay Eternal legal interest at the rate of twelve percent (12%) per annum of
PhP 100,000 from June 17, 1996 until full payment of this award; and
(4) To pay Eternal attorneys fees in the amount of PhP 10,000.
No costs.
SO ORDERED.

G.R. No. L-36413 September 26, 1988

MALAYAN INSURANCE CO., INC., petitioner,
vs.
THE HON. COURT OF APPEALS (THIRD DIVISION) MARTIN C. VALLEJOS, SIO
CHOY, SAN LEON RICE MILL, INC. and PANGASINAN TRANSPORTATION CO.,
INC., respondents.
Freqillana Jr. for petitioner.
B.F. Estrella & Associates for respondent Martin Vallejos.
Vicente Erfe Law Office for respondent Pangasinan Transportation Co., Inc.
Nemesio Callanta for respondent Sio Choy and San Leon Rice Mill, Inc.

PADILLA, J.:
Review on certiorari of the judgment * of the respondent appellate court in CA-G.R. No. 47319-R, dated 22
February 1973, which affirmed, with some modifications, the decision, ** dated 27 April 1970, rendered in Civil Case No. U2021 of the Court of First Instance of Pangasinan.

The antecedent facts of the case are as follows:

On 29 March 1967, herein petitioner, Malayan Insurance Co., Inc., issued in favor of
private respondent Sio Choy Private Car Comprehensive Policy No. MRO/PV-15753,
effective from 18 April 1967 to 18 April 1968, covering a Willys jeep with Motor No.
ET-03023 Serial No. 351672, and Plate No. J-21536, Quezon City, 1967. The
insurance coverage was for "own damage" not to exceed P600.00 and "third-party
liability" in the amount of P20,000.00.
During the effectivity of said insurance policy, and more particularly on 19
December 1967, at about 3:30 o'clock in the afternoon, the insured jeep, while
being driven by one Juan P. Campollo an employee of the respondent San Leon Rice
Mill, Inc., collided with a passenger bus belonging to the respondent Pangasinan
Transportation Co., Inc. (PANTRANCO, for short) at the national highway in Barrio
San Pedro, Rosales, Pangasinan, causing damage to the insured vehicle and injuries
to the driver, Juan P. Campollo, and the respondent Martin C. Vallejos, who was
riding in the ill-fated jeep.
As a result, Martin C. Vallejos filed an action for damages against Sio Choy, Malayan
Insurance Co., Inc. and the PANTRANCO before the Court of First Instance of
Pangasinan, which was docketed as Civil Case No. U-2021. He prayed therein that
the defendants be ordered to pay him, jointly and severally, the amount of
P15,000.00, as reimbursement for medical and hospital expenses; P6,000.00, for

lost income; P51,000.00 as actual, moral and compensatory damages; and

P5,000.00, for attorney's fees.
Answering, PANTRANCO claimed that the jeep of Sio Choy was then operated at an
excessive speed and bumped the PANTRANCO bus which had moved to, and
stopped at, the shoulder of the highway in order to avoid the jeep; and that it had
observed the diligence of a good father of a family to prevent damage, especially in
the selection and supervision of its employees and in the maintenance of its motor
vehicles. It prayed that it be absolved from any and all liability.
Defendant Sio Choy and the petitioner insurance company, in their answer, also
denied liability to the plaintiff, claiming that the fault in the accident was solely
imputable to the PANTRANCO.
Sio Choy, however, later filed a separate answer with a cross-claim against the
herein petitioner wherein he alleged that he had actually paid the plaintiff, Martin C.
Vallejos, the amount of P5,000.00 for hospitalization and other expenses, and, in his
cross-claim against the herein petitioner, he alleged that the petitioner had issued
in his favor a private car comprehensive policy wherein the insurance company
obligated itself to indemnify Sio Choy, as insured, for the damage to his motor
vehicle, as well as for any liability to third persons arising out of any accident during
the effectivity of such insurance contract, which policy was in full force and effect
when the vehicular accident complained of occurred. He prayed that he be
reimbursed by the insurance company for the amount that he may be ordered to
pay.
Also later, the herein petitioner sought, and was granted, leave to file a third-party
complaint against the San Leon Rice Mill, Inc. for the reason that the person driving
the jeep of Sio Choy, at the time of the accident, was an employee of the San Leon
Rice Mill, Inc. performing his duties within the scope of his assigned task, and not an
employee of Sio Choy; and that, as the San Leon Rice Mill, Inc. is the employer of
the deceased driver, Juan P. Campollo, it should be liable for the acts of its
employee, pursuant to Art. 2180 of the Civil Code. The herein petitioner prayed that
judgment be rendered against the San Leon Rice Mill, Inc., making it liable for the
amounts claimed by the plaintiff and/or ordering said San Leon Rice Mill, Inc. to
reimburse and indemnify the petitioner for any sum that it may be ordered to pay
the plaintiff.
After trial, judgment was rendered as follows:
WHEREFORE, in view of the foregoing findings of this Court judgment is hereby
rendered in favor of the plaintiff and against Sio Choy and Malayan Insurance Co.,
Inc., and third-party defendant San Leon Rice Mill, Inc., as follows:
(a) P4,103 as actual damages;

(b) P18,000.00 representing the unearned income of plaintiff Martin C. Vallejos for
the period of three (3) years;
(c) P5,000.00 as moral damages;
(d) P2,000.00 as attomey's fees or the total of P29,103.00, plus costs.
The above-named parties against whom this judgment is rendered are hereby held
jointly and severally liable. With respect, however, to Malayan Insurance Co., Inc.,
its liability will be up to only P20,000.00.
As no satisfactory proof of cost of damage to its bus was presented by defendant
Pantranco, no award should be made in its favor. Its counter-claim for attorney's
fees is also dismissed for not being proved.
1

On appeal, the respondent Court of Appeals affirmed the judgment of the trial court
that Sio Choy, the San Leon Rice Mill, Inc. and the Malayan Insurance Co., Inc. are
jointly and severally liable for the damages awarded to the plaintiff Martin C.
Vallejos. It ruled, however, that the San Leon Rice Mill, Inc. has no obligation to
indemnify or reimburse the petitioner insurance company for whatever amount it
has been ordered to pay on its policy, since the San Leon Rice Mill, Inc. is not a privy
to the contract of insurance between Sio Choy and the insurance company.
2

Hence, the present recourse by petitioner insurance company.

The petitioner prays for the reversal of the appellate court's judgment, or, in the
alternative, to order the San Leon Rice Mill, Inc. to reimburse petitioner any amount,
in excess of one-half (1/2) of the entire amount of damages, petitioner may be
ordered to pay jointly and severally with Sio Choy.
The Court, acting upon the petition, gave due course to the same, but "only insofar
as it concerns the alleged liability of respondent San Leon Rice Mill, Inc. to
petitioner, it being understood that no other aspect of the decision of the Court of
Appeals shall be reviewed, hence, execution may already issue in favor of
respondent Martin C. Vallejos against the respondents, without prejudice to the
determination of whether or not petitioner shall be entitled to reimbursement by
respondent San Leon Rice Mill, Inc. for the whole or part of whatever the former
may pay on the P20,000.00 it has been adjudged to pay respondent Vallejos."
3

However, in order to determine the alleged liability of respondent San Leon Rice
Mill, Inc. to petitioner, it is important to determine first the nature or basis of the
liability of petitioner to respondent Vallejos, as compared to that of respondents Sio
Choy and San Leon Rice Mill, Inc.
Therefore, the two (2) principal issues to be resolved are (1) whether the trial court,
as upheld by the Court of Appeals, was correct in holding petitioner and
respondents Sio Choy and San Leon Rice Mill, Inc. "solidarily liable" to respondent

Vallejos; and (2) whether petitioner is entitled to be reimbursed by respondent San

Leon Rice Mill, Inc. for whatever amount petitioner has been adjudged to pay
respondent Vallejos on its insurance policy.
As to the first issue, it is noted that the trial court found, as affirmed by the
appellate court, that petitioner and respondents Sio Choy and San Leon Rice Mill,
Inc. are jointly and severally liable to respondent Vallejos.
We do not agree with the aforesaid ruling. We hold instead that it is only
respondents Sio Choy and San Leon Rice Mill, Inc, (to the exclusion of the petitioner)
that are solidarily liable to respondent Vallejos for the damages awarded to Vallejos.
It must be observed that respondent Sio Choy is made liable to said plaintiff as
owner of the ill-fated Willys jeep, pursuant to Article 2184 of the Civil Code which
provides:
Art. 2184. In motor vehicle mishaps, the owner is solidarily liable with his driver, if
the former, who was in the vehicle, could have, by the use of due diligence,
prevented the misfortune it is disputably presumed that a driver was negligent, if he
had been found guilty of reckless driving or violating traffic regulations at least
twice within the next preceding two months.
If the owner was not in the motor vehicle, the provisions of article 2180 are
applicable.
On the other hand, it is noted that the basis of liability of respondent San Leon Rice
Mill, Inc. to plaintiff Vallejos, the former being the employer of the driver of the
Willys jeep at the time of the motor vehicle mishap, is Article 2180 of the Civil Code
which reads:
Art. 2180. The obligation imposed by article 2176 is demandable not only for one's
own acts or omissions, but also for those of persons for whom one is responsible.
xxx xxx xxx
Employers shall be liable for the damages caused by their employees and
household helpers acting within the scope of their assigned tasks, even though the
former are not engaged ill any business or industry.
xxx xxx xxx
The responsibility treated in this article shall cease when the persons herein
mentioned proved that they observed all the diligence of a good father of a family
to prevent damage.
It thus appears that respondents Sio Choy and San Leon Rice Mill, Inc. are the
principal tortfeasors who are primarily liable to respondent Vallejos. The law states

that the responsibility of two or more persons who are liable for a quasi-delict is
solidarily.
4

On the other hand, the basis of petitioner's liability is its insurance contract with
respondent Sio Choy. If petitioner is adjudged to pay respondent Vallejos in the
amount of not more than P20,000.00, this is on account of its being the insurer of
respondent Sio Choy under the third party liability clause included in the private car
comprehensive policy existing between petitioner and respondent Sio Choy at the
time of the complained vehicular accident.
In Guingon vs. Del Monte, a passenger of a jeepney had just alighted therefrom, when he
5

was bumped by another passenger jeepney. He died as a result thereof. In the damage suit
filed by the heirs of said passenger against the driver and owner of the jeepney at fault as
well as against the insurance company which insured the latter jeepney against third party
liability, the trial court, affirmed by this Court, adjudged the owner and the driver of the
jeepney at fault jointly and severally liable to the heirs of the victim in the total amount of
P9,572.95 as damages and attorney's fees; while the insurance company was sentenced to
pay the heirs the amount of P5,500.00 which was to be applied as partial satisfaction of the
judgment rendered against said owner and driver of the jeepney. Thus, in said Guingon case,
it was only the owner and the driver of the jeepney at fault, not including the insurance
company, who were held solidarily liable to the heirs of the victim.

While it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer, however,
6

the direct liability of the insurer under indemnity contracts against third party liability does
not mean that the insurer can be held solidarily liable with the insured and/or the other
parties found at fault. The liability of the insurer is based on contract; that of the insured is
based on tort.

In the case at bar, petitioner as insurer of Sio Choy, is liable to respondent Vallejos,
but it cannot, as incorrectly held by the trial court, be made "solidarily" liable with
the two principal tortfeasors namely respondents Sio Choy and San Leon Rice Mill,
Inc. For if petitioner-insurer were solidarily liable with said two (2) respondents by
reason of the indemnity contract against third party liability-under which an insurer
can be directly sued by a third party this will result in a violation of the principles
underlying solidary obligation and insurance contracts.
In solidary obligation, the creditor may enforce the entire obligation against one of
the solidary debtors. On the other hand, insurance is defined as "a contract whereby one
7

undertakes for a consideration to indemnify another against loss, damage, or liability arising
from an unknown or contingent event." 8

In the case at bar, the trial court held petitioner together with respondents Sio Choy
and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total
amount of P29,103.00, with the qualification that petitioner's liability is only up to
P20,000.00. In the context of a solidary obligation, petitioner may be compelled by
respondent Vallejos to pay the entire obligation of P29,013.00, notwithstanding the

qualification made by the trial court. But, how can petitioner be obliged to pay the
entire obligation when the amount stated in its insurance policy with respondent Sio
Choy for indemnity against third party liability is only P20,000.00? Moreover, the
qualification made in the decision of the trial court to the effect that petitioner is
sentenced to pay up to P20,000.00 only when the obligation to pay P29,103.00 is
made solidary, is an evident breach of the concept of a solidary obligation. Thus, We
hold that the trial court, as upheld by the Court of Appeals, erred in holding
petitioner, solidarily liable with respondents Sio Choy and San Leon Rice Mill, Inc. to
respondent Vallejos.
As to the second issue, the Court of Appeals, in affirming the decision of the trial
court, ruled that petitioner is not entitled to be reimbursed by respondent San Leon
Rice Mill, Inc. on the ground that said respondent is not privy to the contract of
insurance existing between petitioner and respondent Sio Choy. We disagree.
The appellate court overlooked the principle of subrogation in insurance contracts.
Thus
... Subrogation is a normal incident of indemnity insurance (Aetna L. Ins. Co. vs.
Moses, 287 U.S. 530, 77 L. ed. 477). Upon payment of the loss, the insurer is
entitled to be subrogated pro tanto to any right of action which the insured may
have against the third person whose negligence or wrongful act caused the loss (44
Am. Jur. 2nd 745, citing Standard Marine Ins. Co. vs. Scottish Metropolitan
Assurance Co., 283 U.S. 284, 75 L. ed. 1037).
The right of subrogation is of the highest equity. The loss in the first instance is that
of the insured but after reimbursement or compensation, it becomes the loss of the
insurer (44 Am. Jur. 2d, 746, note 16, citing Newcomb vs. Cincinnati Ins. Co., 22 Ohio
St. 382).
Although many policies including policies in the standard form, now provide for
subrogation, and thus determine the rights of the insurer in this respect, the
equitable right of subrogation as the legal effect of payment inures to the insurer
without any formal assignment or any express stipulation to that effect in the
policy" (44 Am. Jur. 2nd 746). Stated otherwise, when the insurance company pays
for the loss, such payment operates as an equitable assignment to the insurer of
the property and all remedies which the insured may have for the recovery
thereof. That right is not dependent upon , nor does it grow out of any privity of
contract (emphasis supplied) or upon written assignment of claim, and payment to
the insured makes the insurer assignee in equity (Shambley v. Jobe-Blackley
Plumbing and Heating Co., 264 N.C. 456, 142 SE 2d 18).
9

It follows, therefore, that petitioner, upon paying respondent Vallejos the amount of
riot exceeding P20,000.00, shall become the subrogee of the insured, the
respondent Sio Choy; as such, it is subrogated to whatever rights the latter has
against respondent San Leon Rice Mill, Inc. Article 1217 of the Civil Code gives to a

solidary debtor who has paid the entire obligation the right to be reimbursed by his
co-debtors for the share which corresponds to each.
Art. 1217. Payment made by one of the solidary debtors extinguishes the obligation.
If two or more solidary debtors offer to pay, the creditor may choose which offer to
accept.
He who made the payment may claim from his co-debtors only the share which
corresponds to each, with the interest for the payment already made. If the
payment is made before the debt is due, no interest for the intervening period may
be demanded.
xxx xxx xxx
In accordance with Article 1217, petitioner, upon payment to respondent Vallejos
and thereby becoming the subrogee of solidary debtor Sio Choy, is entitled to
reimbursement from respondent San Leon Rice Mill, Inc.
To recapitulate then: We hold that only respondents Sio Choy and San Leon Rice
Mill, Inc. are solidarily liable to the respondent Martin C. Vallejos for the amount of
P29,103.00. Vallejos may enforce the entire obligation on only one of said solidary
debtors. If Sio Choy as solidary debtor is made to pay for the entire obligation
(P29,103.00) and petitioner, as insurer of Sio Choy, is compelled to pay P20,000.00
of said entire obligation, petitioner would be entitled, as subrogee of Sio Choy as
against San Leon Rice Mills, Inc., to be reimbursed by the latter in the amount of
P14,551.50 (which is 1/2 of P29,103.00 )
WHEREFORE, the petition is GRANTED. The decision of the trial court, as affirmed by
the Court of Appeals, is hereby AFFIRMED, with the modification above-mentioned.
Without pronouncement as to costs.
SO ORDERED.

G.R. No. 198174

September 2, 2013

ALPHA INSURANCE AND SURETY CO., PETITIONER,

vs.
ARSENIA SONIA CASTOR, RESPONDENT.
DECISION
PERALTA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision dated May 31, 2011 and Resolution dated August 10, 2011 of
the Court of Appeals (CA) in CA-G.R. CV No. 93027.
1

The facts follow.

On February 21, 2007, respondent entered into a contract of insurance, Motor Car
Policy No. MAND/CV-00186, with petitioner, involving her motor vehicle, a Toyota
Revo DLX DSL. The contract of insurance obligates the petitioner to pay the
respondent the amount of Six Hundred Thirty Thousand Pesos (P630,000.00) in case
of loss or damage to said vehicle during the period covered, which is from February
26, 2007 to February 26, 2008.
On April 16, 2007, at about 9:00 a.m., respondent instructed her driver, Jose Joel
Salazar Lanuza (Lanuza), to bring the above-described vehicle to a nearby autoshop for a tune-up. However, Lanuza no longer returned the motor vehicle to
respondent and despite diligent efforts to locate the same, said efforts proved futile.
Resultantly, respondent promptly reported the incident to the police and
concomitantly notified petitioner of the said loss and demanded payment of the
insurance proceeds in the total sum of P630,000.00.
In a letter dated July 5, 2007, petitioner denied the insurance claim of respondent,
stating among others, thus:
Upon verification of the documents submitted, particularly the Police Report and
your Affidavit, which states that the culprit, who stole the Insure[d] unit, is
employed with you. We would like to invite you on the provision of the Policy under
Exceptions to Section-III, which we quote:
1.) The Company shall not be liable for:
xxxx
(4) Any malicious damage caused by the Insured, any member of his family or by "A
PERSON IN THE INSUREDS SERVICE."
In view [of] the foregoing, we regret that we cannot act favorably on your claim.

In letters dated July 12, 2007 and August 3, 2007, respondent reiterated her claim
and argued that the exception refers to damage of the motor vehicle and not to its
loss. However, petitioners denial of respondents insured claim remains firm.
Accordingly, respondent filed a Complaint for Sum of Money with Damages against
petitioner before the Regional Trial Court (RTC) of Quezon City on September 10,
2007.
In a Decision dated December 19, 2008, the RTC of Quezon City ruled in favor of
respondent in this wise:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff and against the defendant ordering the latter as follows:
To pay plaintiff the amount of P466,000.00 plus legal interest of 6% per annum from
the time of demand up to the time the amount is fully settled;
To pay attorneys fees in the sum of P65,000.00; and
To pay the costs of suit.
All other claims not granted are hereby denied for lack of legal and factual basis.

Aggrieved, petitioner filed an appeal with the CA.

On May 31, 2011, the CA rendered a Decision affirming in toto the RTC of Quezon
Citys decision. The fallo reads:
WHEREFORE, in view of all the foregoing, the appeal is DENIED. Accordingly, the
Decision, dated December 19, 2008, of Branch 215 of the Regional Trial Court of
Quezon City, in Civil Case No. Q-07-61099, is hereby AFFIRMED in toto.
SO ORDERED.

Petitioner filed a Motion for Reconsideration against said decision, but the same was
denied in a Resolution dated August 10, 2011.
Hence, the present petition wherein petitioner raises the following grounds for the
allowance of its petition:
WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND
GROSSLY OR GRAVELY ABUSED ITS DISCRETION WHEN IT ADJUDGED IN FAVOR OF
THE PRIVATE RESPONDENT AND AGAINST THE PETITIONER AND RULED THAT
EXCEPTION DOES NOT COVER LOSS BUT ONLY DAMAGE BECAUSE THE TERMS OF
THE INSURANCE POLICY ARE [AMBIGUOUS] EQUIVOCAL OR UNCERTAIN, SUCH THAT
THE PARTIES THEMSELVES DISAGREE ABOUT THE MEANING OF PARTICULAR
PROVISIONS, THE POLICY WILL BE CONSTRUED BY THE COURTS LIBERALLY IN FAVOR
OF THE ASSURED AND STRICTLY AGAINST THE INSURER.

WITH DUE RESPECT TO THE HONORABLE COURT OF APPEALS, IT ERRED AND

COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT [AFFIRMED] IN TOTO THE
JUDGMENT OF THE TRIAL COURT.
5

Simply, the core issue boils down to whether or not the loss of respondents vehicle
is excluded under the insurance policy.
We rule in the negative.
Significant portions of Section III of the Insurance Policy states:
SECTION III LOSS OR DAMAGE
The Company will, subject to the Limits of Liability, indemnify the Insured against
loss of or damage to the Schedule Vehicle and its accessories and spare parts whilst
thereon:
(a)
by accidental collision or overturning, or collision or overturning consequent upon
mechanical breakdown or consequent upon wear and tear;
(b)
by fire, external explosion, self-ignition or lightning or burglary, housebreaking or
theft;
(c)
by malicious act;
(d)
whilst in transit (including the processes of loading and unloading) incidental to
such transit by road, rail, inland waterway, lift or elevator.
xxxx
EXCEPTIONS TO SECTION III
The Company shall not be liable to pay for:
Loss or Damage in respect of any claim or series of claims arising out of one event,
the first amount of each and every loss for each and every vehicle insured by this
Policy, such amount being equal to one percent (1.00%) of the Insureds estimate of
Fair Market Value as shown in the Policy Schedule with a minimum deductible
amount of Php3,000.00;

Consequential loss, depreciation, wear and tear, mechanical or electrical

breakdowns, failures or breakages;
Damage to tires, unless the Schedule Vehicle is damaged at the same time;
Any malicious damage caused by the Insured, any member of his family or by a
person in the Insureds service.
6

In denying respondents claim, petitioner takes exception by arguing that the word
"damage," under paragraph 4 of "Exceptions to Section III," means loss due to injury
or harm to person, property or reputation, and should be construed to cover
malicious "loss" as in "theft." Thus, it asserts that the loss of respondents vehicle as
a result of it being stolen by the latters driver is excluded from the policy.
We do not agree.
Ruling in favor of respondent, the RTC of Quezon City scrupulously elaborated that
theft perpetrated by the driver of the insured is not an exception to the coverage
from the insurance policy, since Section III thereof did not qualify as to who would
commit the theft. Thus:
Theft perpetrated by a driver of the insured is not an exception to the coverage
from the insurance policy subject of this case. This is evident from the very
provision of Section III "Loss or Damage." The insurance company, subject to the
limits of liability, is obligated to indemnify the insured against theft. Said provision
does not qualify as to who would commit the theft. Thus, even if the same is
committed by the driver of the insured, there being no categorical declaration of
exception, the same must be covered. As correctly pointed out by the plaintiff, "(A)n
insurance contract should be interpreted as to carry out the purpose for which the
parties entered into the contract which is to insure against risks of loss or damage
to the goods. Such interpretation should result from the natural and reasonable
meaning of language in the policy. Where restrictive provisions are open to two
interpretations, that which is most favorable to the insured is adopted." The
defendant would argue that if the person employed by the insured would commit
the theft and the insurer would be held liable, then this would result to an absurd
situation where the insurer would also be held liable if the insured would commit the
theft. This argument is certainly flawed. Of course, if the theft would be committed
by the insured himself, the same would be an exception to the coverage since in
that case there would be fraud on the part of the insured or breach of material
warranty under Section 69 of the Insurance Code.
7

Moreover, contracts of insurance, like other contracts, are to be construed according

to the sense and meaning of the terms which the parties themselves have used. If
such terms are clear and unambiguous, they must be taken and understood in their
plain, ordinary and popular sense. Accordingly, in interpreting the exclusions in an
8

insurance contract, the terms used specifying the excluded classes therein are to be
given their meaning as understood in common speech.
9

Adverse to petitioners claim, the words "loss" and "damage" mean different things
in common ordinary usage. The word "loss" refers to the act or fact of losing, or
failure to keep possession, while the word "damage" means deterioration or injury
to property.
1wphi1

Therefore, petitioner cannot exclude the loss of respondents vehicle under the
insurance policy under paragraph 4 of "Exceptions to Section III," since the same
refers only to "malicious damage," or more specifically, "injury" to the motor vehicle
caused by a person under the insureds service. Paragraph 4 clearly does not
contemplate "loss of property," as what happened in the instant case.
Further, the CA aptly ruled that "malicious damage," as provided for in the subject
policy as one of the exceptions from coverage, is the damage that is the direct
result from the deliberate or willful act of the insured, members of his family, and
any person in the insureds service, whose clear plan or purpose was to cause
damage to the insured vehicle for purposes of defrauding the insurer, viz.:
This interpretation by the Court is bolstered by the observation that the subject
policy appears to clearly delineate between the terms "loss" and "damage" by using
both terms throughout the said policy. x x x
xxxx
If the intention of the defendant-appellant was to include the term "loss" within the
term "damage" then logic dictates that it should have used the term "damage"
alone in the entire policy or otherwise included a clear definition of the said term as
part of the provisions of the said insurance contract. Which is why the Court finds it
puzzling that in the said policys provision detailing the exceptions to the policys
coverage in Section III thereof, which is one of the crucial parts in the insurance
contract, the insurer, after liberally using the words "loss" and "damage" in the
entire policy, suddenly went specific by using the word "damage" only in the
policys exception regarding "malicious damage." Now, the defendant-appellant
would like this Court to believe that it really intended the word "damage" in the
term "malicious damage" to include the theft of the insured vehicle.
The Court does not find the particular contention to be well taken.
True, it is a basic rule in the interpretation of contracts that the terms of a contract
are to be construed according to the sense and meaning of the terms which the
parties thereto have used. In the case of property insurance policies, the evident
intention of the contracting parties, i.e., the insurer and the assured, determine the
import of the various terms and provisions embodied in the policy. However, when
the terms of the insurance policy are ambiguous, equivocal or uncertain, such that

the parties themselves disagree about the meaning of particular provisions, the
policy will be construed by the courts liberally in favor of the assured and strictly
against the insurer.
10

Lastly, a contract of insurance is a contract of adhesion. So, when the terms of the
insurance contract contain limitations on liability, courts should construe them in
such a way as to preclude the insurer from non-compliance with his obligation.
Thus, in Eternal Gardens Memorial Park Corporation v. Philippine American Life
Insurance Company, this Court ruled
11

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

must be construed liberally in favor of the insured and strictly against the insurer in
order to safeguard the latters interest. Thus, in Malayan Insurance Corporation v.
Court of Appeals, this Court held that:
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 non-compliance with its obligations.
In the more recent case of Philamcare Health Systems, Inc. v. Court of Appeals, we
reiterated the above ruling, stating that:
When the terms of insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with
his obligation. Being a contract of adhesion, the terms of an insurance contract are
to be construed strictly against the party which prepared the contract, the insurer.
By reason of the exclusive control of the insurance company over the terms and
phraseology of the insurance contract, ambiguity must be strictly interpreted
against the insurer and liberally in favor of the insured, especially to avoid
forfeiture.
12

WHEREFORE, premises considered, the instant Petition for Review on Certiorari is

DENIED. Accordingly, the Decision dated May 31, 2011 and Resolution dated August
10, 2011 of the Court of Appeals are hereby AFFIRMED.
SO ORDERED.

[G.R. No. 112360. July 18, 2000]

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT
OF APPEALS and TRANSWORLD KNITTING MILLS,
INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the
Rules of Court seeking to annul and set aside the July 15, 1993
Decision and October 22, 1993 Resolution of the Court of
Appeals in CA-G.R. CV NO. 28779, which modified the Ruling of the
Regional Trial Court of Pasig, Branch 161, in Civil Case No. 46106.
[1]

[2]

[3]

[4]

The antecedent facts that matter are as follows:

On March 13, 1980, Rizal Surety & Insurance Company (Rizal
Insurance) issued Fire Insurance Policy No. 45727 in favor of
Transworld Knitting Mills, Inc. (Transworld), initially for One Million
(P1,000,000.00) Pesos and eventually increased to One Million Five
Hundred Thousand (P1,500,000.00) Pesos, covering the period from
August 14, 1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and
location thereof, read:
"On stocks of finished and/or unfinished products, raw materials
and supplies of every kind and description, the properties of the
Insureds and/or held by them in trust, on commission or on joint
account with others and/or for which they (sic) responsible in case of
loss whilst contained and/or stored during the currency of this Policy
in the premises occupied by them forming part of the buildings
situate (sic) within own Compound at MAGDALO STREET, BARRIO
UGONG, PASIG, METRO MANILA, PHILIPPINES, BLOCK NO. 601.
xxx...............xxx...............xxx

Said building of four-span lofty one storey in height with mezzanine

portions is constructed of reinforced concrete and hollow blocks
and/or concrete under galvanized iron roof and occupied as hosiery
mills, garment and lingerie factory, transistor-stereo assembly plant,
offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under
galvanized iron roof occupied as canteen and guardhouse, partly by
building of two and partly one storey constructed of concrete below,
timber above undergalvanized iron roof occupied as garage and
quarters and partly by open space and/or tracking/ packing, beyond
which is the aforementioned Magdalo Street; on its right and left by
driveway, thence open spaces, and at the rear by open spaces.'"
[5]

The same pieces of property insured with the petitioner were also
insured with New India Assurance Company, Ltd., (New India).
On January 12, 1981, fire broke out in the compound of Transworld,
razing the middle portion of its four-span building and partly gutting
the left and right sections thereof. A two-storey building (behind said
four-span building) where fun and amusement machines and spare
parts were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance
Company and New India Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said
insurance companies an action for collection of sum of money and
damages, docketed as Civil Case No. 46106 before Branch 161 of
the then Court of First Instance of Rizal; praying for judgment
ordering Rizal Insurance and New India to pay the amount of P2,747,
867.00 plus legal interest,P400,000.00 as attorney's fees, exemplary
damages, expenses of litigation of P50,000.00 and costs of suit.
[6]

Petitioner Rizal Insurance countered that its fire insurance policy

sued upon covered only the contents of the four-span building,
which was partly burned, and not the damage caused by the fire on
the two-storey annex building.
[7]

On January 4, 1990, the trial court rendered its decision; disposing

as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay
Transwrold (sic) Knitting Mills, Inc. the amount of P826, 500.00
representing the actual value of the losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."

[8]

Both the petitioner, Rizal Insurance Company, and private

respondent, Transworld Knitting Mills, Inc., went to the Court of
Appeals, which came out with its decision of July 15, 1993 under
attack, the decretal portion of which reads:
"WHEREFORE, and upon all the foregoing, the decision of the court
below is MODIFIED in that defendant New India Assurance Company
has and is hereby required to pay plaintiff-appellant the amount of
P1,818,604.19 while the other Rizal Surety has to pay the plaintiffappellant P470,328.67, based on the actual losses sustained by
plaintiff Transworld in the fire, totalling P2,790,376.00 as against the
amounts of fire insurance coverages respectively extended by New
India in the amount of P5,800,000.00 and Rizal Surety and Insurance
Company in the amount of P1,500,000.00.
No costs.
SO ORDERED."

[9]

On August 20, 1993, from the aforesaid judgment of the Court of

Appeals New India appealed to this Court theorizing inter alia that
the private respondent could not be compensated for the loss of the
fun and amusement machines and spare parts stored at the twostorey building because it (Transworld) had no insurable interest in
said goods or items.

On February 2, 1994, the Court denied the appeal with finality in

G.R. No. L-111118 (New India Assurance Company Ltd. vs. Court of
Appeals).
Petitioner Rizal Insurance and private respondent Transworld,
interposed a Motion for Reconsideration before the Court of Appeals,
and on October 22, 1993, the Court of Appeals reconsidered its
decision of July 15, 1993, as regards the imposition of interest, ruling
thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only
insofar as the imposition of legal interest is concerned, that, on the
assessment against New India Assurance Company on the amount
of P1,818,604.19 and that against Rizal Surety & Insurance
Company on the amount of P470,328.67, from May 26, 1982 when
the complaint was filed until payment is made. The rest of the said
decision is retained in all other respects.
SO ORDERED."

[10]

Undaunted, petitioner Rizal Surety & Insurance Company found its

way to this Court via the present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE
ANNEX BUILDING WHERE THE BULK OF THE BURNED PROPERTIES
WERE STORED, WAS INCLUDED IN THE COVERAGE OF THE
INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN
NOT CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY),
TAKEN IMMEDIATELY AFTER THE FIRE, WHICH CLEARLY SHOW THAT
THE PREMISES OCCUPIED BY TRANSWORLD, WHERE THE INSURED
PROPERTIES WERE LOCATED, SUSTAINED PARTIAL DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT
TRANSWORLD HAD ACTED IN PALPABLE BAD FAITH AND WITH
MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL ACTION, AND IN
NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL
AND PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S

FEES AND EXPENSES OF LITIGATION (ART. 2208 PARS. 4 and 11,

CIVIL CODE).
[11]

The Petition is not impressed with merit.

It is petitioner's submission that the fire insurance policy litigated
upon protected only the contents of the main building (four-span),
and did not include those stored in the two-storey annex building.
On the other hand, the private respondent theorized that the so
called "annex" was not an annex but was actually an integral part of
the four-span building and therefore, the goods and items stored
therein were covered by the same fire insurance policy.
[12]

[13]

Resolution of the issues posited here hinges on the proper

interpretation of the stipulation in subject fire insurance policy
regarding its coverage, which reads:
"xxx contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate
(sic) within own Compound xxx"
Therefrom, it can be gleaned unerringly that the fire insurance
policy in question did not limit its coverage to what were stored in
the four-span building. As opined by the trial court of origin, two
requirements must concur in order that the said fun and amusement
machines and spare parts would be deemed protected by the fire
insurance policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas
occupied by Transworld and second, said areas must form part of
the building described in the policy xxx"
[14]

'Said building of four-span lofty one storey in height with mezzanine

portions is constructed of reinforced concrete and hollow blocks
and/or concrete under galvanized iron roof and occupied as hosiery
mills, garment and lingerie factory, transistor-stereo assembly plant,
offices, ware house and caretaker's quarter.'

The Court is mindful of the well-entrenched doctrine that factual

findings by the Court of Appeals are conclusive on the parties and
not reviewable by this Court, and the same carry even more weight
when the Court of Appeals has affirmed the findings of fact arrived
at by the lower court.
[15]

In the case under consideration, both the trial court and the Court of
Appeals found that the so called "annex " was not an annex building
but an integral and inseparable part of the four-span building
described in the policy and consequently, the machines and spare
parts stored therein were covered by the fire insurance in dispute.
The letter-report of the Manila Adjusters and Surveyor's Company,
which petitioner itself cited and invoked, describes the "annex"
building as follows:
"Two-storey building constructed of partly timber and partly concrete
hollow blocks under g.i. roof which is adjoining and
intercommunicating with the repair of the first right span of the lofty
storey building and thence by property fence wall."
[16]

Verily, the two-storey building involved, a permanent structure

which adjoins and intercommunicates with the "first right span of
the lofty storey building", formed part thereof, and meets the
requisites for compensability under the fire insurance policy sued
upon.
[17]

So also, considering that the two-storey building aforementioned

was already existing when subject fire insurance policy contract was
entered into on January 12, 1981, having been constructed
sometime in 1978, petitioner should have specifically excluded the
said two-storey building from the coverage of the fire insurance if
minded to exclude the same but if did not, and instead, went on to
provide that such fire insurance policy covers the products, raw
materials and supplies stored within the premises of respondent
Transworld which was an integral part of the four-span building
occupied by Transworld, knowing fully well the existence of such
[18]

building adjoining and intercommunicating with the right section of

the four-span building.
After a careful study, the Court does not find any basis for disturbing
what the lower courts found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy
under controversy has created a doubt regarding the portions of the
building insured thereby. Article 1377 of the New Civil Code
provides:
"Art.1377. The interpretation of obscure words or stipulations in a
contract shall not favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved
against the petitioner, Rizal Surety Insurance Company, whose
lawyer or managers drafted the fire insurance policy contract under
scrutiny. Citing the aforecited provision of law in point, the Court
in Landicho vs. Government Service Insurance System, ruled:
[19]

"This is particularly true as regards insurance policies, in respect of

which it is settled that the 'terms in an insurance policy, which are
ambiguous, equivocal, or uncertain x x x are to be construed strictly
and most strongly against the insurer, and liberally in favor of the
insured so as to effect the dominant purpose of indemnity or
payment to the insured, especially where forfeiture is involved' (29
Am. Jur., 181), and the reason for this is that the 'insured usually has
no voice in the selection or arrangement of the words employed and
that the language of the contract is selected with great care and
deliberation by experts and legal advisers employed by, and acting
exclusively in the interest of, the insurance company.' (44 C.J.S., p.
1174).""
[20]

Equally relevant is the following disquisition of the Court

in Fieldmen's Insurance Company, Inc. vs. Vda. De Songco, to wit:
[21]

"'This rigid application of the rule on ambiguities has become

necessary in view of current business practices. The courts cannot
ignore that nowadays monopolies, cartels and concentration of

capital, endowed with overwhelming economic power, manage to

impose upon parties dealing with them cunningly prepared
'agreements' that the weaker party may not change one whit, his
participation in the 'agreement' being reduced to the alternative to
'take it or leave it' labelled since Raymond Saleilles 'contracts by
adherence' (contrats [sic] d'adhesion), in contrast to these entered
into by parties bargaining on an equal footing, such contracts (of
which policies of insurance and international bills of lading are prime
example) obviously call for greater strictness and vigilance on the
part of courts of justice with a view to protecting the weaker party
from abuses and imposition, and prevent their becoming traps for
the unwary (New Civil Code, Article 24; Sent. of Supreme Court of
Spain, 13 Dec. 1934, 27 February 1942.)'"
[22]

The issue of whether or not Transworld has an insurable interest in

the fun and amusement machines and spare parts, which entitles it
to be indemnified for the loss thereof, had been settled in G.R. No. L111118, entitled New India Assurance Company, Ltd., vs. Court of
Appeals, where the appeal of New India from the decision of the
Court of Appeals under review, was denied with finality by this Court
on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the
premises, precludes the relitigation of a particular fact or issue in
another action between the same parties based on a different claim
or cause of action. "xxx the judgment in the prior action operates as
estoppel only as to those matters in issue or points controverted,
upon the determination of which the finding or judgment was
rendered. In fine, the previous judgment is conclusive in the second
case, only as those matters actually and directly controverted and
determined and not as to matters merely involved therein."
[23]

Applying the abovecited pronouncement, the Court, in Smith Bell

and Company (Phils.), Inc. vs. Court of Appeals, held that the issue
of negligence of the shipping line, which issue had already been
passed upon in a case filed by one of the insurers, is conclusive and
can no longer be relitigated in a similar case filed by another insurer
[24]

against the same shipping line on the basis of the same factual
circumstances. Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai
Maru') had been negligent, or so negligent as to have proximately
caused the collision between them, was an issue that was actually,
directly and expressly raised, controverted and litigated in C.A.-G.R.
No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and
held the 'Don Carlos' to have been negligent rather than the 'Yotai
Maru' and, as already noted, that Decision was affirmed by this
Court in G.R. No. L-48839 in a Resolution dated 6 December 1987.
The Reyes Decision thus became final and executory approximately
two (2) years before the Sison Decision, which is assailed in the
case at bar, was promulgated. Applying the rule of conclusiveness of
judgment, the question of which vessel had been negligent in the
collision between the two (2) vessels, had long been settled by this
Court and could no longer be relitigated in C.A.-G.R. No. 61206-R.
Private respondent Go Thong was certainly bound by the ruling or
judgment of Reyes, L.B., J. and that of this Court. The Court of
Appeals fell into clear and reversible error when it disregarded the
Decision of this Court affirming the Reyes Decision."
[25]

The controversy at bar is on all fours with the aforecited case.

Considering that private respondent's insurable interest in, and
compensability for the loss of subject fun and amusement machines
and spare parts, had been adjudicated, settled and sustained by the
Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R.
No. L-111118, in a Resolution, dated February 2, 1994, the same can
no longer be relitigated and passed upon in the present case.
Ineluctably, the petitioner, Rizal Surety Insurance Company, is
bound by the ruling of the Court of Appeals and of this Court that
the private respondent has an insurable interest in the aforesaid fun
and amusement machines and spare parts; and should be
indemnified for the loss of the same.

So also, the Court of Appeals correctly adjudged petitioner liable for

the amount of P470,328.67, it being the total loss and damage
suffered by Transworld for which petitioner Rizal Insurance is liable.

[26]

All things studiedly considered and viewed in proper perspective,

the Court is of the irresistible conclusion, and so finds, that the Court
of Appeals erred not in holding the petitioner, Rizal Surety Insurance
Company, liable for the destruction and loss of the insured buildings
and articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the
Resolution, dated October 22, 1993, of the Court of Appeals in CAG.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement as to
costs.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Gonzaga-Reyes,
JJ., concur.

G.R. No. L-2294

May 25, 1951

FILIPINAS COMPAIA DE SEGUROS, petitioner,

vs.
CHRISTERN, HUENEFELD and CO., INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation, Christern Huenefeld, & Co., Inc.,
after payment of corresponding premium, obtained from the petitioner ,Filipinas Cia.
de Seguros, fire policy No. 29333 in the sum of P1000,000, covering merchandise
contained in a building located at No. 711 Roman Street, Binondo Manila. On
February 27, 1942, or during the Japanese military occupation, the building and
insured merchandise were burned. In due time the respondent submitted to the
petitioner its claim under the policy. The salvage goods were sold at public auction
and, after deducting their value, the total loss suffered by the respondent was fixed
at P92,650. The petitioner refused to pay the claim on the ground that the policy in
favor of the respondent had ceased to be in force on the date the United States
declared war against Germany, the respondent Corporation (though organized
under and by virtue of the laws of the Philippines) being controlled by the German
subjects and the petitioner being a company under American jurisdiction when said
policy was issued on October 1, 1941. The petitioner, however, in pursuance of the
order of the Director of Bureau of Financing, Philippine Executive Commission, dated
April 9, 1943, paid to the respondent the sum of P92,650 on April 19, 1943.
The present action was filed on August 6, 1946, in the Court of First Instance of
Manila for the purpose of recovering from the respondent the sum of P92,650 above
mentioned. The theory of the petitioner is that the insured merchandise were
burned up after the policy issued in 1941 in favor of the respondent corporation has
ceased to be effective because of the outbreak of the war between the United
States and Germany on December 10, 1941, and that the payment made by the
petitioner to the respondent corporation during the Japanese military occupation
was under pressure. After trial, the Court of First Instance of Manila dismissed the
action without pronouncement as to costs. Upon appeal to the Court of Appeals, the
judgment of the Court of First Instance of Manila was affirmed, with costs. The case
is now before us on appeal by certiorari from the decision of the Court of Appeals.
The Court of Appeals overruled the contention of the petitioner that the respondent
corporation became an enemy when the United States declared war against
Germany, relying on English and American cases which held that a corporation is a
citizen of the country or state by and under the laws of which it was created or
organized. It rejected the theory that nationality of private corporation is determine
by the character or citizenship of its controlling stockholders.

There is no question that majority of the stockholders of the respondent corporation

were German subjects. This being so, we have to rule that said respondent became
an enemy corporation upon the outbreak of the war between the United States and
Germany. The English and American cases relied upon by the Court of Appeals have
lost their force in view of the latest decision of the Supreme Court of the United
States in Clark vs. Uebersee Finanz Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in which the controls test has been
adopted. In "Enemy Corporation" by Martin Domke, a paper presented to the
Second International Conference of the Legal Profession held at the Hague
(Netherlands) in August. 1948 the following enlightening passages appear:
Since World War I, the determination of enemy nationality of corporations has been
discussion in many countries, belligerent and neutral. A corporation was subject to
enemy legislation when it was controlled by enemies, namely managed under the
influence of individuals or corporations, themselves considered as enemies. It was
the English courts which first the Daimler case applied this new concept of "piercing
the corporate veil," which was adopted by the peace of Treaties of 1919 and the
Mixed Arbitral established after the First World War.
The United States of America did not adopt the control test during the First World
War. Courts refused to recognized the concept whereby American-registered
corporations could be considered as enemies and thus subject to domestic
legislation and administrative measures regarding enemy property.
World War II revived the problem again. It was known that German and other enemy
interests were cloaked by domestic corporation structure. It was not only by legal
ownership of shares that a material influence could be exercised on the
management of the corporation but also by long term loans and other factual
situations. For that reason, legislation on enemy property enacted in various
countries during World War II adopted by statutory provisions to the control test and
determined, to various degrees, the incidents of control. Court decisions were
rendered on the basis of such newly enacted statutory provisions in determining
enemy character of domestic corporation.
The United States did not, in the amendments of the Trading with the Enemy Act
during the last war, include as did other legislations the applications of the control
test and again, as in World War I, courts refused to apply this concept whereby the
enemy character of an American or neutral-registered corporation is determined by
the enemy nationality of the controlling stockholders.
Measures of blocking foreign funds, the so called freezing regulations, and other
administrative practice in the treatment of foreign-owned property in the United
States allowed to large degree the determination of enemy interest in domestic
corporations and thus the application of the control test. Court decisions sanctioned
such administrative practice enacted under the First War Powers Act of 1941, and

more recently, on December 8, 1947, the Supreme Court of the United States
definitely approved of the control theory. In Clark vs. Uebersee Finanz Korporation, A.
G., dealing with a Swiss corporation allegedly controlled by German interest, the
Court: "The property of all foreign interest was placed within the reach of the
vesting power (of the Alien Property Custodian) not to appropriate friendly or
neutral assets but to reach enemy interest which masqueraded under those
innocent fronts. . . . The power of seizure and vesting was extended to all property
of any foreign country or national so that no innocent appearing device could
become a Trojan horse."
It becomes unnecessary, therefore, to dwell at length on the authorities cited in
support of the appealed decision. However, we may add that, in Haw Pia vs. China
Banking Corporation, 45 Off Gaz., (Supp. 9) 299, we already held that China
Banking Corporation came within the meaning of the word "enemy" as used in the
Trading with the Enemy Acts of civilized countries not only because it was
incorporated under the laws of an enemy country but because it was controlled by
enemies.
*

The Philippine Insurance Law (Act No. 2427, as amended,) in section 8, provides
that "anyone except a public enemy may be insured." It stands to reason that an
insurance policy ceases to be allowable as soon as an insured becomes a public
enemy.
Effect of war, generally. All intercourse between citizens of belligerent powers
which is inconsistent with a state of war is prohibited by the law of nations. Such
prohibition includes all negotiations, commerce, or trading with the enemy; all acts
which will increase, or tend to increase, its income or resources; all acts of voluntary
submission to it; or receiving its protection; also all acts concerning the transmission
of money or goods; and all contracts relating thereto are thereby nullified. It further
prohibits insurance upon trade with or by the enemy, upon the life or lives of aliens
engaged in service with the enemy; this for the reason that the subjects of one
country cannot be permitted to lend their assistance to protect by insurance the
commerce or property of belligerent, alien subjects, or to do anything detrimental
too their country's interest. The purpose of war is to cripple the power and exhaust
the resources of the enemy, and it is inconsistent that one country should destroy
its enemy's property and repay in insurance the value of what has been so
destroyed, or that it should in such manner increase the resources of the enemy, or
render it aid, and the commencement of war determines, for like reasons, all trading
intercourse with the enemy, which prior thereto may have been lawful. All
individuals therefore, who compose the belligerent powers, exist, as to each other,
in a state of utter exclusion, and are public enemies. (6 Couch, Cyc. of Ins. Law, pp.
5352-5353.)
In the case of an ordinary fire policy, which grants insurance only from year, or for
some other specified term it is plain that when the parties become alien enemies,

the contractual tie is broken and the contractual rights of the parties, so far as not
vested. lost. (Vance, the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by the petitioner (a
Philippine corporation) had ceased to be valid and enforcible, and since the insured
goods were burned after December 10, 1941, and during the war, the respondent
was not entitled to any indemnity under said policy from the petitioner. However,
elementary rules of justice (in the absence of specific provision in the Insurance
Law) require that the premium paid by the respondent for the period covered by its
policy from December 11, 1941, should be returned by the petitioner.
The Court of Appeals, in deciding the case, stated that the main issue hinges on the
question of whether the policy in question became null and void upon the
declaration of war between the United States and Germany on December 10, 1941,
and its judgment in favor of the respondent corporation was predicated on its
conclusion that the policy did not cease to be in force. The Court of Appeals
necessarily assumed that, even if the payment by the petitioner to the respondent
was involuntary, its action is not tenable in view of the ruling on the validity of the
policy. As a matter of fact, the Court of Appeals held that "any intimidation resorted
to by the appellee was not unjust but the exercise of its lawful right to claim for and
received the payment of the insurance policy," and that the ruling of the Bureau of
Financing to the effect that "the appellee was entitled to payment from the
appellant was, well founded." Factually, there can be no doubt that the Director of
the Bureau of Financing, in ordering the petitioner to pay the claim of the
respondent, merely obeyed the instruction of the Japanese Military Administration,
as may be seen from the following: "In view of the findings and conclusion of this
office contained in its decision on Administrative Case dated February 9, 1943 copy
of which was sent to your office and the concurrence therein of the Financial
Department of the Japanese Military Administration, and following the instruction of
said authority, you are hereby ordered to pay the claim of Messrs. Christern,
Huenefeld & Co., Inc. The payment of said claim, however, should be made by
means of crossed check." (Emphasis supplied.)
It results that the petitioner is entitled to recover what paid to the respondent under
the circumstances on this case. However, the petitioner will be entitled to recover
only the equivalent, in actual Philippines currency of P92,650 paid on April 19, 1943,
in accordance with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby reversed and the respondent
corporation is ordered to pay to the petitioner the sum of P77,208.33, Philippine
currency, less the amount of the premium, in Philippine currency, that should be
returned by the petitioner for the unexpired term of the policy in question,
beginning December 11, 1941. Without costs. So ordered.

Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo and Bautista Angelo, JJ., concur.

G.R. No. L-44059 October 28, 1977

THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendantsappellants.

MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as
beneficiary in the life insurance policy of a legally married man claim the proceeds
thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life
Assurance Co., Ltd., Policy No. 009929 on a whole-life for P5,882.00 with a, rider for
Accidental Death for the same amount Buenaventura C. Ebrado designated T.
Ebrado as the revocable beneficiary in his policy. He to her as his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was
hit by a failing branch of a tree. As the policy was in force, The Insular Life
Assurance Co., Ltd. liable to pay the coverage in the total amount of P11,745.73,
representing the face value of the policy in the amount of P5,882.00 plus the
additional benefits for accidental death also in the amount of P5,882.00 and the
refund of P18.00 paid for the premium due November, 1969, minus the unpaid
premiums and interest thereon due for January and February, 1969, in the sum of
P36.27.
Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the
designated beneficiary therein, although she admits that she and the insured
Buenaventura C. Ebrado were merely living as husband and wife without the benefit
of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured.
She asserts that she is the one entitled to the insurance proceeds, not the commonlaw wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular
Life Assurance Co., Ltd. commenced an action for Interpleader before the Court of
First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972,
after which, a pre-trial order was entered reading as follows:
+.wph!1

During the pre-trial conference, the parties manifested to the court. that there is no
possibility of amicable settlement. Hence, the Court proceeded to have the parties

submit their evidence for the purpose of the pre-trial and make admissions for the
purpose of pretrial. During this conference, parties Carponia T. Ebrado and Pascuala
Ebrado agreed and stipulated: 1) that the deceased Buenaventura Ebrado was
married to Pascuala Ebrado with whom she has six (legitimate) namely;
Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2)
that during the lifetime of the deceased, he was insured with Insular Life Assurance
Co. Under Policy No. 009929 whole life plan, dated September 1, 1968 for the sum
of P5,882.00 with the rider for accidental death benefit as evidenced by Exhibits A
for plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for Carponia
Ebrado; 3) that during the lifetime of Buenaventura Ebrado, he was living with his
common-wife, Carponia Ebrado, with whom she had 2 children although he was not
legally separated from his legal wife; 4) that Buenaventura in accident on October
21, 1969 as evidenced by the death Exhibit 3 and affidavit of the police report of his
death Exhibit 5; 5) that complainant Carponia Ebrado filed claim with the Insular
Life Assurance Co. which was contested by Pascuala Ebrado who also filed claim for
the proceeds of said policy 6) that in view ofthe adverse claims the insurance
company filed this action against the two herein claimants Carponia and Pascuala
Ebrado; 7) that there is now due from the Insular Life Assurance Co. as proceeds of
the policy P11,745.73; 8) that the beneficiary designated by the insured in the
policy is Carponia Ebrado and the insured made reservation to change the
beneficiary but although the insured made the option to change the beneficiary,
same was never changed up to the time of his death and the wife did not have any
opportunity to write the company that there was reservation to change the
designation of the parties agreed that a decision be rendered based on and
stipulation of facts as to who among the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous
memoranda from the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others,
Carponia T. Ebrado disqualified from becoming beneficiary of the insured
Buenaventura Cristor Ebrado and directing the payment of the insurance proceeds
to the estate of the deceased insured. The trial court held:
+.wph!1

It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal
conviction for adultery or concubinage is not essential in order to establish the
disqualification mentioned therein. Neither is it also necessary that a finding of such
guilt or commission of those acts be made in a separate independent action brought
for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare
the nullity of the donation).

It is, however, essential that such adultery or concubinage exists at the time
defendant Carponia T. Ebrado was made beneficiary in the policy in question for the
disqualification and incapacity to exist and that it is only necessary that such fact be
established by preponderance of evidence in the trial. Since it is agreed in their
stipulation above-quoted that the deceased insured and defendant Carponia T.
Ebrado were living together as husband and wife without being legally married and
that the marriage of the insured with the other defendant Pascuala Vda. de Ebrado
was valid and still existing at the time the insurance in question was purchased
there is no question that defendant Carponia T. Ebrado is disqualified from
becoming the beneficiary of the policy in question and as such she is not entitled to
the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on
July 11, 1976, the Appellate Court certified the case to Us as involving only
questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the
new Insurance Code (PD No. 612, as amended) does not contain any specific
provision grossly resolutory of the prime question at hand. Section 50 of the
Insurance Act which provides that "(t)he insurance shag be applied exclusively to
the proper interest of the person in whose name it is made" cannot be validly seized
1

upon to hold that the mm includes the beneficiary. The word "interest" highly suggests that
the provision refers only to the "insured" and not to the beneficiary, since a contract of
insurance is personal in character. 2 Otherwise, the prohibitory laws against illicit
relationships especially on property and descent will be rendered nugatory, as the same
could easily be circumvented by modes of insurance. Rather, the general rules of civil law
should be applied to resolve this void in the Insurance Law. Article 2011 of the New Civil
Code states: "The contract of insurance is governed by special laws. Matters not expressly
provided for in such special laws shall be regulated by this Code." When not otherwise
specifically provided for by the Insurance Law, the contract of life insurance is governed by
the general rules of the civil law regulating contracts. 3 And under Article 2012 of the same
Code, "any person who is forbidden from receiving any donation under Article 739 cannot be
named beneficiary of a fife insurance policy by the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred from receiving donations from each other.
Article 739 of the new Civil Code provides:
+.wph!1

The following donations shall be void:

1. Those made between persons who were guilty of adultery or concubinage at the
time of donation;
Those made between persons found guilty of the same criminal offense, in
consideration thereof;

3. Those made to a public officer or his wife, descendants or ascendants by reason

of his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilt of the donee may be proved by
preponderance of evidence in the same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as
the beneficiary is concerned. Both are founded upon the same consideration:
liberality. A beneficiary is like a donee, because from the premiums of the policy
which the insured pays out of liberality, the beneficiary will receive the proceeds or
profits of said insurance. As a consequence, the proscription in Article 739 of the
new Civil Code should equally operate in life insurance contracts. The mandate of
Article 2012 cannot be laid aside: any person who cannot receive a donation cannot
be named as beneficiary in the life insurance policy of the person who cannot make
the donation. Under American law, a policy of life insurance is considered as a testament
5

and in construing it, the courts will, so far as possible treat it as a will and determine the
effect of a clause designating the beneficiary by rules under which wins are interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a

barrier between common law spouses in record to Property relations since such hip
ultimately encroaches upon the nuptial and filial rights of the legitimate family
There is every reason to hold that the bar in donations between legitimate spouses
and those between illegitimate ones should be enforced in life insurance policies
since the same are based on similar consideration As above pointed out, a
beneficiary in a fife insurance policy is no different from a donee. Both are recipients
of pure beneficence. So long as manage remains the threshold of family laws,
reason and morality dictate that the impediments imposed upon married couple
should likewise be imposed upon extra-marital relationship. If legitimate relationship
is circumscribed by these legal disabilities, with more reason should an illicit
relationship be restricted by these disabilities. Thus, in Matabuena v. Cervantes, this
7

Court, through Justice Fernando, said:

+.wph!1

If the policy of the law is, in the language of the opinion of the then Justice J.B.L.
Reyes of that court (Court of Appeals), 'to prohibit donations in favor of the other
consort and his descendants because of and undue and improper pressure and
influence upon the donor, a prejudice deeply rooted in our ancient law;" por-que no
se enganen desponjandose el uno al otro por amor que han de consuno' (According
to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem);
then there is very reason to apply the same prohibitive policy to persons living
together as husband and wife without the benefit of nuptials. For it is not to be
doubted that assent to such irregular connection for thirty years bespeaks greater
influence of one party over the other, so that the danger that the law seeks to avoid
is correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib.

32 ad Sabinum, fr. 1), 'it would not be just that such donations should subsist, lest
the condition 6f those who incurred guilt should turn out to be better.' So long as
marriage remains the cornerstone of our family law, reason and morality alike
demand that the disabilities attached to marriage should likewise attach to
concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement,
any other conclusion cannot stand the test of scrutiny. It would be to indict the
frame of the Civil Code for a failure to apply a laudable rule to a situation which in
its essentials cannot be distinguished. Moreover, if it is at all to be differentiated the
policy of the law which embodies a deeply rooted notion of what is just and what is
right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be
susceptible to such a reproach. If there is every any occasion where the principle of
statutory construction that what is within the spirit of the law is as much a part of it
as what is written, this is it. Otherwise the basic purpose discernible in such codal
provision would not be attained. Whatever omission may be apparent in an
interpretation purely literal of the language used must be remedied by an
adherence to its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before
the disabilities mentioned in Article 739 may effectuate. More specifically, with
record to the disability on "persons who were guilty of adultery or concubinage at
the time of the donation," Article 739 itself provides:
+.wph!1

In the case referred to in No. 1, the action for declaration of nullity may be brought
by the spouse of the donor or donee; and the guilty of the donee may be proved by
preponderance of evidence in the same action.
The underscored clause neatly conveys that no criminal conviction for the offense is
a condition precedent. In fact, it cannot even be from the aforequoted provision that
a prosecution is needed. On the contrary, the law plainly states that the guilt of the
party may be proved "in the same acting for declaration of nullity of donation. And,
it would be sufficient if evidence preponderates upon the guilt of the consort for the
offense indicated. The quantum of proof in criminal cases is not demanded.
In the caw before Us, the requisite proof of common-law relationship between the
insured and the beneficiary has been conveniently supplied by the stipulations
between the parties in the pre-trial conference of the case. It case agreed upon and
stipulated therein that the deceased insured Buenaventura C. Ebrado was married
to Pascuala Ebrado with whom she has six legitimate children; that during his
lifetime, the deceased insured was living with his common-law wife, Carponia
Ebrado, with whom he has two children. These stipulations are nothing less
thanjudicial admissions which, as a consequence, no longer require proof and
cannot be contradicted. A fortiori, on the basis of these admissions, a judgment may be
8

validly rendered without going through the rigors of a trial for the sole purpose of proving
the illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the parties
even agreed "that a decision be rendered based on this agreement and stipulation of facts
as to who among the two claimants is entitled to the policy."

ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed.

Carponia T. Ebrado is hereby declared disqualified to be the beneficiary of the late
Buenaventura C. Ebrado in his life insurance policy. As a consequence, the proceeds
of the policy are hereby held payable to the estate of the deceased insured. Costs
against Carponia T. Ebrado.
SO ORDERED.
Teehankee (Chairman), Makasiar, Mu;oz Palma, Fernandez and Guerrero, JJ.,
concur.
1w

G.R. No. 181132

June 5, 2009

HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA

PANGILINAN MARAMAG,Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL
BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR
LIFE ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, Respondents.
DECISION
NACHURA, J.:
This is a petition for review on certiorari under Rule 45 of the Rules, seeking to
reverse and set aside the Resolution dated January 8, 2008 of the Court of Appeals
(CA), in CA-G.R. CV No. 85948, dismissing petitioners appeal for lack of jurisdiction.
1

The case stems from a petition filed against respondents with the Regional Trial
Court, Branch 29, for revocation and/or reduction of insurance proceeds for being
void and/or inofficious, with prayer for a temporary restraining order (TRO) and a
writ of preliminary injunction.
3

The petition alleged that: (1) petitioners were the legitimate wife and children of
Loreto Maramag (Loreto), while respondents were Loretos illegitimate family; (2)
Eva de Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the
killing of the latter, thus, she is disqualified to receive any proceeds from his
insurance policies from Insular Life Assurance Company, Ltd. (Insular) and Great
Pacific Life Assurance Corporation (Grepalife); (3) the illegitimate children of Loreto
Odessa, Karl Brian, and Trisha Angeliewere entitled only to one-half of the
legitime of the legitimate children, thus, the proceeds released to Odessa and those
to be released to Karl Brian and Trisha Angelie were inofficious and should be
reduced; and (4) petitioners could not be deprived of their legitimes, which should
be satisfied first.
4

In support of the prayer for TRO and writ of preliminary injunction, petitioners
alleged, among others, that part of the insurance proceeds had already been
released in favor of Odessa, while the rest of the proceeds are to be released in
favor of Karl Brian and Trisha Angelie, both minors, upon the appointment of their
legal guardian. Petitioners also prayed for the total amount of P320,000.00 as actual
litigation expenses and attorneys fees.
In answer, Insular admitted that Loreto misrepresented Eva as his legitimate wife
and Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they
filed their claims for the insurance proceeds of the insurance policies; that when it
ascertained that Eva was not the legal wife of Loreto, it disqualified her as a
6

beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha Angelie,
as the remaining designated beneficiaries; and that it released Odessas share as
she was of age, but withheld the release of the shares of minors Karl Brian and
Trisha Angelie pending submission of letters of guardianship. Insular alleged that the
complaint or petition failed to state a cause of action insofar as it sought to declare
as void the designation of Eva as beneficiary, because Loreto revoked her
designation as such in Policy No. A001544070 and it disqualified her in Policy No.
A001693029; and insofar as it sought to declare as inofficious the shares of Odessa,
Karl Brian, and Trisha Angelie, considering that no settlement of Loretos estate had
been filed nor had the respective shares of the heirs been determined. Insular
further claimed that it was bound to honor the insurance policies designating the
children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance
Code.
In its own answer with compulsory counterclaim, Grepalife alleged that Eva was not
designated as an insurance policy beneficiary; that the claims filed by Odessa, Karl
Brian, and Trisha Angelie were denied because Loreto was ineligible for insurance
due to a misrepresentation in his application form that he was born on December
10, 1936 and, thus, not more than 65 years old when he signed it in September
2001; that the case was premature, there being no claim filed by the legitimate
family of Loreto; and that the law on succession does not apply where the
designation of insurance beneficiaries is clear.
7

As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known
to petitioners, summons by publication was resorted to. Still, the illegitimate family
of Loreto failed to file their answer. Hence, the trial court, upon motion of
petitioners, declared them in default in its Order dated May 7, 2004.
During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the
issues raised in their respective answers be resolved first. The trial court ordered
petitioners to comment within 15 days.
In their comment, petitioners alleged that the issue raised by Insular and Grepalife
was purely legal whether the complaint itself was proper or not and that the
designation of a beneficiary is an act of liberality or a donation and, therefore,
subject to the provisions of Articles 752 and 772 of the Civil Code.
8

In reply, both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies, not to the estate or to the
heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was legally married to Vicenta
Pangilinan Maramag.
On September 21, 2004, the trial court issued a Resolution, the dispositive portion
of which reads

WHEREFORE, the motion to dismiss incorporated in the answer of defendants

Insular Life and Grepalife is granted with respect to defendants Odessa, Karl Brian
and Trisha Maramag. The action shall proceed with respect to the other defendants
Eva Verna de Guzman, Insular Life and Grepalife.
SO ORDERED.

10

In so ruling, the trial court ratiocinated thus

Art. 2011 of the Civil Code provides that the contract of insurance is governed by
the (sic) special laws. Matters not expressly provided for in such special laws shall
be regulated by this Code. The principal law on insurance is the Insurance Code, as
amended. Only in case of deficiency in the Insurance Code that the Civil Code may
be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)
The Insurance Code, as amended, contains a provision regarding to whom the
insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the person
in whose name or for whose benefit it is made, unless otherwise specified in the
policy. Since the defendants are the ones named as the primary beneficiary (sic) in
the insurances (sic) taken by the deceased Loreto C. Maramag and there is no
showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the
beneficiary has a vested right to the indemnity, unless the insured reserves the
right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil.
[sic] 63).
Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to collect
the insurance indemnity. The beneficiary in a contract of insurance is not the donee
spoken in the law of donation. The rules on testamentary succession cannot apply
here, for the insurance indemnity does not partake of a donation. As such, the
insurance indemnity cannot be considered as an advance of the inheritance which
can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In the case of Southern
Luzon Employees Association v. Juanita Golpeo, et al., the Honorable Supreme
Court made the following pronouncements[:]
"With the finding of the trial court that the proceeds to the Life Insurance Policy
belongs exclusively to the defendant as his individual and separate property, we
agree that the proceeds of an insurance policy belong exclusively to the beneficiary
and not to the estate of the person whose life was insured, and that such proceeds
are the separate and individual property of the beneficiary and not of the heirs of
the person whose life was insured, is the doctrine in America. We believe that the
same doctrine obtains in these Islands by virtue of Section 428 of the Code of
Commerce x x x."

In [the] light of the above pronouncements, it is very clear that the plaintiffs has
(sic) no sufficient cause of action against defendants Odessa, Karl Brian and Trisha
Angelie Maramag for the reduction and/or declaration of inofficiousness of donation
as primary beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag.
However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag
is his concubine Eva Verna De Guzman. Any person who is forbidden from receiving
any donation under Article 739 cannot be named beneficiary of a life insurance
policy of the person who cannot make any donation to him, according to said article
(Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the
insurance contract will still remain valid, but the indemnity must go to the legal
heirs and not to the concubine, for evidently, what is prohibited under Art. 2012 is
the naming of the improper beneficiary. In such case, the action for the declaration
of nullity may be brought by the spouse of the donor or donee, and the guilt of the
donor and donee may be proved by preponderance of evidence in the same action
(Comment of Edgardo L. Paras, Civil Code of the Philippines, page 897). Since the
designation of defendant Eva Verna de Guzman as one of the primary beneficiary
(sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art.
739 of the Civil Code, the insurance indemnity that should be paid to her must go to
the legal heirs of the deceased which this court may properly take cognizance as
the action for the declaration for the nullity of a void donation falls within the
general jurisdiction of this Court.
11

Insular and Grepalife filed their respective motions for reconsideration, arguing, in
the main, that the petition failed to state a cause of action. Insular further averred
that the proceeds were divided among the three children as the remaining named
beneficiaries. Grepalife, for its part, also alleged that the premiums paid had already
been refunded.
12

13

Petitioners, in their comment, reiterated their earlier arguments and posited that
whether the complaint may be dismissed for failure to state a cause of action must
be determined solely on the basis of the allegations in the complaint, such that the
defenses of Insular and Grepalife would be better threshed out during trial.
1avvphi1

On June 16, 2005, the trial court issued a Resolution, disposing, as follows:
WHEREFORE, in view of the foregoing disquisitions, the Motions for Reconsideration
filed by defendants Grepalife and Insular Life are hereby GRANTED. Accordingly, the
portion of the Resolution of this Court dated 21 September 2004 which ordered the
prosecution of the case against defendant Eva Verna De Guzman, Grepalife and
Insular Life is hereby SET ASIDE, and the case against them is hereby ordered
DISMISSED.
SO ORDERED.

14

In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in
one policy and that Insular disqualified her as a beneficiary in the other policy such
that the entire proceeds would be paid to the illegitimate children of Loreto with Eva
pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases where
there are no beneficiaries designated, or when the only designated beneficiary is
disqualified, that the proceeds should be paid to the estate of the insured. As to the
claim that the proceeds to be paid to Loretos illegitimate children should be
reduced based on the rules on legitime, the trial court held that the distribution of
the insurance proceeds is governed primarily by the Insurance Code, and the
provisions of the Civil Code are irrelevant and inapplicable. With respect to the
Grepalife policy, the trial court noted that Eva was never designated as a
beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the
dismissal of the case as to the illegitimate children. It further held that the matter of
Loretos misrepresentation was premature; the appropriate action may be filed only
upon denial of the claim of the named beneficiaries for the insurance proceeds by
Grepalife.
Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the
appeal for lack of jurisdiction, holding that the decision of the trial court dismissing
the complaint for failure to state a cause of action involved a pure question of law.
The appellate court also noted that petitioners did not file within the reglementary
period a motion for reconsideration of the trial courts Resolution, dated September
21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha
Angelie; thus, the said Resolution had already attained finality.
Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of
action, may the Court consider matters which were not alleged in the Complaint,
particularly the defenses put up by the defendants in their Answer?
b. In granting a motion for reconsideration of a motion to dismiss for failure to state
a cause of action, did not the Regional Trial Court engage in the examination and
determination of what were the facts and their probative value, or the truth thereof,
when it premised the dismissal on allegations of the defendants in their answer
which had not been proven?
c. x x x (A)re the members of the legitimate family entitled to the proceeds of the
insurance for the concubine?
15

In essence, petitioners posit that their petition before the trial court should not have
been dismissed for failure to state a cause of action because the finding that Eva
was either disqualified as a beneficiary by the insurance companies or that her
designation was revoked by Loreto, hypothetically admitted as true, was raised only
in the answers and motions for reconsideration of both Insular and Grepalife. They

argue that for a motion to dismiss to prosper on that ground, only the allegations in
the complaint should be considered. They further contend that, even assuming
Insular disqualified Eva as a beneficiary, her share should not have been distributed
to her children with Loreto but, instead, awarded to them, being the legitimate heirs
of the insured deceased, in accordance with law and jurisprudence.
The petition should be denied.
The grant of the motion to dismiss was based on the trial courts finding that the
petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the
Rules of Court, which reads
SECTION 1. Grounds. Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any of
the following grounds:
xxxx
(g) That the pleading asserting the claim states no cause of action.
A cause of action is the act or omission by which a party violates a right of
another. A complaint states a cause of action when it contains the three (3)
elements of a cause of action(1) the legal right of the plaintiff; (2) the correlative
obligation of the defendant; and (3) the act or omission of the defendant in violation
of the legal right. If any of these elements is absent, the complaint becomes
vulnerable to a motion to dismiss on the ground of failure to state a cause of
action.
16

17

When a motion to dismiss is premised on this ground, the ruling thereon should be
based only on the facts alleged in the complaint. The court must resolve the issue
on the strength of such allegations, assuming them to be true. The test of
sufficiency of a cause of action rests on whether, hypothetically admitting the facts
alleged in the complaint to be true, the court can render a valid judgment upon the
same, in accordance with the prayer in the complaint. This is the general rule.
However, this rule is subject to well-recognized exceptions, such that there is no
hypothetical admission of the veracity of the allegations if:
1. the falsity of the allegations is subject to judicial notice;
2. such allegations are legally impossible;
3. the allegations refer to facts which are inadmissible in evidence;
4. by the record or document in the pleading, the allegations appear unfounded; or
5. there is evidence which has been presented to the court by stipulation of the
parties or in the course of the hearings related to the case.
18

In this case, it is clear from the petition filed before the trial court that, although
petitioners are the legitimate heirs of Loreto, they were not named as beneficiaries
in the insurance policies issued by Insular and Grepalife. The basis of petitioners
claim is that Eva, being a concubine of Loreto and a suspect in his murder, is
disqualified from being designated as beneficiary of the insurance policies, and that
Evas children with Loreto, being illegitimate children, are entitled to a lesser share
of the proceeds of the policies. They also argued that pursuant to Section 12 of the
Insurance Code, Evas share in the proceeds should be forfeited in their favor, the
former having brought about the death of Loreto. Thus, they prayed that the share
of Eva and portions of the shares of Loretos illegitimate children should be awarded
to them, being the legitimate heirs of Loreto entitled to their respective legitimes.
19

It is evident from the face of the complaint that petitioners are not entitled to a
favorable judgment in light of Article 2011 of the Civil Code which expressly
provides that insurance contracts shall be governed by special laws, i.e., the
Insurance Code. Section 53 of the Insurance Code states
SECTION 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.
Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the insured is
already deceased, upon the maturation of the policy. The exception to this rule is a
situation where the insurance contract was intended to benefit third persons who
are not parties to the same in the form of favorable stipulations or indemnity. In
such a case, third parties may directly sue and claim from the insurer.
20

21

Petitioners are third parties to the insurance contracts with Insular and Grepalife
and, thus, are not entitled to the proceeds thereof. Accordingly, respondents Insular
and Grepalife have no legal obligation to turn over the insurance proceeds to
petitioners. The revocation of Eva as a beneficiary in one policy and her
disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loretos insurance policies
remains valid. Because no legal proscription exists in naming as beneficiaries the
children of illicit relationships by the insured, the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition on donations
under Article 739 of the Civil Code or by the insurers themselves for reasons based
on the insurance contracts, must be awarded to the said illegitimate children, the
designated beneficiaries, to the exclusion of petitioners. It is only in cases where the
insured has not designated any beneficiary, or when the designated beneficiary is
disqualified by law to receive the proceeds, that the insurance policy proceeds shall
redound to the benefit of the estate of the insured.
22

23

24

In this regard, the assailed June 16, 2005 Resolution of the trial court should be
upheld. In the same light, the Decision of the CA dated January 8, 2008 should be
sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the
appeal; the issue of failure to state a cause of action is a question of law and not of
fact, there being no findings of fact in the first place.
25

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.
SO ORDERED.
ANTONIO EDUARDO B. NACHURA
Associate Justice
WE CONCUR: