Insurance Cases Part 1 502m6w

G.R. No. L-1669 August 31, 1950 PAZ LOPEZ DE CONSTANTINO v. ASIA LIFE INSURANCE COMPANY, G.R. No. L-1670. August 31, 1950 AGUSTINA PERALTA v. ASIA LIFE INSURANCE COMPANY 1. INSURANCE; EFFECT OF NON-PAYMENT OF DUE TO WAR; LIFE INSURANCE; FORFEITURE OF POLICY. — When the life insurance policy provides that nonpayment of s will cause its forfeiture, war doe not excuse non-payment, and does not avoid forfeiture. 2. ID.; EFFECT OF WAR ON NON-PAYMENT OF S; COURT REJECTS CONNECTICUT AND NEW YORK RULES AND ADOPTS UNITED STATES RULE. — Rejecting the Connecticut Rule, and the New York Rule, the court adopts the Unites States Rule about the effects of war upon non-payment of s. 3. ID.; LIFE INSURANCE; PERIODIC PAYMENT OF S IS NOT AN ACTIONABLE OBLIGATION. — The periodic payment of s in life insurances policies is not an obligation of the insured enforceable by action. These two cases, appealed from the Court of First Instance of Manila, call for decision of the question whether the beneficiary in a life insurance policy may recover the amount thereof although the insured died after repeatedly failing to pay the stipulated s, such failure having been caused by the last war in the Pacific. The facts are these: First case. In consideration of the sum of P176.04 as annual duly paid to it, the Asia Life Insurance Company (a foreign corporation incorporated under the laws of

Delaware, U. S. A.) , issued on September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio Constantino for a term of twenty years. The first covered the period up to September 26, 1942. The plaintiff Paz Lopez de Constantino was regularly appointed beneficiary. The policy contained these stipulations, among others:

"This POLICY OF INSURANCE is issued in consideration of the written and printed application herefor, a copy of which is attached hereto and is hereby made a part hereof, and of the payment in advance during the lifetime and good health of the Insured of the annual of One Hundred fifty-eight and 4/100 pesos Philippine currency 1 and of the payment of a like amount upon each twenty-seventh day of September hereafter during the term of Twenty years or until the prior death of the Insured. (Emphasis supplied.) x

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"All payments are due in advance and any unpunctuality in making any such payment shall cause this policy to lapse unless and except as kept in force by the Grace Period condition or under Option 4 below. (Grace of 31 days.)" After that first payment, no further s were paid. The insured died on September 22, 1944. It is itted that the defendant, being an American corporation, had to close its branch office in Manila by reason of the Japanese occupation, i. e. from January 2 1942, until the year 1945. Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No. 78145 (t Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of the spouses Tomas Ruiz and Agustina Peralta, for the sum

of P3,000, The annual stipulated in the policy was regularly paid from August 1, 1938, up to and including September 30, 1941. Effective August 1, 1941 the mode of payment of s was changed from annual to quarterly, so that quarterly s were paid, the last having been delivered on November 18, 1941, said payment covering the period up to January 31, 1942. No further payments were handed to the insurer. Upon the Japanese occupation, the insured and the insurer became separated by the lines of war, and it was impossible and illegal for them to deal with each other. Because the insured had borrowed on the policy an amount of P234.00 in January, 1941, the cash surrender value of the policy was sufficient to maintain the policy in force only up to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff Agustina Peralta is his beneficiary. Her demand for payment met with defendant’s refusal, grounded on non-payment of the s. The policy provides in part: "This POLICY OF INSURANCE is issued in consideration of the written and printed application herefor, a copy of which is attached hereto and is hereby made a part hereof, and of the payment in advance during the life time and good health of the Insured of the annual of Two hundred and 43/100 pesos Philippine currency and of the payment of a like amount upon each first day of August hereafter during the term of Twenty years or until the prior death of either of the Insured. (Emphasis supplied.) x

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"All payments are due in advance and any unpunctuality in making any such payment shall cause this policy to lapse unless and except as kept in force by the Grace Period condition or under Option 4 below. (Grace of 31 days.) . . ."

Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies minus all sums due for s in arrears. They allege that non-payment of the s was caused by the closing of defendant’s offices in Manila during the Japanese occupation and the impossible circumstances created by war. Defendant on the other hand asserts that the policies had lapsed for non-payment of s, in accordance with the contract of the parties and the law applicable to the situation. The lower court absolved the defendant. Hence this appeal. The controversial point has never been decided in this jurisdiction. Fortunately, this court has had the benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has received careful consideration, inasmuch as it affects the interest of thousands of policy-holders and the obligations of many insurance companies operating in this country. Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the Civil Code. 2 Act No. 2427 was largely copied from the Civil Code of California. 3 And this court has heretofore announced its intention to supplement the statutory laws with general principles prevailing on the subject in the United States. 4 In Young v. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are contracts of indemnity upon the and conditions specified in the policy. The parties have a right to impose such reasonable conditions at the time of the making of the contract as they may deem wise and necessary. The rate of is measured by the character of the risk assumed. The insurance company, for a comparatively small consideration, undertakes to guarantee the insured against loss or

damage, upon the and conditions agreed upon, and upon no other, and when called upon to pay, in case of loss, the insurer, therefore, may justly insist upon a fulfillment of these . If the insured cannot bring himself within the conditions of the policy, he is not entitled to recover for the loss. The of the policy constitute the measure of the insurer’s liability, and in order to recover the insured must show himself within those ; and if it appears that the contract has been terminated by a violation, on the part of the insured, of its conditions, then there can be no right of recovery. The compliance of the insured with the of the contract is a condition precedent to the right of recovery." Recall of the above pronouncements is appropriate because the policies in question stipulate that "all payments are due in advance and any unpunctuality in making any such payment shall cause this policy to lapse." Wherefore, it would seem that pursuant to the express of the policy, nonpayment of produces its avoidance. "The conditions of contracts of insurance, when plainly expressed in a policy, are binding upon the parties and should be enforced by the courts, if the evidence brings the case clearly within their meaning and intent. It tends to bring the law itself into disrepute when, by astute and subtle distinctions, a plain case is attempted to be taken without the operation of a clear, reasonable, and material obligation of the contract. Mack v. Rochester German Ins. Co., 106 N. Y., 560, 564." (Young v. Midland Textile Insurance Co., 30 Phil., 617, 622.) In Glaraga v. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because the had not been paid within the time fixed, since by its express , nonpayment of any when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This goes to show that although we take the view that insurance policies should be conserved 5 and should not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.

"Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse to enforce an insurance contract according to its meaning." (45 C. J. S., p. 150.) . Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of was the consequence of war, it should be excused and should not cause the forfeiture of the policy. Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of non-payment of s occasioned by war, the American cases may be divided into three groups, according as they the so-called Connecticut Rule, the New York Rule, or the United States Rule. The first holds the view that "there are two elements in the consideration for which the annual is paid — First, the mere protection for the year, and, second, the privilege of renewing the contract for each succeeding year by paying the for that year at the time agreed upon. According to this view of the contract, the payment of s is a condition precedent, the nonperformance of which, even when performance would be illegal, necessarily defeats the right to renew the contract." The second rule, apparently followed by the greater number of decisions, holds that "war between states in which the parties reside merely suspends the contracts of life insurance, and that, upon tender of all s due by the insured or his representative after the war has terminated, the contract revives and becomes fully operative." The United States rule declares that the contract is not merely suspended, but is abrogated by reason of nonpayment of s, since the time of the payments is peculiarly of the essence of the contract. It

additionally holds that it would be unjust to allow the insurer to retain the reserve value of the policy, which is the excess of the s paid over the actual risk carried during the years when the policy had been in force. This rule was announced in the well-known Statham 6 case which, in the opinion of Professor Vance, is the correct rule. 7 The appellants and some amici curiæ contend that the New York rule should be applied here. The appellee and other amici curiae contend that the United States doctrine is the orthodox view. We have read and re-read the principal cases upholding the different theories. Besides the respect and high regard we have always entertained for decisions of the Supreme Court of the United States, we cannot resist the conviction that the reasons expounded in its decision of the Statham case are logically and juridically sound. Like the instant case, the policy involved in the Statham decision specifies that non-payment on time shall cause the policy to cease and determine. Reasoning out that punctual payments were essential, the court said: ". . . it must be conceded that promptness of payment is essential in the business of life insurance. All the calculations of the insurance company are based on the hypothesis of prompt payments. They not only calculate on the receipt of the s when due, but on compounding interest upon them. It is on this basis that they are enabled to offer assurance at the favorable rates they do. Forfeiture for non-payment is a necessary means of protecting themselves from embarrassment. Unless it were enforceable, the business would be thrown into confusion. It is like the forfeiture of shares in mining enterprises, and all other hazardous undertakings. There must be power to cut off unprofitable , or the success of the whole scheme is endangered. The insured parties are associates in a great scheme. This associated relation exists whether the company be a mutual one or not. Each is interested in the engagements

of all; for out of the co- existence of many risks arises the law of average, which underlies the whole business. An essential feature of this scheme is the mathematical calculations referred to, on which the s and amounts assured are based. And these calculations, again, are based on the assumption of average mortality, and of prompt payments and compound interest thereon. Delinquency cannot be tolerated nor redeemed, except at the option of the company. This has always been the understanding and the practice in this department of business. Some companies, it is true, accord a grace of thirty days, or other fixed period, within which the in arrear may be paid, on certain conditions of continued good health, etc. But this is a matter of stipulation, or of discretion, on the part of the particular company. When no stipulation exists, it is the general understanding that time is material, and that the forfeiture is absolute if the be not paid. The extraordinary and even desperate efforts sometimes made, when an insured person is in extremes to meet a coming due, demonstrates the common view of this matter. "The case, therefore, is one in which time is material and of the essence of the contract. Non-payment at the day involves absolute forfeiture if such be the of the contract, as is the case here. Courts cannot with safety vary the stipulation of the parties by introducing equities for the relief of the insured against their own negligence." In another part of the decision, the United States Supreme Court considers and rejects what is, in effect, the New York theory in the following words and phrases: "The truth is, that the doctrine of the revival of contracts suspended during the war is one based on considerations of equity and justice, and cannot be invoked to revive a contract which it would be unjust or inequitable to revive.

"In the case of life insurance, besides the materiality of time in the performance of the contract, another strong reason exists why the policy should not be revived. The parties do not stand on equal ground in reference to such a revival. It would operate most unjustly against the company. The business of insurance is founded on the law of average; that of life insurance eminently so. The average rate of mortality is the basis on which it rests. By spreading their risks over a large number of cases, the companies calculate on this average with reasonable certainty and safety. Anything that interferes with it deranges the security of the business. If every policy lapsed by reason of the war should be revived, and all the back s should be paid, the companies would have the benefit of this average amount of risk. But the good risks are never heard from; only the bar are sought to be revived, where the person insured is either dead or dying. Those in health can get new policies cheaper than to pay arrearages on the old. To enforce a revival of the bad cases, whilst the company necessarily lose the cases which are desirable, would be manifestly unjust. An insured person, as before stated, does not stand isolated and alone. His case is connected with and co-related to the cases of all others insured by the same company. The nature of the business, as a whole, must be looked at to understand the general equities of the parties." The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if, as alleged, the consequences of war should not prejudice the insured, neither should they bear down on the insurer. Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the insured to pay s was excused during the war owing to impossibility of performance, and that consequently no unfavorable consequences should follow from such failure.

The appellee answers, quite plausibly, that the periodic payment of s, at least those after the first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of the insurer. "Under an Oklahoma decision, the annual due is not a debt. It is not an obligation upon which the insurer can maintain an action against insured; nor is its settlement governed by the strict rule controlling payment of debts. So, the court in a Kentucky case declares, in the opinion, that it is not a debt. . . . The fact that it is payable annually or semiannually, or at any other stipulated time, does not of itself constitute a promise to pay, either express or implied. In case of non-payment, the policy is forfeited, except so far as the forfeiture may be saved by agreement, by waiver, estoppel, or by statute. The payment of the is entirely optional, while a debt may be enforced at law, and the fact that the is agreed to be paid is without force, in the absence of an unqualified and absolute agreement to pay a specified sum at some certain time. In the ordinary policy there is no promise to pay, but it is optional with the insured whether he will continue the policy or forfeit it." (3 Couch, Cyc. on Insurance, Sec. 623, p. 1996.) "It is well settled that a contract of insurance is sui generis. While the insured by an observance of the conditions may hold the insurer to his contract, the latter has not the power or right to compel the insured to maintain the contract relation with it longer than he chooses. Whether the insured will continue it or not is optional with him. There being no obligation to pay for the , they did not constitute a debt." Noble v. Southern States M. D. Ins. Co., 157 Ky., 46; 162 S. W., 528) (Emphasis ours.) It should be noted that the parties contracted not only for peacetime conditions but also for times of war, because the policies contained provisions applicable expressly to wartime

days. The logical inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if armed conflict should ensue. For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since the Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation of rules relating to insurance is in direct proportion to the growth of the business. If there were only 100 men, for example, insured by a Company or a mutual Association, the death of one will distribute the insurance proceeds among the remaining 99 policy- holders. Because the loss which each survivor will bear will be relatively great, death from certain agreed or specified causes may be deemed not a compensable loss. But if the policy-holders of the Company or Association should be 1,000,000 individuals, it is clear that the death of one of them will not seriously prejudice each one of the 999,999 surviving insured. The loss to be borne by each individual will be relatively small." The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be considered will not be the death of one but the death of ten thousand, since the proportion of 1 to 100 should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small." After perusing the Insurance Act, we are firmly persuaded that the non-payment of s is such a vital defense of insurance companies that since the very beginning, said Act No. 2427 expressly preserved it, by providing that after the policy shall have been in force for two years, it shall become incontestable (i. e. the insurer shall have no defense) except for fraud, non-payment of s, and military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress recently amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the defense of nonpayment of s was preserved. Thus the fundamental character of

the undertaking to pay s and the high importance of the defense of non-payment thereof, was specifically recognized. In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is in effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that the first policy had no reserve value, and that the equitable values of the second had been practically returned to the insured in the form of loan and advance for . For all the foregoing, the lower court’s decision absolving the defendant from all liability on the policies in question, is hereby affirmed, without costs.

G.R. No. L-44059. October 28, 1977. THE INSULAR LIFE ASSURANCE COMPANY, LTD., v. CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO 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 Insular Life Assurance Co., Ltd., Policy No. 009929 on a whole-life plan for P5,882.00 with a rider for Accidental Death Benefits for the same amount. Buenaventura C. Ebrado designated Carponia T. Ebrado as the revocable beneficiary in his policy. He referred to her as his wife. On October 21, 1969, Buenventura C. Ebrado died as a result of an accident when he was hit by a falling branch of a tree. As the insurance policy was in force, The Insular Life Assurance

Co., Ltd. stands liable to pay the coverage of the policy in an 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 due November, 1969, minus the unpaid s 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 its 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 common-law 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 ed, a pre-trial conference was held on July 8, 1972, after which, a pre-trial order was entered reading as follows: "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 purposes of the pre-trial and make issions 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-law wife, Carponia Ebrado, with whom she had 2 children although he was not legally separated from his legal wife; 4) that Buenaventura Ebrado died by accident on October 21, 1969 as evidenced by the death certificate 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 of the 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 legal wife did not have any opportunity to write the company that there was reservation to change the designation of the beneficiary; 9) the parties 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.

insurance proceeds to the estate of the deceased insured. The trial court held:j "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."

"Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda from the receipt of this order.

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.

SO ORDERED."

We affirm the judgment of the lower court.

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

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 shall be applied exclusively to the proper interest of the person in whose name it is made" 1 cannot be validly seized upon to hold that the same 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 life 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: "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 s 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. 5 Under American law, a policy of life insurance is considered as a testament 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 wills are interpreted. 6 3. Policy considerations and dictates of morality rightly justify the institution of a barrier between common-law spouses in regard to property relations since such relationship 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 life insurance policy is no different from a donee. Both the recipients of pure beneficence. So long as marriage 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, 7 this Court, through

Justice Fernando, said: "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 fear 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’ of 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 of 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 framers 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 regard to the disability on "persons who were guilty of adultery or concubinage at the time of the donation," Article 739 itself provides: "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."

proof and cannot be contradicted. 8 A fortiori, on the basis of these issions, a judgment may be 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 pre-trial, 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.

The underscored clause neatly conveys that no criminal conviction for the disqualifying offense is a condition precedent. In fact, it cannot even be gleaned from the aforequoted provision that a criminal prosecution is needed. On the contrary, the law plainly states that the guilt of the party may be proved "in the same action" 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 case 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 than judicial issions which, as a consequence, no longer require

G.R. No. L-4611 December 17, 1955 QUA CHEE GAN v. LAW UNION AND ROCK INSURANCE CO., LTD., represented by its agent, WARNER, BARNES AND CO., LTD.

SYLLABUS 1. INSURANCE; BREACH OF WARRANTY; WHEN INSURER BARRED FROM CLAIMING POLICIES VOID "AB INITIO." — The insurer is barred by estoppel to claim violation of the socalled fire hydrant warranty where, knowing fully well that the number of hydrants demanded in the warranty never existed from the very beginning, it nevertheless issued the policies subject to such warranty, and received the corresponding s. 2. ID.; ID.; EVIDENCE; PAROL EVIDENCE RULE NOT APPLICABLE. — The parol evidence rule is not applicable to the present case. It is not a

question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of inequitable contract shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured. 3. ID.; AMBIGUITIES IN THE OF THE CONTRACT, HOW CONSTRUED. — The contract of insurance is one of perfect good faith (uberrimae fidei) 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. By reason of the exclusive control of the insurance company over the and phraseology of the insurance contract, the ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180). 4. ID.; ID.; WARRANTY AGAINST STORAGE OF GASOLINE. — In the present case, gasoline is not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The clause relied upon by the insurer speaks of "oils" and is decidedly ambiguous and uncertain; for in ordinary parlance, "oils" mean "lubricants" and not gasoline or kerosene. Besides, the gasoline kept by the insured was only incidental to his business, being no more than a customary 2 days supply for the five or six motor vehicles used for transporting of the stored merchandise, and it is well settled rule that the keeping of inflammable oils on the premises, through prohibited by the policy, does not void it if such keeping is incidental to the business. (Bachrach v. British American Ass. Co., 17 Phil. 555, 660.) 5. ID.; FALSE CLAIMS THAT AVOIDS THE POLICY. — The rule is that to avoid a policy, the claim filed by the insured must contain false and fraudulent statements with intent to defraud the insurer.

Qua Chee Gan, a merchant of Albay, instituted this action in 1940, in the Court of First Instance of said province, seeking to recover the proceeds of certain fire insurance policies totalling P370,000, issued by the Law Union & Rock Insurance Co., Ltd., upon certain bodegas and merchandise of the insured that were burned on June 21, 1940. The records of the original case were destroyed during the liberation of the region, and were reconstituted in 1946. After a trial that lasted several years, the Court of First Instance rendered a decision in favor of the plaintiff, the dispositive part whereof reads as follows: Wherefore, judgment is rendered for the plaintiff and against the defendant condemning the latter to pay the former — (a) Under the first cause of action, the sum of P146,394.48;

From the decision, the defendant Insurance Company appealed directly to this Court. The record shows that before the last war, plaintiff-appellee owned four warehouses or bodegas (designated as Bodegas Nos. 1 to 4) in the municipality of Tabaco, Albay, used for the storage of stocks of copra and of hemp, baled and loose, in which the appellee dealth extensively. They had been, with their contents, insured with the defendant Company since 1937, and the lose made payable to the Philippine National Bank as mortgage of the hemp and crops, to the extent of its interest. On June, 1940, the insurance stood as follows: Policy No.

Property Insured

Amount

263716 4 (Exhibi t "LL")

Bodega No. 1 (Building)

P15,000.00

Bodega No. 2 (Building)

10,000.00

Bodega No. 3 (Building)

25,000.00

Bodega No. 4 (Building)

10,000.00

Hemp Press — moved by steam engine

5,000.00

263734 5 (Exhibi t "X")

Merchandise contents (copra and empty sacks of Bodega No. 1)

150,000.00

263734 6 (Exhibi t "Y")

Merchandise contents (hemp) of Bodega No. 3

150,000.00

263706 7 (Exhibi t "GG")

Merchandise contents (loose hemp) of Bodega No. 4

(b) Under the second cause of action, the sum of P150,000; (c) Under the third cause of action, the sum of P5,000; (d) Under the fourth cause of action, the sum of P15,000; and (e) Under the fifth cause of action, the sum of P40,000; all of which shall bear interest at the rate of 8% per annum in accordance with Section 91 (b) of the Insurance Act from September 26, 1940, until each is paid, with costs against the defendant. The complaint in intervention of the Philippine National Bank is dismissed without costs. (Record on Appeal, 166-167.)

263716 5 (Exhibi t "JJ")

Total

5,000.00

P370,000.00

Fire of undetermined origin that broke out in the early morning of July 21, 1940, and lasted almost one week, gutted and completely destroyed Bodegas Nos. 1, 2 and 4, with the merchandise stored theren. Plaintiff-appellee informed the insurer by telegram on the same date; and on the next day, the fire adjusters engaged by appellant insurance company arrived and proceeded to examine and photograph the premises, pored over the books of the insured and conducted an extensive investigation. The plaintiff having submitted the corresponding fire claims, totalling P398,562.81 (but reduced to the full amount of the insurance, P370,000), the Insurance Company resisted payment, claiming violation of warranties and conditions, filing of fraudulent claims, and that the fire had been deliberately caused by the insured or by other persons in connivance with him. With counsel for the insurance company acting as private prosecutor, Que Chee Gan, with his brother, Qua Chee Pao, and some employees of his, were indicted and tried in 1940 for the crime of arson, it being claimed that they had set fire to the destroyed warehouses to collect the insurance. They were, however, acquitted by the trial court in a final decision dated July 9, 1941 (Exhibit WW). Thereafter, the civil suit to collect the insurance money proceeded to its trial and termination in the Court below, with the result noted at the start of this opinion. The Philippine National Bank's complaint in intervention was dismissed because the appellee had managed to pay his indebtedness to the Bank during the pendecy of the suit, and despite the fire losses. In its first assignment of error, the insurance company alleges that the trial Court should have held that the policies were avoided for breach of warranty, specifically the one appearing on a rider pasted (with other similar riders) on the face of the policies (Exhibits X, Y, JJ and LL). These riders were attached for the first time in 1939, and the pertinent portions read as follows:

Memo. of Warranty. — The undernoted Appliances for the extinction of fire being kept on the premises insured hereby, and it being declared and understood that there is an ample and constant water supply with sufficient pressure available at all seasons for the same, it is hereby warranted that the said appliances shall be maintained in efficient working order during the currency of this policy, by reason whereof a discount of 2 1/2 per cent is allowed on the chargeable under this policy. Hydrants in the compound, not less in number than one for each 150 feet of external wall measurement of building, protected, with not less than 100 feet of hose piping and nozzles for every two hydrants kept under cover in convenient places, the hydrants being supplied with water pressure by a pumping engine, or from some other source, capable of discharging at the rate of not less than 200 gallons of water per minute into the upper story of the highest building protected, and a trained brigade of not less than 20 men to work the same.' It is argued that since the bodegas insured had an external wall perimeter of 500 meters or 1,640 feet, the appellee should have eleven (11) fire hydrants in the compound, and that he actually had only two (2), with a further pair nearby, belonging to the municipality of Tabaco. We are in agreement with the trial Court that the appellant is barred by waiver (or rather estoppel) to claim violation of the so-called fire hydrants warranty, for the reason that knowing fully all that the number of hydrants demanded therein never existed from the very beginning, the appellant neverthless issued the policies in question subject to such warranty, and received the corresponding s. It would

be perilously close to conniving at fraud upon the insured to allow appellant to claims now as void ab initio the policies that it had issued to the plaintiff without warning of their fatal defect, of which it was informed, and after it had misled the defendant into believing that the policies were effective. The insurance company was aware, even before the policies were issued, that in the premises insured there were only two fire hydrants installed by Qua Chee Gan and two others nearby, owned by the municipality of TAbaco, contrary to the requirements of the warranty in question. Such fact appears from positive testimony for the insured that appellant's agents inspected the premises; and the simple denials of appellant's representative (Jamiczon) can not overcome that proof. That such inspection was made is moreover rendered probable by its being a prerequisite for the fixing of the discount on the to which the insured was entitled, since the discount depended on the number of hydrants, and the fire fighting equipment available (See "Scale of Allowances" to which the policies were expressly made subject). The law, ed by a long line of cases, is expressed by American Jurisprudence (Vol. 29, pp. 611612) to be as follows: It is usually held that where the insurer, at the time of the issuance of a policy of insurance, has knowledge of existing facts which, if insisted on, would invalidate the contract from its very inception, such knowledge constitutes a waiver of conditions in the contract inconsistent with the facts, and the insurer is stopped thereafter from asserting the breach of such conditions. The law is charitable enough to assume, in the absence of any showing to the contrary, that an insurance company intends to executed a valid contract in return for the received; and when the policy contains a condition which

renders it voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration. (29 Am. Jur., Insurance, section 807, at pp. 611-612.) The reason for the rule is not difficult to find. The plain, human justice of this doctrine is perfectly apparent. To allow a company to accept one's money for a policy of insurance which it then knows to be void and of no effect, though it knows as it must, that the assured believes it to be valid and binding, is so contrary to the dictates of honesty and fair dealing, and so closely related to positive fraud, as to the abhorent to fairminded men. It would be to allow the company to treat the policy as valid long enough to get the preium on it, and leave it at liberty to repudiate it the next moment. This cannot be deemed to be the real intention of the parties. To hold that a literal construction of the policy expressed the true intention of the company would be to indict it, for fraudulent purposes and designs which we cannot believe it to be guilty of (Wilson vs. Commercial Union Assurance Co., 96 Atl. 540, 543-544). The inequitableness of the conduct observed by the insurance company in this case is heightened by the fact that after the insured had incurred the expense of installing the two hydrants, the company collected the s and issued him a policy so worded that it gave the insured a discount much smaller than that he was normaly entitledto. According to the "Scale of Allowances," a policy subject to a warranty of the existence of one fire hydrant

for every 150 feet of external wall entitled the insured to a discount of 7 1/2 per cent of the ; while the existence of "hydrants, in compund" (regardless of number) reduced the allowance on the to a mere 2 1/2 per cent. This schedule was logical, since a greater number of hydrants and fire fighting appliances reduced the risk of loss. But the appellant company, in the particular case now before us, so worded the policies that while exacting the greater number of fire hydrants and appliances, it kept the discount at the minimum of 2 1/2 per cent, thereby giving the insurance company a double benefit. No reason is shown why appellant's premises, that had been insured with appellant for several years past, suddenly should be regarded in 1939 as so hazardous as to be accorded a treatment beyond the limits of appellant's own scale of allowances. Such abnormal treatment of the insured strongly points at an abuse of the insurance company's selection of the words and of the contract, over which it had absolute control. These considerations lead us to regard the parol evidence rule, invoked by the appellant as not applicable to the present case. It is not a question here whether or not the parties may vary a written contract by oral evidence; but whether testimony is receivable so that a party may be, by reason of inequitable conduct shown, estopped from enforcing forfeitures in its favor, in order to forestall fraud or imposition on the insured. Receipt of s or Assessments afte Cause for Forfeiture Other than Nonpayment. — It is a well settled rule of law that an insurer which with knowledge of facts entitling it to treat a policy as no longer in force, receives and accepts a preium on the policy, estopped to take advantage of the forfeiture. It cannot treat the policy as void for the purpose of defense to an action to recover for a loss thereafter occurring and at the same time treat it

as valid for the purpose of earning and collecting further s." (29 Am. Jur., 653, p. 657.) It would be unconscionable to permit a company to issue a policy under circumstances which it knew rendered the policy void and then to accept and retain s under such a void policy. Neither law nor good morals would justify such conduct and the doctrine of equitable estoppel is peculiarly applicable to the situation. (McGuire vs. Home Life Ins. Co. 94 Pa. Super Ct. 457.) Moreover, taking into the well known rule that ambiguities or obscurities must be strictly interpreted aganst the prty that caused them, 1the "memo of warranty" invoked by appellant bars the latter from questioning the existence of the appliances called for in the insured premises, since its initial expression, "the undernoted appliances for the extinction of fire being kept on the premises insured hereby, . . . it is hereby warranted . . .", ists of interpretation as an ission of the existence of such appliances which appellant cannot now contradict, should the parol evidence rule apply. The alleged violation of the warranty of 100 feet of fire hose for every two hydrants, must be equally rejected, since the appellant's argument thereon is based on the assumption that the insured was bound to maintain no less than eleven hydrants (one per 150 feet of wall), which requirement appellant is estopped from enforcing. The supposed breach of the wter pressure condition is made to rest on the testimony of witness Serra, that the water supply could fill a 5-gallon can in 3 seconds; appellant thereupon inferring that the maximum quantity obtainable from the hydrants was 100 gallons a minute, when the warranty called for 200 gallons a minute. The transcript shows, however, that Serra repeatedly refused and professed inability to

estimate the rate of discharge of the water, and only gave the "5-gallon per 3-second" rate because the insistence of appellant's counsel forced the witness to hazard a guess. Obviously, the testimony is worthless and insufficient to establish the violation claimed, specially since the burden of its proof lay on appellant. As to maintenance of a trained fire brigade of 20 men, the record is preponderant that the same was organized, and drilled, from time to give, altho not maintained as a permanently separate unit, which the warranty did not require. Anyway, it would be unreasonable to expect the insured to maintain for his compound alone a fire fighting force that many municipalities in the Islands do not even possess. There is no merit in appellant's claim that subordinate hip of the business manager (Co Cuan) in the fire brigade, while its direction was entrusted to a minor employee unders the testimony improbable. A business manager is not necessarily adept at fire fighting, the qualities required being different for both activities. Under the second assignment of error, appellant insurance company avers, that the insured violated the "Hemp Warranty" provisions of Policy No. 2637165 (Exhibit JJ), against the storage of gasoline, since appellee itted that there were 36 cans (latas) of gasoline in the building designed as "Bodega No. 2" that was a separate structure not affected by the fire. It is well to note that gasoline is not specifically mentioned among the prohibited articles listed in the so-called "hemp warranty." The cause relied upon by the insurer speaks of "oils (animal and/or vegetable and/or mineral and/or their liquid products having a flash point below 300o Fahrenheit", and is decidedly ambiguous and uncertain; for in ordinary parlance, "Oils" mean "lubricants" and not gasoline or kerosene. And how many insured, it may well be wondered, are in a position to understand or determine "flash point below 003o Fahrenheit. Here,

again, by reason of the exclusive control of the insurance company over the and phraseology of the contract, the ambiguity must be held strictly against the insurer and liberraly in favor of the insured, specially to avoid a forfeiture (44 C. J. S., pp. 1166-1175; 29 Am. Jur. 180). Insurance is, in its nature, complex and difficult for the layman to understand. Policies are prepared by experts who know and can anticipate the hearing and possible complications of every contingency. So long as insurance companies insist upon the use of ambiguous, intricate and technical provisions, which conceal rather than frankly disclose, their own intentions, the courts must, in fairness to those who purchase insurance, construe every ambiguity in favor of the insured. (Algoe vs. Pacific Mut. L. Ins. Co., 91 Wash. 324, LRA 1917A, 1237.) An insurer should not be allowed, by the use of obscure phrases and exceptions, to defeat the very purpose for which the policy was procured (Moore vs. Aetna Life Insurance Co., LRA 1915D, 264). We see no reason why the prohibition of keeping gasoline in the premises could not be expressed clearly and unmistakably, in the language and that the general public can readily understand, without resort to obscure esoteric expression (now derisively termed "gobbledygook"). We reiterate the rule stated in Bachrach vs. British American Assurance Co. (17 Phil. 555, 561): If the company intended to rely upon a condition of that character, it ought to have been plainly expressed in the policy.

This rigid application of the rule on ambiguities has become necessary in view of current business practices. The courts cannot ignore that nowadays monopolies, cartels and concentrations of capital, endowed with overwhelming economic power, manage to impose upon parties dealing with them cunningly prepared "agreements" that the weaker party may not change one whit, his participation in the "agreement" being reduced to the alternative to take it or leave it" labelled since Raymond Baloilles" contracts by adherence" (con tracts d'adhesion), in contrast to these entered into by parties bargaining on an equal footing, such contracts (of which policies of insurance and international bills of lading are prime examples) obviously call for greater strictness and vigilance on the part of courts of justice with a view to protecting the weaker party from abuses and imposition, and prevent their becoming traps for the unwarry (New Civil Coee, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27 February 1942). Si pudiera estimarse que la condicion 18 de la poliza de seguro envolvia alguna oscuridad, habra de ser tenido en cuenta que al seguro es, practicamente un contrato de los llamados de adhesion y por consiguiente en caso de duda sobre la significacion de las clausulas generales de una poliza — redactada por las compafijas sin la intervencion alguna de sus clientes — se ha de adoptar de acuerdo con el articulo 1268 del Codigo Civil, la interpretacion mas favorable al asegurado, ya que la obscuridad es imputable a la empresa aseguradora, que debia haberse explicado mas claramante. (Dec. Trib. Sup. of Spain 13 Dec. 1934) The contract of insurance is one of perfect good faith (uferrimal fidei) not for the insured alone, but equally so for the insurer; in fact, it is mere so for the latter, since its dominant

bargaining position carries with it stricter responsibility. Another point that is in favor of the insured is that the gasoline kept in Bodega No. 2 was only incidental to his business, being no more than a customary 2 day's supply for the five or six motor vehicles used for transporting of the stored merchandise (t. s. n., pp. 1447-1448). "It is well settled that the keeping of inflammable oils on the premises though prohibited by the policy does not void it if such keeping is incidental to the business." Bachrach vs. British American Ass. Co., 17 Phil. 555, 560); and "according to the weight of authority, even though there are printed prohibitions against keeping certain articles on the insured premises the policy will not be avoided by a violation of these prohibitions, if the prohibited articles are necessary or in customary use in carrying on the trade or business conducted on the premises." (45 C. J. S., p. 311; also 4 Couch on Insurance, section 966b). It should also be noted that the "Hemp Warranty" forbade storage only "in the building to which this insurance applies and/or in any building communicating therewith", and it is undisputed that no gasoline was stored in the burned bodegas, and that "Bodega No. 2" which was not burned and where the gasoline was found, stood isolated from the other insured bodegas. The charge that the insured failed or refused to submit to the examiners of the insurer the books, vouchers, etc. demanded by them was found unsubstantiated by the trial Court, and no reason has been shown to alter this finding. The insured gave the insurance examiner all the date he asked for (Exhibits AA, BB, CCC and Z), and the examiner even kept and photographed some of the examined books in his possession. What does appear to have been rejected by the insured was the demand that he should submit "a list of all books, vouchers, receipts and other records" (Age 4, Exhibit 9c); but the refusal of the insured in this instance was well justified, since the demand

for a list of all the vouchers (which were not in use by the insured) and receipts was positively unreasonable, considering that such listing was superfluous because the insurer was not denied access to the records, that the volume of Qua Chee Gan's business ran into millions, and that the demand was made just after the fire when everything was in turmoil. That the representatives of the insurance company were able to secure all the date they needed is proved by the fact that the adjuster Alexander Stewart was able to prepare his own balance sheet (Exhibit L of the criminal case) that did not differ from that submitted by the insured (Exhibit J) except for the valuation of the merchandise, as expressly found by the Court in the criminal case for arson. (Decision, Exhibit WW). How valuations may differ honestly, without fraud being involved, was strikingly illustrated in the decision of the arson case (Exhibit WW) acquiting Qua Choc Gan, appellee in the present proceedings. The decision states (Exhibit WW, p. 11): Alexander D. Stewart declaro que ha examinado los libros de Qua Choc Gan en Tabaco asi como su existencia de copra y abaca en las bodega al tiempo del incendio durante el periodo comprendido desde el 1.o de enero al 21 de junio de 1940 y ha encontrado que Qua Choc Gan ha sufrico una perdida de P1,750.76 en su negocio en Tabaco. Segun Steward al llegar a este conclusion el ha tenidoen cuenta el balance de comprobacion Exhibit 'J' que le ha entregado el mismo acusado Que Choc Gan en relacion con sus libros y lo ha encontrado correcto a excepcion de los precios de abaca y copra que alli aparecen que no estan de acuerdo con los precios en el mercado. Esta comprobacion aparece en el balance mercado exhibit J que fue preparado por el mismo testigo.

In view of the discrepancy in the valuations between the insured and the adjuster Stewart for the insurer, the Court referred the controversy to a government auditor, Apolonio Ramos; but the latter reached a different result from the other two. Not only that, but Ramos reported two different valuations that could be reached according to the methods employed (Exhibit WW, p. 35): La ciencia de la contabilidad es buena, pues ha tenido sus muchos usos buenos para promovar el comercio y la finanza, pero en el caso presente ha resultado un tanto cumplicada y acomodaticia, como lo prueba el resultado del examen hecho por los contadores Stewart y Ramos, pues el juzgado no alcanza a ver como habiendo examinado las mismas partidas y los mismos libros dichos contadores hayan de llegara dos conclusiones que difieron sustancialmente entre si. En otras palabras, no solamente la comprobacion hecha por Stewart difiere de la comprobacion hecha por Ramos sino que, segun este ultimo, su comprobacion ha dado lugar a dos resultados diferentes dependiendo del metodo que se emplea. Clearly then, the charge of fraudulent overvaluation cannot be seriously entertained. The insurer attempted to bolster its case with alleged photographs of certain pages of the insurance book (destroyed by the war) of insured Qua Chee Gan (Exhibits 26-A and 26B) and allegedly showing abnormal purchases of hemp and copra from June 11 to June 20, 1940. The Court below remained unconvinced of the authenticity of those photographs, and rejected them, because they were not mentioned not introduced in the criminal case; and considering the evident importance of said exhibits in establishing the motive of the insured in committing the arson charged, and the absence of adequate explanation for their

omission in the criminal case, we cannot say that their rejection in the civil case constituted reversible error. The next two defenses pleaded by the insurer, — that the insured connived at the loss and that the fraudulently inflated the quantity of the insured stock in the burnt bodegas, — are closely related to each other. Both defenses are predicted on the assumption that the insured was in financial difficulties and set the fire to defraud the insurance company, presumably in order to pay off the Philippine National Bank, to which most of the insured hemp and copra was pledged. Both defenses are fatally undermined by the established fact that, notwithstanding the insurer's refusal to pay the value of the policies the extensive resources of the insured (Exhibit WW) enabled him to pay off the National Bank in a short time; and if he was able to do so, no motive appears for attempt to defraud the insurer. While the acquittal of the insured in the arson case is not res judicata on the present civil action, the insurer's evidence, to judge from the decision in the criminal case, is practically identical in both cases and must lead to the same result, since the proof to establish the defense of connivance at the fire in order to defraud the insurer "cannot be materially less convincing than that required in order to convict the insured of the crime of arson"(Bachrach vs. British American Assurance Co., 17 Phil. 536). As to the defense that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates, inferences and conclusionsAs to the defense that the burned bodegas could not possibly have contained the quantities of copra and hemp stated in the fire claims, the insurer's case rests almost exclusively on the estimates, inferences and conclusions of its adjuster investigator, Alexander D. Stewart, who examined the premises during and after the fire. His

testimony, however, was based on inferences from the photographs and traces found after the fire, and must yield to the contradictory testimony of engineer Andres Bolinas, and specially of the then Chief of the Loan Department of the National Bank's Legaspi branch, Porfirio Barrios, and of Bank Appraiser Loreto Samson, who actually saw the contents of the bodegas shortly before the fire, while inspecting them for the mortgagee Bank. The lower Court was satisfied of the veracity and accuracy of these witnesses, and the appellant insurer has failed to substantiate its charges aganst their character. In fact, the insurer's repeated accusations that these witnesses were later "suspended for fraudulent transactions" without giving any details, is a plain attempt to create prejudice against them, without the least in fact. Stewart himself, in testifying that it is impossible to determine from the remains the quantity of hemp burned (t. s. n., pp. 1468, 1470), rebutted appellant's attacks on the refusal of the Court below to accept its inferences from the remains shown in the photographs of the burned premises. It appears, likewise, that the adjuster's calculations of the maximum contents of the destroyed warehouses rested on the assumption that all the copra and hemp were in sacks, and on the result of his experiments to determine the space occupied by definite amounts of sacked copra. The error in the estimates thus arrived at proceeds from the fact that a large amount of the insured's stock were in loose form, occupying less space than when kept in sacks; and from Stewart's obvious failure to give due allowance for the compression of the material at the bottom of the piles (t. s. n., pp. 1964, 1967) due to the weight of the overlying stock, as shown by engineer Bolinas. It is probable that the errors were due to inexperience (Stewart himself itted that this was the first copra fire he had investigated); but it is clear that such errors render valueles Stewart's computations. These were in fact twice ed upon and twice rejected by different judges (in the

criminal and civil cases) and their concordant opinion is practically conclusive. The adjusters' reports, Exhibits 9-A and 9-B, were correctly disregarded by the Court below, since the opinions stated therein were based on ex parte investigations made at the back of the insured; and the appellant did not present at the trial the original testimony and documents from which the conclusions in the report were drawn.lawphi1.net Appellant insurance company also contends that the claims filed by the insured contained false and fraudulent statements that avoided the insurance policy. But the trial Court found that the discrepancies were a result of the insured's erroneous interpretation of the provisions of the insurance policies and claim forms, caused by his imperfect knowledge of English, and that the misstatements were innocently made and without intent to defraud. Our review of the lengthy record fails to disclose reasons for rejecting these conclusions of the Court below. For example, the occurrence of previous fires in the premises insured in 1939, altho omitted in the claims, Exhibits EE and FF, were nevertheless revealed by the insured in his claims Exhibits Q (filed simultaneously with them), KK and WW. Considering that all these claims were submitted to the smae agent, and that this same agent had paid the loss caused by the 1939 fire, we find no error in the trial Court's acceptance of the insured's explanation that the omission in Exhibits EE and FF was due to inadvertance, for the insured could hardly expect under such circumstances, that the 1939 would unnoticed by the insurance agents. Similarly, the 20 per cent overclaim on 70 per cent of the hemo stock, was explained by the insured as caused by his belief that he was entitled to include in the claim his expected profit on the 70 per cent of the hemp, because the same was already contracted for and sold to other parties before the fire occurred. Compared with other cases of over-valuation recorded in our judicial

annals, the 20 per cent excess in the case of the insured is not by itself sufficient to establish fraudulent intent. Thus, in Yu Cua vs. South British Ins. Co., 41 Phil. 134, the claim was fourteen (14) times (1,400 per cent) bigger than the actual loss; in Go Lu vs. Yorkshire Insurance Co., 43 Phil., 633, eight (8) times (800 per cent); in Tuason vs. North China Ins. Co., 47 Phil. 14, six (6) times (600 per cent); in Tan It vs. Sun Insurance, 51 Phil. 212, the claim totalled P31,860.85 while the goods insured were inventoried at O13,113. Certainly, the insured's overclaim of 20 per cent in the case at bar, duly explained by him to the Court a quo, appears puny by comparison, and can not be regarded as "more than misstatement, more than inadvertence of mistake, more than a mere error in opinion, more than a slight exaggeration" (Tan It vs. Sun Insurance Office, ante) that would entitle the insurer to avoid the policy. It is well to note that the overchange of 20 per cent was claimed only on a part (70 per cent) of the hemp stock; had the insured acted with fraudulent intent, nothing prevented him from increasing the value of all of his copra, hemp and buildings in the same proportion. This also applies to the alleged fraudulent claim for burned empty sacks, that was likewise explained to our satisfaction and that of the trial Court. The rule is that to avoid a policy, the false swearing must be wilful and with intent to defraud (29 Am. Jur., pp. 849-851) which was not the cause. Of course, the lack of fraudulent intent would not authorize the collection of the expected profit under the of the polices, and the trial Court correctly deducte the same from its award. We find no reversible error in the judgment appealed from, wherefore the smae is hereby affirmed. Costs against the appellant. So ordered. G.R. Nos. L-21821-22, L-211824-27 May 31, 1966. DIOSDADO C. TY v. FILIPINAS COMPAÑA

DE SEGUROS, ET AL. SYLLABUS 1. CONTRACTS; INSURANCE; AGREEMENT CONTAINED IN INSURANCE POLICY IS THE LAW BETWEEN THE PARTIES. — The agreement contained in the policy is the law between the parties, and the Court cannot go beyond the clear and express conditions thereof. Thus where the of the policy are clear, express, and specific that only amputation of the hand should be considered as a loss thereof, an interpretation that would include the fracture or other temporary disability not covered by the policy would be unwarranted. 2. ID.; ID.; PARTIES BOUND BY CLEAR OF CONTRACT. — Where the of the policy is clear enough to inform the insured entering into that contract that the loss to be considered a disability entitled to indemnity must be severance or amputation of that affected member from the body of the insured, the latter cannot come to the courts and claim that he was misled by the of the contract. These are appeals instituted by Diosdado C. Ty from a single decision of the Court of First Instance of Manila Civil Cases Nos. 26343, 26344, 26404, 26405, 26406, 26442 which were tried together), dismissing the six separate complaints he filed against six insurance companies (Filipinas Compania de Seguros, People’s Surety & Insurance Co, Inc., South Sea Surety & Insurance Co., Inc., The Philippine Guaranty Company, Inc., Universal Insurance & Indemnity Co., and Plaridel Surety & Insurance Co., Inc.) for collection from each of them, of the sum of P650.00, as compensation for the disability of his left hand. The facts of these cases are not controverted:

Plaintiff-appellant was an employee of Broadway Cotton Factory at Grace Park, Caloocan City, working as mechanic-operator, with a monthly salary of P185.00. In the latter part of 1953, he took Personal Accident Policies from several insurance companies, among which are herein defendants-appellees, on different dates, 1 effective for 12 months. During the effectivity of these policies, or on December 24, 1953, a fire broke out in the factory where plaintiff was working. As he was trying to put out said fire with the help of a fire extinguisher, a heavy object fell upon his left hand. Plaintiff received treatment at the National Orthopedic Hospital from December 26, 1953 to February 8, 1954, for the following injuries, to wit: (1) Fracture, simple, proximal phalanx, index finger, left; (2) Fracture, compound, communite proximal phalanx, middle finger, left and 2nd phalanx, simple;

insurance policies, partial disability of the insured caused by loss of either hand to be compensable, the loss must result in the amputation of that hand. Hence, these appeals by the insured. Plaintiff-appellant is basing his claim for indemnity under the provision of the insurance contract uniform in all the cases, which reads:jgc:chanrobles.com.ph "INDEMNITY FOR TOTAL OR PARTIAL DISABILITY" "If the Insured sustains any Bodily Injury which is effected solely through violent, external, visible and accidental means, and which shall not prove fatal but shall result, independently of all other causes and within sixty (60) days from the occurrence thereof, in Total or Partial Disability of the Insured, the Company shall pay, subject to the exceptions as provided for hereinafter, the amount set opposite such injury:

(3) Fracture, compound, communite phalanx, 4th finger, left; (4) Fracture, simple, middle phalanx, middle finger, left;

x

which injuries, the attending surgeon certified, would cause temporary total disability of appellant’s left hand. As the insurance companies refused to pay his claim for compensation under the policies by reason of the said disability of his left hand, Ty filed actions in the Municipal Court of Manila, which rendered favorable decision. On appeal to the Court of First Instance by the insurance companies, the cases were dismissed on the ground that under the uniform of the

x

x

x

x

x

x

x

x

x

"PARTIAL DISABILITY

(5) Lacerated wound, sutured, volar aspect, small finger, left; (6) Fracture, simple chip, head, 1st phalanx, 5th digit, left.

x

"LOSS OF:

"Either hand P650.00 x

"The loss of a hand shall mean the loss by amputation through the bones of the wrist." Appellant contends that to be entitled to indemnification under the foregoing provision,

it is enough that the insured is disabled to such an extent that he cannot substantially perform all acts or duties of the kind necessary in the prosecution of his business. It is argued that what is compensable is the disability and not the amputation of the hand. The definition of what constitutes loss of hand, placed in the contract, according to appellant, consequently, makes the provision ambiguous and calls for the interpretation thereof by this Court. This is not the first time that the proper construction of this provision, which is uniformly carried in personal accident policies has been questioned. Herein appellant himself has already brought this matter to the attention of this Court in connection with the other accident policies which he took and under which he had tried to collect indemnity, for the identical injury that is the basis of the claims in these cases. And, we had already ruled: "While we sympathize with the plaintiff or his employer, for whose benefit the policies were issued, we can not go beyond the clear and express conditions of the insurance policies, all of which defined partial disability as loss of either hand by amputation through the bones of the wrist. There was no such amputation in the case at bar. All that was found by the trial court, which is not disputed on appeal, was that physical injuries ’caused temporary total disability of plaintiff’s left hand.’ Note that the disability of plaintiff’s hand was merely temporary, having been caused by fractures of the index, the middle and the fourth fingers of the left hand. "We might add that the agreement contained in the insurance policies is the law between the parties. As the of the policies are clear, express and specific that only amputation of the left hand should be considered as a loss thereof, an interpretation that would include the mere fracture or temporary disability not covered by the policies would certainly be unwarranted." 2

We find no reason to depart from the foregoing ruling on the matter. Plaintiff-appellant cannot come to the court and claimed that he was misled by the of the contract. The provision is clear enough to inform the party entering into that contract that the loss to be considered a disability entitled to indemnity, must be severance or amputation of that affected member from the body of the Insured. Wherefore, finding no error in the decision appealed from, the same is hereby affirmed, without costs. So ordered. G.R. No. 76452 July 26, 1994 PHILIPPINE AMERICAN LIFE INSURANCE COMPANY and RODRIGO DE LOS REYES v. HON. ARMANDO ANSALDO, in his capacity as Insurance Commissioner, and RAMON MONTILLA PATERNO, JR. SYLLABUS 1. COMMERCIAL LAW; LAW ON INSURANCE; INSURANCE COMMISSIONER; JURISDICTION; CONTRACT OF AGENCY BETWEEN INSURANCE COMPANY AND AGENT, NOT INCLUDED. — 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. The general regulatory authority of the Insurance Commissioner is described in Section 414 of the Insurance Code. A plain reading of the above-quoted provisions show that the Insurance Commissioner has the authority to regulate the business of insurance, as defined in Section 2[2] thereof. 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. The quasi-judicial power of the Insurance Commissioner under Section 416 of the

Insurance Code is likewise not applicable in this case. 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 relation 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. 2. ID.; ID.; AGENTS; CLASSIFICATION; GOVERNING RULES. — An insurance company may have two classes of agents who sell its insurance policies: (1) salaried employees who keep definite insurance policies: (1) salaried employees who keep definite hours and work under the control and supervision of the company; and (2) ed representatives, who work on commission basis. Under the first category, the relationship between the insurance company and its agent 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.

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. 186.

was held by respondent Commissioner on the validity of the Contract of Agency complained of by private Respondent.

We grant the petition. I 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 particular’s listing and citing actual cases, facts, dates, figures, provisions of law, rules and regulations, and all other pertinent date 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

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 particularly 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

hearing on his complaint. On October 1, private respondent executed and affidavit, ing his letters of April 17, 1986 and July 31, 1986. In a letter dated October 14, 1986, Manuel Ortega, Philamlife’s Senior Assistant VicePresident 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, 1985. On November 3, Manuel Ortega filed a Motion to Quash Subpoena/Notice on the following grounds: "I. 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, 1985 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 istrative 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.

On the other hand, Section 415 provides: "In addition to the istrative 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 or unsound manner as may be determined by the Insurance Commissioner, the following:

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, . . . ."

(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 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 insurer 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 hip certificates it has issued to its , 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 hip 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 relation 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(, and Investment 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 insurance policies: (1) salaried employees who keep definite hours and work under the control and supervision of the company; and (2) ed representatives, who work on commission basis. Under the first category, the relationship between the insurance company and its agent 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.

G.R. No. L-16215. June 29, 1963. SIMEON DEL ROSARIO v. THE EQUITABLE INSURANCE AND CASUALTY CO., INC. SYLLABUS

1. INSURANCE; INDEMNITY; AMBIGUITY IN AND CONDITIONS OF A LIFE ACCIDENT POLICY RESOLVED AGAINST INSURER. — Where there is an ambiguity with respect to the and conditions of a policy, the same will be resolved against the one responsible thereof. Generally, the insured, has little, if any, participation in the preparation of the policy, together with the drafting of its and conditions. The interpretation of obscure stipulations in a contract should not favor the party who caused the obscurity (Art. 1377, N.C.C.) which, in the case at bar, is the insurance company.

SECTION 3. Injury sustained by the burning of a church, theatre, public library or municipal istration 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 enger elevator car in which the Insured is being conveyed as a enger (Elevator in mines excluded) P2,500.00 SECTION 5. Injury sustained by a stroke of lightning or by a cyclone P3,000.00 x

DECISION 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 excepted hereinafter P1,000.00 SECTION 2. Injury sustained by the wrecking or disablement of a railroad enger car or street railway car in or on which the insured is traveling as a fare-paying enger P1,500.00

x

x

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 enger steam or motor vessel in which the Insured is traveling as a fare-paying enger; . . ." 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 of fire which broke out on said vessel, resulting to the death by drowning, of the insured and beneficiary in the

waters of Jolo. 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 1 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 our 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 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 1 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 CFI of Rizal (Pasay City, Branch VIII), praying for a 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 as set forth in the complaint had already been released, plaintiff having received the full amount due as appearing in the 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 filed 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 itted 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 — "x

x

x

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 g 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 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: x

x

x

‘Part I of the policy fixes specific amounts as indemnities in case of deaths 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 any cut, bruise or wound.’ x

x

x

Besides, on the face of the policy Exhibit ’A’ itself, death by drowning is a ground for recovery a part 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 no 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 P1,000.00 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 a low a greater indemnity. x

x

x

. . . 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 ed by the generally accepted principles or rulings on insurance, which enunciate that where there is an ambiguity with respect to the and conditions of a 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 and conditions. The interpretation of obscure stipulations in a contract should not favor the party who caused 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 ’ 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. 98 Phil., 79." ". . . 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)."cralaw virtua1aw library 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, as 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.

G.R. No. L-21380 May 20, 1966 MISAMIS LUMBER CORPORATION v. CAPITAL INSURANCE & SURETY CO., INC. SYLLABUS

1. INSURANCE; MOTOR VEHICLES; STIPULATION LIMITING INSURER’S LIABILITY. — The insurance policy stipulated that if the insured authorizes the repair of the damaged motor vehicle, the liability of the insurer is limited to P150.00. The literal meaning of this stipulation must control, it being the actual contract, expressly and plainly provided for in the policy (Art. 1370, Civil Code; Young v. Midland Textile Ins. Co., 30 Phil. 617; Ty v. First Nat. Surety & Assur. Co., Inc., L-1613645, 29 April 1961). 2. ID.; ID.; ID.; ONEROUS INSURANCE CONTRACT DOES NOT JUSTIFY — ABROGATION OF EXPRESS . — The fact that the insurance contract is onerous does not in itself justify the abrogation of its express which the insured accepted or adhered to and which is the law between the contracting parties. DECISION

Plaintiff-appellee Misamis Lumber Corporation, under its former name, Lanao Timber Mills, Inc., insured its Ford Falcon motor car for the amount of P14,000 with the defendantappellant, Capital Insurance & Surety Company, Inc. The pertinent provisions of the policy provided, as follows: "1. The Company will subject to the Limits of Liability indemnify the Insured against loss or damage to the Motor Vehicle and its accessories and spare parts whilst thereon. "2. (a) by accidental collision or overturing or collision or overturning consequent when mechanical breakdown or consequent upon wear and tear. x

x

x

"3. At its option the Company may pay in cash

the amount of the loss or damage or may repair, reinstate or replace the Motor Vehicle or any part thereof or its accessories or spare parts. The liability of the Company shall not exceed the value of the parts lost or damaged and the reasonable cost of fitting such parts or the value of the Motor Vehicle at the time of the loss or damage whichever is the less. The Insured’s estimate of value stated in the schedule shall be the maximum amount payable by the Company in respect of any claim for loss or damage. x

x

x

"4. The insured may authorize the repair of the Motor Vehicle necessitated by damage for which the Company may be liable under this policy provided that: (a) the estimated cost of such repair does not exceed the Authorized Repair Limit. (b) a detailed estimate of the cost is forwarded to the Company without delay." and providing also that the authorized repair limit is P150.00. At around eleven o’clock in the evening of 25 November 1961, and while the abovementioned insurance policy was in force, the insured car, while traveling along Aurora Boulevard in front of the Pepsi Cola plant in Quezon City, ed over a water hole which the driver did not see because an oncoming car did not dim its light. The crankcase and flywheel housing of the car broke when it hit a hollow block Lying alongside the water hole. At the instance of the plaintiff-appellee, the car was towed and repaired by Morosi Motors at its shop at 1906 Taft Avenue Extension at a total cost of P302.27. On 29 November 1961, when the repairs on the car had already been made, the plaintiffappellee made a report of the accident to the defendant-appellant Capital Insurance &

Surety Company. Since the defendant-appellant refused to pay for the total cost of towage and repairs, suit was filed in the municipal court originally. The case before Us is now a direct appeal on a point of law from the judgment of the Court of First Instance of Manila finding for the plaintiff and against the defendant-insurer in its Civil Case No. 51757. Per our resolution on 13 February 1964, it was resolved to proceed with the case without the appellee’s brief, which was filed late. The defendant-appellant its liability in the amount of P150, but not for any excess thereof. The lower court did not exonerate the said appellant for the excess because, according to it, the company’s absolution would render the insurance contract one-sided and that the said insurer had not shown that the cost of repairs in the sum of P302.27 is unreasonable, excessive or padded, nor had it shown that it could have undertaken the repairs itself at less expense. The above reasoning is beside the point, because the insurance policy stipulated in paragraph 4 that if the insured authorizes the repair, the liability of the insurer, per its subparagraph (a), is limited to P150.00. The literal meaning of this stipulation must control, it being the actual contract, expressly and plainly provided for in the policy (Art. 1370, Civil Code, Young v. Midland Textile Ins. Co., 30 Phil, 617; Ty v. First Nat. Surety & Assur. Co., Inc., L-16138-45, 29 April 1961). The lower court’s recourse to legal hermeneutics is not called for because paragraph 4 of the policy is clear and specific and leaves no room for interpretation. The interpretation given is even unjustified because it opposes what was specifically stipulated. Thus, it will be observed that the policy drew out not only the limits of the insurer’s liability

but also the mechanics that the insured had to follow to be entitled to full indemnity of repairs. The option to undertake the repairs is accorded to the insurance company per paragraph 2. The said company was deprived of the option because the insured took it upon itself to have the repairs made, and only notified the insurer when the repairs were done. As a consequence, paragraph 4, which limits the company’s liability to P150.00, applies. The insurance contract may be rather onerous ("one-sided", as the lower court put it), but that in itself does not justify the abrogation of its express , which the insured accepted or adhered to and which is the law between the contracting parties. Finally, to require the insurer to prove that the cost of the repairs ordered by the insured is unreasonable, as the appealed decision does, when the insurer was not given an opportunity to inspect and assess the damage before the repairs were made, strikes us as contrary to elementary justice and equity. For the foregoing reasons, the appealed decision is hereby modified by ordering the defendant-appellant Capital Insurance & Surety Company, Inc. to pay not more than P150.00 to the plaintiff-appellee Misamis Lumber Corporation. Each party shall bear its own costs and attorney’s fees.

G.R. No. 76399 January 22, 1993 RAFAEL (REX) VERENDIA v. COURT OF APPEALS and FIDELITY & SURETY CO. OF THE PHILIPPINES G.R. No. 75605. January 22, 1993. FIDELITY & SURETY CO. OF THE PHILIPPINES, INC. v. RAFAEL VERENDIA and THE COURT OF APPEALS

3. CIVIL LAW; INSURANCE CONTRACT; LAW BETWEEN THE PARTIES; GENERALLY, SHOULD BE CONSTRUED IN FAVOR OF THE INSURED. — Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific Banking Corporation v. Court of Appeals 168 SCRA 1 [1988]). Its and conditions constitute the measure of the insurer’s liability and compliance therewith is a condition precedent to the insured’s right to recovery from the insurer (Oriental Assurance Corporation v. Court of Appeals, 200 SCRA 459 [1991], citing Perla Compania de Sequros, Inc. v. Court of Appeals, 185 SCRA 741 [1991]). As it is also a contract of adhesion, an insurance contract should be liberally construed in favor of the insured and strictly against the insurer company which usually prepares it (Western Guaranty Corporation v. Court of Appeals, 187 SCRA 652 [1980]). 4. ID.; ID.; BENEFITS THEREUNDER SHALL BE FORFEITED IF ANY FALSE DECLARATIONS BE MADE IN OF THE CLAIM; CASE AT BAR. — Considering that Verendia used a false lease contract to his claim under Fire Insurance Policy No. F-18876, the of the policy should be strictly construed against the insured. Verendia failed to live by the of the policy, specifically Section 13 thereof which is expressed in that are clear and unambiguous, that all benefits under the policy shall be forfeited "if the claim be in any respect fraudulent, or if any false declaration be made or used in thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in his behalf to obtain any benefit under the policy." Verendia, having presented a false declaration to his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of Section 13 of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking Corporation v. Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia reprehensibly disregarded the principle that insurance contracts are uberrimae fidae and demand the

most abundant good faith (Velasco v. Apostol, 173 SCRA 228 [1989]). 5. ID.; ID.; SUBROGATION RECEIPTS, NOT AN INDICATION OF PRESENCE OF MUTUAL AGREEMENT TO SETTLE CLAIM OF INSURED. — There is no reason to conclude that by submitting the subrogation receipt as evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia’s claims in consideration of the amount of P142,685.77. While the said receipt appears to have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It might be that there had been efforts to settle Verendia’s claims, but surely, the subrogation receipt by itself does not prove that a settlement had been arrived at and enforced. Thus, to interpret Fidelity’s presentation of the subrogation receipt in evidence as indicative of its accession to its "" is not only wanting in rational basis but would be substituting the will of the Court for that of the parties. DECISION The two consolidated cases involved herein stemmed from the issuance by Fidelity and Surety Insurance Company of the Philippines (Fidelity for short) of its Fire Insurance Policy No. F-18876 effective between June 23, 1980 and June 23, 1981 covering Rafael (Rex) Verendia’s residential building located at Tulip Drive, Beverly Hills, Antipolo, Rizal in the amount of P385,000.00. Designated as beneficiary was the Monte de Piedad & Savings Bank. Verendia also insured the same building with two other companies, namely, The Country Bankers Insurance for P56,000.00 under Policy No. PDB-80-1913 expiring on May 12, 1981, and The Development Insurance for P400,000.00 under Policy No. F-48867 expiring on June 30, 1981. While the three fire insurance policies were in force, the insured property was completely destroyed by fire on the early morning of

December 28, 1980. Fidelity was accordingly informed of the loss and despite demands, refused payment under its policy, thus prompting Verendia to file a complaint with the then Court of First Instance of Quezon City, praying for payment of P385,000.00, legal interest thereon, plus attorney’s fees and litigation expenses. The complaint was later amended to include Monte de Piedad as an "unwilling defendant" (p. 16, Record). Answering the complaint, Fidelity, among other things, averred that the policy was avoided by reason of over-insurance, that Verendia maliciously represented that the building at the time of the fire was leased under a contract executed on June 25, 1980 to a certain Roberto Garcia, when actually it was a Marcelo Garcia who was the lessee. On May 24, 1983, the trial court rendered a decision, per Judge Rodolfo A. Ortiz, ruling in favor of Fidelity. In sustaining the defenses set up by Fidelity, the trial court ruled that Paragraph 3 of the policy was also violated by Verendia in that the insured failed to inform Fidelity of his other insurance coverages with Country Bankers Insurance and Development Insurance. Verendia appealed to the then Intermediate Appellate Court and in a decision promulgated on March 31, 1986, (CA-G.R. No. CV No. 02895, Coquia, Zosa, Bartolome, and Ejercito (P), JJ.,), the appellate court reversed for the following reasons: (a) there was no misrepresentation concerning the lease for the contract was signed by Marcelo Garcia in the name of Roberto Garcia; and (b) Paragraph 3 of the policy contract requiring Verendia to give notice to Fidelity of other contracts of insurance was waived by Fidelity as shown by its conduct in attempting to settle the claim of Verendia (pp. 32-33, Rollo of G.R. No. 76399). Fidelity received a copy of the appellate court’s decision on April 4, 1986, but instead of directly filing a motion for reconsideration within 15 days therefrom, Fidelity filed on April

21, 1986, a motion for extension of 3 days within which to file a motion for reconsideration. The motion for extension was not filed on April 19, 1986 which was the 15th day after receipt of the decision because said 15th day was a Saturday and of course, the following day was a Sunday (p. 14, Rollo of G.R. No. 75605). The motion for extension was granted by the appellate court on April 30, 1986 (p. 15, ibid.), but Fidelity had in the meantime filed its motion for reconsideration on April 24, 1986 (p. 16, ibid.). Verendia filed a motion to expunge from the record Fidelity’s motion for reconsideration on the ground that the motion for extension was filed out of time because the 15th day from receipt of the decision which fell on a Saturday was ignored by Fidelity, for indeed, so Verendia contended, the Intermediate Appellate Court has personnel receiving pleadings even on Saturdays. The motion to expunge was denied on June 17, 1986 (p. 27, ibid.) and after a motion for reconsideration was similarly brushed aside on July 22, 1986 (p. 30, ibid.), the petition herein docketed as G.R. No. 75605 was initiated. Subsequently, or more specifically on October 21, 1986, the appellate court denied Fidelity’s motion for reconsideration and thereof. Fidelity filed on March 31, 1986, the petition for review on certiorari now docketed as G.R. No. 76399. The two petitions, interrelated as they are, were consolidated (p. 54, Rollo of G.R. No. 76399) and thereafter given due course. Before we can even begin to look into the merits of the main case which is the petition for review on certiorari, we must first determine whether the decision of the appellate court may still be reviewed, or whether the same is beyond further judicial scrutiny. Stated otherwise before anything else, inquiry must be made into the issue of whether Fidelity could have legally asked for an extension of the 15-day reglementary

period for appealing or for moving for reconsideration. As early as 1944, this Court through Justice Ozaeta already pronounced the doctrine that the pendency of a motion for extension of time to perfect an appeal does not suspend the running of the period sought to be extended (Garcia v. Buenaventura 74 Phil. 611 [1944]). To the same effect were the rulings in Gibbs v. CFI of Manila (80 Phil. 160 [1948]), Bello v. Fernando (4 SCRA 138 [1962]), and Joe v. King (20 SCRA 1120 [1967]). The above cases notwithstanding and because the Rules of Court do not expressly prohibit the filing of a motion for extension of time to file a motion for reconsideration in regard to a final order or judgment, magistrates, including those in the Court of Appeals, held sharply divided opinions on whether the period for appealing which also includes the period for moving to reconsider may be extended. The matter was not definitely settled until this Court issued its Resolution in Habaluyas Enterprises, Inc. v. Japson (142 SCRA 208 [1986]), declaring that beginning one month from the promulgation of the resolution on May 30, 1986 — ". . . the rule shall be strictly enforced that no motion for extension of time to file a motion for new trial or reconsideration shall be filed . . ." (at p. 212.) In the instant case, the motion for extension was filed and granted before June 30, 1986, although, of course, Verendia’s motion to expunge the motion for reconsideration was not finally disposed until July 22, 1986, or after the dictum in Habaluyas had taken effect. Seemingly, therefore, the filing of the motion for extension came before its formal proscription under Habaluyas, for which reason we now turn our attention to G.R. No. 76399. Reduced to bare essentials, the issues Fidelity raises therein are: (a) whether or not the contract of lease submitted by Verendia to

his claim on the fire insurance policy constitutes a false declaration which would forfeit his benefits under Section 13 of the policy and (b) whether or not, in submitting the subrogation receipt in evidence, Fidelity had in effect agreed to settle Verendia’s claim in the amount stated in said receipt. 1 Verging on the factual, the issue of the veracity or falsity of the lease contract could have been better resolved by the appellate court for, in a petition for review on certiorari under Rule 45, the jurisdiction of this Court is limited to the review of errors of law. The appellate court’s findings of fact are. therefore. conclusive upon this Court except in the following cases: (1) when the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly absurd, mistaken, or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the judgment is premised on a misapprehension of facts; (5) when the findings of fact are conflicting; and (6) when the Court of Appeals in making its findings went beyond the issues of the case and the same are contrary to the issions of both appellant and appellee (Ronquillo v. Court of Appeals, 195 SCRA 433 [1991]). In view of the conflicting findings of the trial court and the appellate court on important issues in these consolidated cases and it appearing that the appellate court judgment is based on a misapprehension of facts, this Court shall review the evidence on record. The contract of lease upon which Verendia relies to his claim for insurance benefits, was entered into between him and one Robert Garcia, married to Helen Cawinian, on June 25, 1980 (Exh. "1"), a couple of days after the effectivity of the insurance policy. When the rented residential building was razed to the ground on December 28, 1980, it appears that Robert Garcia (or Roberto Garcia) was still within the premises. However, according to the investigation report prepared by Pat. Eleuterio M. Buenviaje of the Antipolo

police, the building appeared to have "no occupant" and that Mr. Roberto Garcia was "renting on the otherside (sic) portion of said compound" (Exh. "E"). These pieces of evidence belie Verendia’s uncorroborated testimony that Marcelo Garcia whom he considered as the real lessee, was occupying the building when it was burned (TSN, July 27, 1982, p. 10). Robert Garcia disappeared after the fire. It was only on October 9, 1981 that an adjuster was able to locate him. Robert Garcia then executed an affidavit before the National Intelligence and Security Authority (NISA) to the effect that he was not the lessee of Verendia’s house and that his signature on the contract of lease was a complete forgery. Thus, on the strength of these facts, the adjuster submitted a report dated December 4, 1981 recommending the denial of Verendia’s claim (Exh. "2"). Ironically, during the trial, Verendia itted that it was not Robert Garcia who signed the lease contract. According to Verendia, it was signed by Marcelo Garcia cousin of Robert, who had been paying the rentals all the while. Verendia, however, failed to explain why Marcelo had to sign his cousin’s name when he in fact was paying for the rent and why he (Verendia) himself, the lessor, allowed such a ruse. Fidelity’s conclusions on these proven facts appear, therefore, to have sufficient bases: Verendia concocted the lease contract to deflect responsibility for the fire towards an alleged "lessee", inflated the value of the property by the alleged monthly rental of P6,500) when in fact, the Provincial Assessor of Rizal had assessed the property’s fair market value to be only P40,300.00, insured the same property with two other insurance companies for a total coverage of around P900,000, and created a dead-end for the adjuster by the disappearance of Robert Garcia. Basically a contract of indemnity, an insurance contract is the law between the parties (Pacific

Banking Corporation v. Court of Appeals 168 SCRA 1 [1988]). Its and conditions constitute the measure of the insurer’s liability and compliance therewith is a condition precedent to the insured’s right to recovery from the insurer (Oriental Assurance Corporation v. Court of Appeals, 200 SCRA 459 [1991], citing Perla Compania de Sequros, Inc. v. Court of Appeals, 185 SCRA 741 [1991]). As it is also a contract of adhesion, an insurance contract should be liberally construed in favor of the insured and strictly against the insurer company which usually prepares it (Western Guaranty Corporation v. Court of Appeals, 187 SCRA 652 [1980]). Considering, however, the foregoing discussion pointing to the fact that Verendia used a false lease contract to his claim under Fire Insurance Policy No. F-18876, the of the policy should be strictly construed against the insured. Verendia failed to live by the of the policy, specifically Section 13 thereof which is expressed in that are clear and unambiguous, that all benefits under the policy shall be forfeited "if the claim be in any respect fraudulent, or if any false declaration be made or used in thereof, or if any fraudulent means or devises are used by the Insured or anyone acting in his behalf to obtain any benefit under the policy." Verendia, having presented a false declaration to his claim for benefits in the form of a fraudulent lease contract, he forfeited all benefits therein by virtue of Section 13 of the policy in the absence of proof that Fidelity waived such provision (Pacific Banking Corporation v. Court of Appeals, supra). Worse yet, by presenting a false lease contract, Verendia reprehensibly disregarded the principle that insurance contracts are uberrimae fidae and demand the most abundant good faith (Velasco v. Apostol, 173 SCRA 228 [1989]). There is also no reason to conclude that by submitting the subrogation receipt as evidence in court, Fidelity bound itself to a "mutual agreement" to settle Verendia’s claims in consideration of the amount of P142,685.77.

While the said receipt appears to have been a filled-up form of Fidelity, no representative of Fidelity had signed it. It is even incomplete as the blank spaces for a witness and his address are not filled up. More significantly, the same receipt states that Verendia had received the aforesaid amount. However, that Verendia had not received the amount stated therein, is proven by the fact that Verendia himself filed the complaint for the full amount of P385,000.00 stated in the policy. It might be that there had been efforts to settle Verendia’s claims, but surely, the subrogation receipt by itself does not prove that a settlement had been arrived at and enforced. Thus, to interpret Fidelity’s presentation of the subrogation receipt in evidence as indicative of its accession to its "" is not only wanting in rational basis but would be substituting the will of the Court for that of the parties. WHEREFORE, the petition in G.R. No. 75605 is DISMISSED. The petition in G.R. No. 76399 is GRANTED and the decision of the then Intermediate Appellate Court under review is REVERSED and SET ASIDE and that of the trial court is hereby REINSTATED and UPHELD. SO ORDERED.

G.R. NO. 156167 : May 16, 2005 GULF RESORTS, INC. v. PHILIPPINE CHARTER INSURANCE CORPORATION DECISION Before the Court is the Petition for Certiorariunder Rule 45 of the Revised Rules of Court by petitioner GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner assails the appellate court decision1 which dismissed its two appeals and affirmed the judgment of the trial court.

For review are the warring interpretations of petitioner and respondent on the scope of the insurance company's liability for earthquake damage to petitioner's properties. Petitioner avers that, pursuant to its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the properties within its resort caused by earthquake. Respondent contends that the rider limits its liability for loss to the two swimming pools of petitioner.

(Exhs. "G" also "G-1") and in said policy the

the policy wording and rates in said policy be

earthquake endorsement clause as indicated in

copied in the policy to be issued by defendant;

Exhibits "C-1", "D-1", Exhibits "E" and "F-1"

that defendant issued Policy No. 31944 to

was deleted and the entry under

plaintiff covering the period of March 14, 1990

Endorsements/Warranties at the time of issue

to March 14, 1991 for P10,700,600.00 for a

read that plaintiff renewed its policy with AHAC

total of P45,159.92 (Exh. "I"); that in

(AIU) for the period of March 14, 1989 to

the computation of the , defendant's

March 14, 1990 under Policy No. 206-

Policy No. 31944 (Exh. "I"), which is the policy

4568061-9 (Exh. "H") which carried the entry

in question, contained on the right-hand upper

[P]laintiff is the owner of the Plaza Resort

under "Endorsement/Warranties at Time of

portion of page 7 thereof, the following:

situated at Agoo, La Union and had its

Issue", which read "Endorsement to Include

properties in said resort insured originally with

Earthquake Shock (Exh. "6-B-1") in the

RateVarious

the American Home Assurance Company

amount of P10,700.00 and paid P42,658.14

Premiu m

(AHAC-AIU). In the first four insurance policies

(Exhs. "6-A" and "6-B") as thereof,

' 2,061.52

'

Typhoon

issued by AHAC-AIU from 1984-85; 1985-86;

computed as follows:

' 1,030.76

'

EC

' 393.00

'

ES

The facts as established by the court a quo, and affirmed by the appellate court are as follows:

1986-1987; and 1987-88 (Exhs. "C", "D", "E"

Item -

P7,691,000.00

- on the Clubhouse only @ .392%;

-

1,500,000.00

- on the furniture, etc. contained in the F.S.T. building above- mentioned@ .490%;

-

393,000.00

- on the two swimming pools, only Prem. 409.05 (against the peril of earthquake shock Tax only) @ 0.100%

-

116,600.00

and "F"; also Exhs. "1", "2", "3" and "4" respectively), the risk of loss from earthquake shock was extended only to plaintiff's two swimming pools, thus, "earthquake shock endt." (Item 5 only) (Exhs. "C-1"; "D-1," and "E" and two (2) swimming pools only (Exhs. "C-1"; 'D-1", "E" and "F-1"). "Item 5" in those policies referred to the two (2) swimming pools

' P37,420.60 F/L

a) Tilter House

Doc. Stamps

other buildings include as follows: - P19,800.00

TOTAL

3,068.10 776.89

45,159.92;

b) Power House - P41,000.00

0.551% the above break-down of s shows -that 0.551%

c) House Shed

- P55,000.00

-that 0.540% plaintiff paid only P393.00 as

P100,000.00

- for furniture, fixtures, lines air-con and against earthquake shock (ES); that in all the operating equipment

only (Exhs. "1-B", "2-B", "3-B" and "F-2"); that

-

six insurance policies (Exhs. "C", "D", "E", "F",

subsequently AHAC(AIU) issued in plaintiff's

that plaintiff agreed to insure with defendant

"G" and "H"), the against the peril of

favor Policy No. 206-4182383-0 covering the

the properties covered by AHAC (AIU) Policy

earthquake shock is the same, that is P393.00

period March 14, 1988 to March 14, 1989

No. 206-4568061-9 (Exh. "H") provided that

(Exhs. "C" and "1-B"; "2-B" and "3-B-1" and

"3-B-2"; "F-02" and "4-A-1"; "G-2" and "5-C1"; "6-C-1"; issued by AHAC (Exhs. "C", "D", "E", "F", "G" and "H") and in Policy No. 31944 issued by defendant, the shock endorsement provide(sic): In consideration of the payment by the insured to the company of the sum included additional the Company agrees, notwithstanding what is stated in the printed conditions of this policy due to the contrary, that this insurance covers loss or damage to shock to any of the property insured by this Policy occasioned by or through or in consequence of earthquake (Exhs. "1-D", "2D", "3-A", "4-B", "5-A", "6-D" and "7-C");

petitioner to submit various documents in of its claim. On August 7, 1990, Bayne Adjusters and Surveyors, Inc., through its Vice-President A.R. de Leon,4rendered a preliminary report5 finding extensive damage caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de Leon stated that "except for the swimming pools, all affected items have no coverage for earthquake shocks."6 On August 11, 1990, petitioner filed its formal demand7 for settlement of the damage to all its properties in the Agoo Playa Resort. On August 23, 1990, respondent denied petitioner's claim on the ground that its insurance policy only afforded earthquake shock coverage to the two swimming pools of the resort.8 Petitioner and respondent failed to arrive at a settlement.9 Thus, on January 24, 1991, petitioner filed a complaint10 with the regional trial court of Pasig praying for the payment of the following:

losses sustained by the insured properties,

that in Exhibit "7-C" the word "included" above the underlined portion was deleted; that on

29 of the policy (Annex "B") until fully paid;

Luzon and Northern Luzon and plaintiff's properties covered by Policy No. 31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged.2 After the earthquake, petitioner advised respondent that it would be making a claim under its Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a formal claim, then assigned the investigation of the claim to an independent claims adjuster, Bayne Adjusters and Surveyors, Inc.3 On July 30, 1990, respondent, through its adjuster, requested

Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims.12 On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz: The above schedule clearly shows that plaintiff paid only a of P393.00 against the peril of earthquake shock, the same it paid against earthquake shock only on the two swimming pools in all the policies issued by AHAC(AIU) (Exhibits "C", "D", "E", "F" and "G"). From this fact the Court must consequently agree with the position of

1.) The sum of P5,427,779.00, representing

with interest thereon, as computed under par.

July 16, 1990 an earthquake struck Central

5.) Costs.11

defendant that the endorsement rider (Exhibit "7-C") means that only the two swimming pools were insured against earthquake shock. Plaintiff correctly points out that a policy of

2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on of defendant's refusal to pay the claims; 3.) The sum of P500,000.00, by way of exemplary damages;

insurance is a contract of adhesion hence, where the language used in an insurance contract or application is such as to create ambiguity the same should be resolved against the party responsible therefor, i.e., the insurance company which prepared the contract. To the mind of [the] Court, the

4.) The sum of P500,000.00 by way of

language used in the policy in litigation is clear

attorney's fees and expenses of litigation;

and unambiguous hence there is no need for

interpretation or construction but only

therefore, of defendant for damages is likewise

31944; EXH "I") BY LIMITING ITSELF TO A

application of the provisions therein.

denied.

CONSIDERATION OF THE SAID

From the above observations the Court finds

WHEREFORE, premises considered, defendant

that only the two (2) swimming pools had

is ordered to pay plaintiffs the sum of THREE

earthquake shock coverage and were heavily

HUNDRED EIGHTY SIX THOUSAND PESOS

damaged by the earthquake which struck on

(P386,000.00) representing damage to the two

July 16, 1990. Defendant having itted that

(2) swimming pools, with interest at 6% per

C. THE TRIAL COURT ERRED IN NOT HOLDING

the damage to the swimming pools was

annum from the date of the filing of the

THAT PLAINTIFF-APPELLANT IS ENTITLED TO

appraised by defendant's adjuster

Complaint until defendant's obligation to

THE DAMAGES CLAIMED, WITH INTEREST

at P386,000.00, defendant must, by virtue of

plaintiff is fully paid.

COMPUTED AT 24% PER ANNUM ON CLAIMS

POLICY ISOLATED FROM THE CIRCUMSTANCES

the contract of insurance, pay plaintiff said amount. Because it is the finding of the Court as stated in the immediately preceding paragraph that

defendant has made known to plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of the other damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not agree that the action filed by plaintiff is baseless and highly speculative since such action is a lawful exercise of the plaintiff's right to come to Court in the honest belief that their Complaint is meritorious. The prayer,

ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.

ON PROCEEDS OF POLICY. No pronouncement as to costs.13 Petitioner's Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of Appeals based on the following assigned errors:14

defendant is liable only for the damage caused to the two (2) swimming pools and that

SURROUNDING ITS ISSUANCE AND THE

A. THE TRIAL COURT ERRED IN FINDING THAT

On the other hand, respondent filed a partial appeal, assailing the lower court's failure to award it attorney's fees and damages on its compulsory counterclaim. After review, the appellate court affirmed the decision of the trial court and ruled, thus:

PLAINTIFF-APPELLANT CAN ONLY RECOVER

However, after carefully perusing the

FOR THE DAMAGE TO ITS TWO SWIMMING

documentary evidence of both parties, We are

POOLS UNDER ITS FIRE POLICY NO. 31944,

not convinced that the last two (2) insurance

CONSIDERING ITS PROVISIONS, THE

contracts (Exhs. "G" and "H"), which the

CIRCUMSTANCES SURROUNDING THE

plaintiff-appellant had with AHAC (AIU) and

ISSUANCE OF SAID POLICY AND THE

upon which the subject insurance contract with

ACTUATIONS OF THE PARTIES SUBSEQUENT

Philippine Charter Insurance Corporation is

TO THE EARTHQUAKE OF JULY 16, 1990.

said to have been based and copied (Exh. "I"),

B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANT'S RIGHT TO RECOVER UNDER DEFENDANT-APPELLEE'S POLICY (NO.

covered an extended earthquake shock insurance on all the insured properties. xxx

We also find that the Court a quo was correct

speculative, We find that the Court a quo did

in not granting the plaintiff-appellant's prayer

not err in granting the same.

for the imposition of interest - 24% on the insurance claim and 6% on loss of income allegedly amounting to P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage caused on the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable

WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial Court hereby AFFIRMED in toto. No costs.15 Petitioner filed the present petition raising the following issues:16

only, it then cannot be said that it was in

A. WHETHER THE COURT OF APPEALS

default and therefore liable for interest.

CORRECTLY HELD THAT UNDER

Coming to the defendant-appellant's prayer for an attorney's fees, long-standing is the rule that the award thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised, it will not be disturbed on

RESPONDENT'S INSURANCE POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.

appeal (Castro et al. v. CA, et al., G.R. No.

B. WHETHER THE COURT OF APPEALS

115838, July 18, 2002). Moreover, being the

CORRECTLY DENIED PETITIONER'S PRAYER

award thereof an exception rather than a rule,

FOR DAMAGES WITH INTEREST THEREON AT

it is necessary for the court to make findings of

THE RATE CLAIMED, ATTORNEY'S FEES AND

facts and law that would bring the case within

EXPENSES OF LITIGATION.

the exception and justify the grant of such award (Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No. 136914, January 25, 2002). Therefore, holding that the plaintiffappellant's action is not baseless and highly

Petitioner contends: First, that the policy's earthquake shock endorsement clearly covers all of the properties insured and not only the swimming pools. It used the words "any property insured by this policy," and it should be interpreted as all inclusive.

Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in the body of the insurance policy itself, which states that it is "[s]ubject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual Payment Agreement On Long Term Policies."17 Third, that the qualification referring to the two swimming pools had already been deleted in the earthquake shock endorsement. Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it deleted the said qualification. Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of the insurance policy, because the rider is the more deliberate expression of the agreement of the contracting parties. Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties enumerated at the time of issue. Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of petitioner and against respondent. It was respondent which caused the ambiguity when it made the policy in issue. Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming pools from the coverage for the risk of fire. It should not be used to limit the respondent's liability for earthquake shock to the two swimming pools only. Ninth, there is no basis for the appellate court to hold that the additional was not paid under the extended coverage. The

for the earthquake shock coverage was already included in the paid for the policy. Tenth, the parties' contemporaneous and subsequent acts show that they intended to extend earthquake shock coverage to all insured properties. When it secured an insurance policy from respondent, petitioner told respondent that it wanted an exact replica of its latest insurance policy from American Home Assurance Company (AHAC-AIU), which covered all the resort's properties for earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent assured petitioner that it was covered for earthquake shock. Respondent's insurance adjuster, Bayne Adjusters and Surveyors, Inc., likewise requested petitioner to submit the necessary documents for its building claims and other repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny that the insurance policy it issued to petitioner covered all of the properties within the resort. Eleventh, that it is proper for it to avail of a Petition for Review by certiorari under Rule 45 of the Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in order to establish the facts upon which this petition is based. On the other hand, respondent made the following counter arguments:18 First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended coverage against earthquake shock to petitioner's insured properties other than on the two swimming pools. Petitioner itted that from 1984 to 1988, only the two swimming pools were insured against earthquake shock. From 1988 until 1990, the provisions in its policy were practically identical to its earlier policies, and there was no increase in the paid. AHAC-AIU, in a letter19 by its representative Manuel C.

Quijano, categorically stated that its previous policy, from which respondent's policy was copied, covered only earthquake shock for the two swimming pools. Second, petitioner's payment of additional in the amount of P393.00 shows that the policy only covered earthquake shock damage on the two swimming pools. The amount was the same amount paid by petitioner for earthquake shock coverage on the two swimming pools from 1990-1991. No additional was paid to warrant coverage of the other properties in the resort. Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to the two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of petitioner's properties. As per its agreement with petitioner, respondent copied its policy from the AHACAIU policy provided by petitioner. Although the first five policies contained the said qualification in their rider's title, in the last two policies, this qualification in the title was deleted. AHAC-AIU, through Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not make the policy incomplete, nor did it broaden the scope of the endorsement whose descriptive title was merely enumerated. Any ambiguity in the policy can be easily resolved by looking at the other provisions, specially the enumeration of the items insured, where only the two swimming pools were noted as covered for earthquake shock damage. Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase "Item 5 - P393,000.00 - on the two swimming pools only (against the peril of earthquake shock only)" meant that only the swimming pools were insured for earthquake damage. The same phrase is used in toto in the policies from 1989 to 1990, the only difference being the designation of the two swimming pools as "Item 3."

Fifth, in order for the earthquake shock endorsement to be effective, s must be paid for all the properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as for coverage of the swimming pools against earthquake shock. No other was paid for earthquake shock coverage on the other properties. In addition, the use of the qualifier "ANY" instead of "ALL" to describe the property covered was done deliberately to enable the parties to specify the properties included for earthquake coverage. Sixth, petitioner did not inform respondent of its requirement that all of its properties must be included in the earthquake shock coverage. Petitioner's own evidence shows that it only required respondent to follow the exact provisions of its previous policy from AHACAIU. Respondent complied with this requirement. Respondent's only deviation from the agreement was when it modified the provisions regarding the replacement cost endorsement. With regard to the issue under litigation, the riders of the old policy and the policy in issue are identical. Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from maintaining that only the two swimming pools were covered for earthquake shock. The adjuster's letter notifying petitioner to present certain documents for its building claims and repair costs was given to petitioner before the adjuster knew the full coverage of its policy. Petitioner anchors its claims on AHAC-AIU's inadvertent deletion of the phrase "Item 5 Only" after the descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy reflect the parties' clear intention to limit earthquake shock coverage to the two swimming pools. Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to any deficiency nor did it institute

any action to reform the policy. The policy binds the petitioner. Eighth, there is no basis for petitioner to claim damages, attorney's fees and litigation expenses. Since respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot be considered to be in default, and therefore, it is not liable for interest. We hold that the petition is devoid of merit. In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar. First, in the designation of location of risk, only the two swimming pools were specified as included, viz: ITEM 3 - 393,000.00 - On the two (2) swimming pools only (against the peril of

Second, under the breakdown for payments,21 it was stated that:

RATES



xx x 3

the following occurrences, namely: - -

or through or in consequence of Earthquake.

(a) Earthquake, volcanic eruption or other convulsion of nature.23 Fourth, the rider attached to the policy, titled "Extended Coverage Endorsement (To Include the Perils of Explosion, Aircraft, Vehicle and Smoke)," stated, viz: ANNUAL PAYMENT AGREEMENT ON LONG TERM POLICIES THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7

HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x

Earthquake Endorsement In consideration of the payment by the Insured

393,000.00 0.100%E/S

393.0022]

to the Company of the sum of P. . . . . . . . . . . . . . . . . additional the Company

Third, Policy Condition No. 6 stated: 6. This insurance does not cover any loss or damage occasioned by or through or in

Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply also to loss or

AND TO PAY THE .

RECAPITULATION AMOUNT

property insured by this Policy occasioned by

- % OF THE NET x x x POLICY

earthquake shock only)20

ITEM NOS.

consequence, directly or indirectly of any of

agrees, notwithstanding what is stated in the printed conditions of this Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire) to any of the

damage occasioned by or through or in consequence of Earthquake.24 Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured properties. It is basic that all the provisions of the insurance policy should be examined and interpreted in consonance with each other.25 All its parts are reflective of the true intent of the parties. The policy cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control; neither do particular words or phrases necessarily determine its character. Petitioner cannot focus on the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and riders, taken and interpreted together, indubitably show the intention of the parties to extend earthquake shock coverage to the two swimming pools only. A careful examination of the recapitulation will show that it is the clear intent of the parties to extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against

loss, damage or liability arising from an unknown or contingent event. Thus, an insurance contract exists where the following elements concur:

CROSS EXAMINATION OF LEOPOLDO

Q. Did you also do this through your insurance

MANTOHAC TSN, November 25, 1991

agency?

pp. 12-13 A. If you are referring to Forte Insurance

1. The insured has an insurable interest; Q. Now Mr. Mantohac, will it be correct to state 2. The insured is subject to a risk of loss by the

also that insofar as your insurance policy

happening of the designated peril;

during the period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was

3. The insurer assumes the risk; 4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk;

limited to the two swimming pools only? A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there

Agency, yes. Q. Is Forte Insurance Agency a department or division of your company? A. No, sir. They are our insurance agency. Q. And they are independent of your company insofar as operations are concerned?

is a provision here that it was only for item 5.

and

A. Yes, sir, they are separate entity. Q. More specifically Item 5 states the amount

5. In consideration of the insurer's promise, the insured pays a .26

of P393,000.00 corresponding to the two

Q. But insofar as the procurement of the

swimming pools only?

insurance policy is concerned they are of

(Emphasis ours)

An insurance is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril.27 In fire, casualty, and marine insurance, the payable becomes a debt as soon as the risk attaches.28 In the subject policy, no payments were made with regard to earthquake shock coverage, except on the two swimming pools. There is no mention of any payable for the other resort properties with regard to earthquake shock. This is consistent with the history of petitioner's previous insurance policies from AHAC-AIU. As borne out by petitioner's witnesses:

course subject to your instruction, is that not A. Yes, sir. CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991 pp. 23-26 Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the procurement of this policy?

correct? A. Yes, sir. The final action is still with us although they can recommend what insurance to take. Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you give written instruction to Forte Insurance Agency advising it that the

A. Yes, sir.

earthquake shock coverage must extend to all properties of Agoo Playa Resort in La Union?

A. No, sir. We did not make any written

A. I examined the policy and seeing that the

marked by counsel for defendant as Exhibit[s]

instruction, although we made an oral

warranty on the earthquake shock

1-6 inclusive. Did you have occasion to review

instruction to that effect of extending the

endorsement has no more limitation referring

of (sic) these six (6) policies issued by your

coverage on (sic) the other properties of the

to the two swimming pools only, I was

company [in favor] of Agoo Playa Resort?

company.

contented already that the previous limitation pertaining to the two swimming pools was

Q. And that instruction, according to you, was very important because in April 1987 there was an earthquake tremor in La Union? A. Yes, sir. Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct? A. Yes, sir. Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to your instructions that all properties must be covered again by earthquake shock endorsement? A. Are you referring to the insurance policy issued by American Home Assurance Company marked Exhibit "G"? Atty. Mejia: Yes.

already removed. Petitioner also cited and relies on the attachment of the phrase "Subject to: Other Insurance Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies"29 to the insurance policy as proof of the intent of the parties to extend the coverage for earthquake shock. However, this phrase is merely an enumeration of the descriptive titles of the riders, clauses, warranties or endorsements to which the policy is subject, as required under Section 50, paragraph 2 of the Insurance Code. We also hold that no significance can be placed on the deletion of the qualification limiting the coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone. As explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:

Yes[,] I having gone over these policies at one point of time, sir. Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries an earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings indicated in Exhibits C to H respectively what was the extent of the coverage [against] the peril of earthquake shock as provided for in each of the six (6) policies? xxx WITNESS:

DIRECT EXAMINATION OF JUAN BARANDA

The extent of the coverage is only up to the

III30

two (2) swimming pools, sir.

TSN, August 11, 1992 pp. 9-12

Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?

Atty. Mejia: We respectfully manifest that the same

Witness:

WITNESS:

exhibits C to H inclusive have been previously

A. Yes, sir. ATTY. MEJIA:

What is your basis for stating that the

Earthquake shock coverage could not stand

going to look at the there has been

coverage against earthquake shock as

alone. If we are covering building or another

no change with respect to the rates. Everytime

provided for in each of the six (6) policies

we can issue earthquake shock solely but that

(sic) there is a renewal if the intention of the

extend to the two (2) swimming pools only?

the moment I see this, the thing that comes to

insurer was to include the earthquake shock, I

my mind is either insuring a swimming pool,

think there is a substantial increase in the

foundations, they are normally affected by

. We are not only going to consider

earthquake but not by fire, sir.

the two (2) swimming pools of the other as

WITNESS: Because it says here in the policies, in the enumeration "Earthquake Shock Endorsement,

stated in the policy. As I see, there is no

in the Clauses and Warranties: Item 5 only

DIRECT EXAMINATION OF JUAN BARANDA III

(Earthquake Shock Endorsement)," sir.

TSN, August 11, 1992 pp. 23-25

ATTY. MEJIA: Witness referring to Exhibit C-1, your Honor.

Q. Plaintiff's witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F

WITNESS: We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools we do cover earthquake shock. For building we covered it for full earthquake coverage which includes earthquake shock' COURT: As far as earthquake shock endorsement you do not have a specific coverage for other things other than swimming pool? You are covering building? They are covered by a general insurance? WITNESS:

increase in the amount of the . I must say that the coverage was not broaden (sic) to include the other items. COURT: They are the same, the rates?

inclusive [remained] its coverage against earthquake shock to two (2) swimming pools

WITNESS:

only but that Exhibits G and H respectively

They are the same in the sence (sic), in the

entend the coverage against earthquake shock

amount of the coverage. If you are going to do

to all the properties indicated in the respective

some computation based on the rates you will

schedules attached to said policies, what can

arrive at the same s, your Honor.

you say about that testimony of plaintiff's witness?

CROSS-EXAMINATION OF JUAN BARANDA III TSN, September 7, 1992

WITNESS:

pp. 4-6

As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure you that this one covers the two swimming pools with respect to earthquake shock endorsement. Based on it, if we are

ATTY. ANDRES: Would you as a matter of practice [insure] swimming pools for fire insurance? WITNESS:

No, we don't, sir.

attachments, rates and so on. It was

Q. So, all the provisions here will be the same

inadvertent, sir.

except that of the rates?

Q. That is why the phrase "earthquake shock to the two (2) swimming pools only" was placed, is it not? A. Yes, sir. ATTY. ANDRES: Will you not also agree with me that these

The Court also rejects petitioner's contention that respondent's contemporaneous and subsequent acts to the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the earthquake shock endorsement included all its properties in the resort. Respondent only insured the properties as intended by the petitioner. Petitioner's own witness testified to this agreement, viz:

A. Yes, sir. He assured me that with regards to the insurance rates that they will be charging will be limited to this one. I (sic) can even be lesser. CROSS EXAMINATION OF LEOPOLDO MANTOHAC

exhibits, Exhibits G and H which you have

CROSS EXAMINATION OF LEOPOLDO

TSN, January 14, 1992

pointed to during your direct-examination, the

MANTOHAC

pp. 12-14

phrase "Item no. 5 only" meaning to (sic) the

TSN, January 14, 1992

two (2) swimming pools was deleted from the

pp. 4-5

Atty. Mejia:

Q. Just to be clear about this particular answer

Q. Will it be correct to state[,] Mr. Witness,

of yours Mr. Witness, what exactly did you tell

that you made a comparison of the provisions

Atty. Omlas (sic) to copy from Exhibit "H" for

and scope of coverage of Exhibits "I" and "H"

purposes of procuring the policy from

sometime in the third week of March, 1990 or

Philippine Charter Insurance Corporation?

thereabout?

A. I told him that the insurance that they will

A. Yes, sir, about that time.

policies issued by AIU, is it not? xxx ATTY. ANDRES: As an insurance executive will you not attach any significance to the deletion of the qualifying phrase for the policies? WITNESS: My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company underwriter, we do not cover. . it was

have to get will have the same provisions as this American Home Insurance Policy No. 2064568061-9.

Q. And at that time did you notice any discrepancy or difference between the policy wordings as well as scope of coverage of

Q. You are referring to Exhibit "H" of course?

Exhibits "I" and "H" respectively?

A. Yes, sir, to Exhibit "H".

A. No, sir, I did not discover any difference

inadvertent because of the previous policies that we have issued with no specific

inasmuch (sic) as I was assured already that the policy wordings and rates were copied from

the insurance policy I sent them but it was

shock covered properties other than the two swimming pools, viz:

xxx

only when this case erupted that we DIRECT EXAMINATION OF ALBERTO DE LEON

A. I based my statement on my findings,

(Bayne Adjusters and Surveyors, Inc.)

because upon my examination of the policy I

Q. With respect to the items declared for

TSN, January 26, 1993

found out that under Item 3 it was specific on

insurance coverage did you notice any

pp. 22-26

the wordings that on the two swimming pools

discovered some discrepancies.

discrepancy at any time between those

only, then enclosed in parenthesis (against the

indicated in Exhibit "I" and those indicated in

Q. Do you recall the circumstances that led to

peril[s] of earthquake shock only), and

Exhibit "H" respectively?

your discussion regarding the extent of

secondly, when I examined the summary of

coverage of the policy issued by Philippine

payment only Item 3 which refers to

Charter Insurance Corporation?

the swimming pools have a computation for

A. With regard to the wordings I did not notice any difference because it was exactly the same P393,000.00 on the two (2) swimming

A. I that when I returned to the

pools only against the peril of earthquake

office after the inspection, I got a photocopy of

shock which I understood before that this

the insurance coverage policy and it was

provision will have to be placed here because

indicated under Item 3 specifically that the

this particular provision under the peril of

coverage is only for earthquake shock. Then, I

earthquake shock only is requested because

I had a talk with Atty. Umlas (sic),

this is an insurance policy and therefore cannot

and I relayed to him what I had found out in

be insured against fire, so this has to be

the policy and he confirmed to me indeed only

placed.

Item 3 which were the two swimming pools

The verbal assurances allegedly given by respondent's representative Atty. Umlas were not proved. Atty. Umlas categorically denied having given such assurances. Finally, petitioner puts much stress on the letter of respondent's independent claims adjuster, Bayne Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement for earthquake

have coverage for earthquake shock. xxx Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the swimming pools all affected items have no coverage for earthquake shock?

payment for earthquake shock and all the other items have no computation for payment of s. In sum, there is no ambiguity in the of the contract and its riders. Petitioner cannot rely on the general rule that insurance contracts are contracts of adhesion which should be liberally construed in favor of the insured and strictly against the insurer company which usually prepares it.31 A contract of adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party merely affixes his signature or his "adhesion" thereto. Through the years, the courts have held that in these type of contracts, the parties do not bargain on equal footing, the weaker party's participation being reduced to the alternative to take it or leave it. Thus, these contracts are viewed as traps for the weaker party whom the courts of justice must protect.32 Consequently, any ambiguity therein is resolved against the insurer, or construed liberally in favor of the insured.33 The case law will show that this Court will only rule out blind adherence to where facts

and circumstances will show that they are basically one-sided.34 Thus, we have called on lower courts to remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of the claims of contending parties. In Development Bank of the Philippines v. National Merchandising Corporation, et al.,35 the parties, who were acute businessmen of experience, were presumed to have assented to the assailed documents with full knowledge. We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it did not know the provisions of the policy. From the inception of the policy, petitioner had required the respondent to copy verbatim the provisions and of its latest insurance policy from AHAC-AIU. The testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner, is reflective of petitioner's knowledge, viz: DIRECT EXAMINATION OF LEOPOLDO MANTOHAC36 TSN, September 23, 1991 pp. 20-21 Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo Playa? A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter

Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American Home Insurance policy are to be incorporated in the PCIC policy? A. Yes, sir. Q. What steps did you take? A. When I examined the policy of the Philippine Charter Insurance Corporation I specifically told him that the policy and wordings shall be copied from the AIU Policy No. 206-45680619. Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some , specifically in the replacement cost endorsement, but the principal provisions of the policy remained essentially similar to AHAC-AIU's policy. Consequently, we cannot apply the "fine print" or "contract of adhesion" rule in this case as the parties' intent to limit the coverage of the policy to the two swimming pools only is not ambiguous.37 IN VIEW WHEREOF, the judgment of the Court of Appeals is affirmed. The Petition for Certiorari is dismissed. No costs. SO ORDERED.

Insurance Corporation as long as it will follow

G.R. No. 125678 March 18, 2002

the same or exact provisions of the previous

PHILAMCARE HEALTH SYSTEMS, INC. v. COURT OF APPEALS and JULITA TRINOS

insurance policy we had with American Home Assurance Corporation.

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question: Have you or any of your family ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details). 1 The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondent’s husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of "out-patient benefits" such as annual physical examinations, preventive health care and other out-patient services. Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability. 2 During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernani’s medical history. Doctors at the MMC allegedly discovered at the time of Ernani’s confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to

about P76,000.00. After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was itted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day. On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90 53795. She asked for reimbursement of her expenses plus moral damages and attorney’s fees. After trial, the lower court ruled against petitioners, viz: WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering: 1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same; 2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff; 3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff; 4. Defendants to pay attorney’s fees of P20,000.00, plus costs of suit.

review, raising the primary argument that a health care agreement is not an insurance contract; hence the "incontestability clause" under the Insurance Code 6 does not apply. Petitioner argues that the agreement grants "living benefits," such as medical check-ups and hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as compared to insurance contracts which last longer, 7 petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the Department of Health. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur: 1. The insured has an insurable interest; 2. The insured is subject to a risk of loss by the happening of the designated peril; 3. The insurer assumes the risk;

SO ORDERED 3 On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner Reverente. 4 Petitioner’s motion for reconsideration was denied. 5 Hence, petitioner brought the instant petition for

4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk; and 5. In consideration of the insurer’s promise, the insured pays a . 8

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest against him, may be insured against. Every person has an insurable interest in the life and health of himself. Section 10 provides: Every person has an insurable interest in the life and health: (1) of himself, of his spouse and of his children; (2) of any person on whom he depends wholly or in part for education or , or in whom he has a pecuniary interest; (3) of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and (4) of any person upon whose life any estate or interest vested in him depends. In the case at bar, the insurable interest of respondent’s husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of non-life insurance, which is primarily a contract of indemnity. 9 Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. Petitioner argues that respondent’s husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondent’s husband to sign an express authorization for any person, organization or entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination. 10

Specifically, the Health Care Agreement signed by respondent’s husband states: We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this application and the full hip Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed ; that no information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed and that the acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as stated in the space for Home Office Endorsement. 11 (Emphasis ours) In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicant’s medical history, thus: I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of ________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization. consultation. treatment or any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A photographic copy of this authorization shall be as valid as the original. 12 (Emphasis ours) Petitioner cannot rely on the stipulation regarding "Invalidation of agreement" which reads:

Failure to disclose or misrepresentation of any material information by the member in the application or medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of Philamcare shall be limited to return of all hip Fees paid. An undisclosed or misrepresented information is deemed material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher hip Fee for the benefit or benefits applied for. 13 The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming from respondent’s husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue. 14 Thus, (A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of , and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since in such case the intent to deceive the insurer is obvious and amounts to actual fraud. 15 (Emphasis ours) The fraudulent intent on the part of the insured must be established to warrant rescission of

the insurance contract. 16 Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid. Under Section 27 of the Insurance Code, "a concealment entitles the injured party to rescind a contract of insurance." The right to rescind should be exercised previous to the commencement of an action on the contract. 17 In this case, no rescission was made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following conditions: 1. Prior notice of cancellation to insured; 2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned; 3. Must be in writing, mailed or delivered to the insured at the address shown in the policy; 4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based. 18 None of the above pre-conditions was fulfilled in this case. When the of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation. 19 Being a contract of adhesion, the of an insurance contract are to be construed strictly against the party which

prepared the contract — the insurer. 20 By reason of the exclusive control of the insurance company over the and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture. 21 This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider. 22 Anent the incontestability of the hip of respondent’s husband, we quote with approval the following findings of the trial court:

WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED. SO ORDERED. G.R. No. L-2294 May 25, 1951 FILIPINAS COMPAÑIA DE SEGUROS v. CHRISTERN, HUENEFELD & CO., INC. 3. INSURANCE; TERMINATION OF POLICY OF PUBLIC ENEMY. — As the Philippine Insurance Law (Act No. 2427, as amended), in its section 8, provides that "anyone except a public enemy may be insured," an insurance policy ceases to be allowable as soon as an insured becomes a public enemy.

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which to contest the hip of the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no longer lie. 23

4. ID.; ID.; RETURN OF S UPON TERMINATION OF POLICY BY REASON OF WAR. — Where an insurance policy ceases to be effective by reason of war, which has made the insured an enemy, the s paid for the period covered by the policy from the date war is declared, should be returned. DECISION

Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred by respondent for the deceased’s hospitalization, medication and the professional fees of the attending physicians. 24

On October 1, 1941, the respondent corporation, Christern, Huenefeld & Co., Inc., after payment of corresponding , obtained from the petitioner, Filipinas Cia. de Seguros, fire policy No. 29333 in the sum of P100,000, 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 salvaged 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 , the respondent corporation (though organized under and by virtue of the laws of the Philippines) being controlled by 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 the 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 after the policy issued in 1941 in favor of the respondent corporation had ceased to be effective because of the outbreak of the war between the United States and 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 , 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 the nationality of a private corporation is determined 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 . 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 v. Uebersee Finanz Korporation, decided on December 8, 1947, 92 Law. Ed. Advance Opinions, No. 4, pp. 148153, in which the control test has been adopted. In "Enemy Corporations" 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 ages appear:jgc:chanrobles.com.ph "Since World War I, the determination of enemy nationality of corporations has been discussed 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 in the Daimler case applied this new concept of "piercing the corporate veil’, which was adopted by the Peace Treaties of 1919 and the Mixed Arbitral Tribunals 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 recognize the concept whereby American-ed corporations could be considered as enemies and thus subject to domestic legislation and istrative 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 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.

length on the authorities cited in of the appealed decision. However, we may add that, in Haw Pia v. China Banking Corporation, * 45 Off. Gaz., (Supp. 9) 229, we already held that the 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 United States did not, in the amendments of the Trading with the Enemy Act during the last war, include as did other legislations, the application 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-ed corporation is determined by the enemy nationality of the controlling stockholders.

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.

"Measures of blocking foreign funds, the so called freezing regulations, and other istrative practice in the treatment of foreign-owned property in the United States allowed to a large degree the determination of enemy interests in domestic corporations and thus the application of the control test. Court decisions sanctioned such istrative 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 v. Uebersee Finanz Korporation, A. G., dealing with a Swiss corporation allegedly controlled by German interests, the Court said: ’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 interests 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

"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 of 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, and 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 to 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 insurances 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 to 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 enforceable, 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 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 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 receive 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 instructions of the Japanese Military istration, as may be seen from the following: "In view of the findings and conclusion of this office contained in its decision on istrative 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 istration, and following the instructions 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." (Italics supplied.) . It results that the petitioner is entitled to recover what was paid to the respondent under the circumstances of this case. However, the petitioner will be entitled to recover only the equivalent, in actual Philippine 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 P77,208.39, Philippine currency, less the amount of the , 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.

G.R. No. 113899 October 13, 1999 GREAT PACIFIC LIFE ASSURANCE CORP. v. COURT OF APPEALS AND MEDARDA V. LEUTERIO DECISION This petition for review, under Rule 45 of the Rules of Court, assails the Decision 1 dated

May 17, 1993, of the Court of Appeals and its Resolution 2 dated January 4, 1994 in CA-G.R. CV No. 18341. The appellate court affirmed in toto the judgment of the Misamis Oriental Regional Trial Court, Branch 18, in an insurance claim filed by private respondent against Great Pacific Life Assurance Co. The dispositive portion of the trial court’s decision reads: "WHEREFORE, judgment is rendered adjudging the defendant GREAT PACIFIC LIFE ASSURANCE CORPORATION as insurer under its Group policy No. G-1907, in relation to Certification B-18558 liable and ordered to pay to the DEVELOPMENT BANK OF THE PHILIPPINES as creditor of the insured Dr. Wilfredo Leuterio, the amount of EIGHTY SIX THOUSAND TWO HUNDRED PESOS (P86,200.00); dismissing the claims for damages, attorney’s fees and litigation expenses in the complaint and counterclaim, with costs against the defendant and dismissing the complaint in respect to the plaintiffs, other than the widow-beneficiary, for lack of cause of action." 3 The facts, as found by the Court of Appeals, are as follows: A contract of group life insurance was executed between petitioner Great Pacific Life Assurance Corporation (hereinafter Grepalife) and Development Bank of the Philippines (hereinafter DBP). Grepalife agreed to insure the lives of eligible housing loan mortgagors of DBP. On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of DBP applied for hip in the group life insurance plan. In an application form, Dr. Leuterio answered questions concerning his health condition as follows: "7. Have you ever had, or consulted, a physician for a heart condition, high blood pressure, cancer, diabetes, lung, kidney or stomach disorder or any other physical

impairment?

interposed the following assigned errors:

Answer: No. If so give details ___________.

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

8. Are you now, to the best of your knowledge, in good health? Answer: [ x ] Yes [ ] No." 4 On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance coverage of Dr. Leuterio, to the extent of his DBP mortgage indebtedness amounting to eightysix thousand, two hundred (P86,200.00) pesos. On August 6, 1984, Dr. Leuterio died due to "massive cerebral hemorrhage." Consequently, DBP submitted a death claim to Grepalife. Grepalife denied the claim alleging that Dr. Leuterio was not physically healthy when he applied for an insurance coverage on November 15, 1983. Grepalife insisted that Dr. Leuterio did not disclose he had been suffering from hypertension, which caused his death. Allegedly, such non-disclosure constituted concealment that justified the denial of the claim. On October 20, 1986, the widow of the late Dr. Leuterio, respondent Medarda V. Leuterio, filed a complaint with the Regional Trial Court of Misamis Oriental, Branch 18, against Grepalife for "Specific Performance with Damages." 5 During the trial, Dr. Hernando Mejia, who issued the death certificate, was called to testify. Dr. Mejia’s findings, based partly from the information given by the respondent widow, stated that Dr. Leuterio complained of headaches presumably due to high blood pressure. The inference was not conclusive because Dr. Leuterio was not autopsied, hence, other causes were not ruled out. On February 22, 1988, the trial court rendered a decision in favor of respondent widow and against Grepalife. On May 17, 1993, the Court of Appeals sustained the trial court’s decision. Hence, the present petition. Petitioners

2. THE LOWER COURT ERRED IN NOT DISMISSING THE CASE FOR WANT OF JURISDICTION OVER THE SUBJECT OR NATURE OF THE ACTION AND OVER THE PERSON OF THE DEFENDANT. 3. THE LOWER COURT ERRED IN ORDERING DEFENDANT-APPELLANT TO PAY TO DBP THE AMOUNT OF P86,200.00 IN THE ABSENCE OF ANY EVIDENCE TO SHOW HOW MUCH WAS THE ACTUAL AMOUNT PAYABLE TO DBP IN ACCORDANCE WITH ITS GROUP INSURANCE CONTRACT WITH DEFENDANT-APPELLANT. 4. THE LOWER COURT ERRED IN - HOLDING THAT THERE WAS NO CONCEALMENT OF MATERIAL INFORMATION ON THE PART OF WILFREDO LEUTERIO IN HIS APPLICATION FOR HIP IN THE GROUP LIFE INSURANCE PLAN BETWEEN DEFENDANTAPPELLANT OF THE INSURANCE CLAIM ARISING FROM THE DEATH OF WILFREDO LEUTERIO." 6 Synthesized below are the assigned errors for our resolution: 1. Whether the Court of Appeals erred in holding petitioner liable to DBP as beneficiary in a group life insurance contract from a complaint filed by the widow of the decedent/mortgagor? 2. Whether the Court of Appeals erred in not finding that Dr. Leuterio concealed that he had

hypertension, which would vitiate the insurance contract? 3. Whether the Court of Appeals erred in holding Grepalife liable in the amount of eighty six thousand, two hundred (P86,200.00) pesos without proof of the actual outstanding mortgage payable by the mortgagor to DBP. Petitioner alleges that the complaint was instituted by the widow of Dr. Leuterio, not the real party in interest, hence the trial court acquired no jurisdiction over the case. It argues that when the Court of Appeals affirmed the trial court’s judgment, Grepalife was held liable to pay the proceeds of insurance contract in favor of DBP, the indispensable party who was not ed in the suit. To resolve the issue, we must consider the insurable interest in mortgaged properties and the parties to this type of contract. The rationale of a group insurance policy of mortgagors, otherwise known as the "mortgage redemption insurance," is a device for the protection of both the mortgagee and the mortgagor. On the part of the mortgagee, it has to enter into such form of contract so that in the event of the unexpected demise of the mortgagor during the subsistence of the mortgage contract, the proceeds from such insurance will be applied to the payment of the mortgage debt, thereby relieving the heirs of the mortgagor from paying the obligation. 7 In a similar vein, ample protection is given to the mortgagor under such a concept so that in the event of death; the mortgage obligation will be extinguished by the application of the insurance proceeds to the mortgage indebtedness. 8 Consequently, where the mortgagor pays the insurance under the group insurance policy, making the loss payable to the mortgagee, the insurance is on the mortgagor’s interest, and the mortgagor continues to be a party to the contract. In this type of policy insurance, the mortgagee is simply an appointee of the insurance fund, such loss-payable clause does not make the

mortgagee a party to the contract. 9 Section 8 of the Insurance Code provides: "Unless the policy provides, where a mortgagor of property effects insurance in his own name providing that the loss shall be payable to the mortgagee, or assigns a policy of insurance to a mortgagee, the insurance is deemed to be upon the interest of the mortgagor, who does not cease to be a party to the original contract, and any act of his, prior to the loss, which would otherwise avoid the insurance, will have the same effect, although the property is in the hands of the mortgagee, but any act which, under the contract of insurance, is to be performed by the mortgagor, may be performed by the mortgagee therein named, with the same effect as if it had been performed by the mortgagor." The insured private respondent did not cede to the mortgagee all his rights or interests in the insurance, the policy stating that: "In the event of the debtor’s death before his indebtedness with the Creditor [DBP] shall have been fully paid, an amount to pay the outstanding indebtedness shall first be paid to the creditor and the balance of sum assured, if there is any, shall then be paid to the beneficiary/ies designated by the debtor." 10 When DBP submitted the insurance claim against petitioner, the latter denied payment thereof, interposing the defense of concealment committed by the insured. Thereafter, DBP collected the debt from the mortgagor and took the necessary action of foreclosure on the residential lot of private Respondent. 11 In Gonzales La O v. Yek Tong Lin Fire & Marine Ins. Co. 12 we held: "Insured, being the person with whom the contract was made, is primarily the proper person to bring suit thereon. . . . Subject to some exceptions, insured may thus sue, although the policy is taken wholly or in part for the benefit of another person named or unnamed, and although it is expressly made

payable to another as his interest may appear or otherwise. . . . Although a policy issued to a mortgagor is taken out for the benefit of the mortgagee and is made payable to him, yet the mortgagor may sue thereon in his own name, especially where the mortgagee’s interest is less than the full amount recoverable under the policy, . . . .’ And in volume 33, page 82, of the same work, we read the following: ‘Insured may be regarded as the real party in interest, although he has assigned the policy for the purpose of collection, or has assigned as collateral security any judgment he may obtain." 13 And since a policy of insurance upon life or health may by transfer, will or succession to any person, whether he has an insurable interest or not, and such person may recover it whatever the insured might have recovered, 14 the widow of the decedent Dr. Leuterio may file the suit against the insurer, Grepalife. The second assigned error refers to an alleged concealment that the petitioner interposed as its defense to annul the insurance contract. Petitioner contends that Dr. Leuterio failed to disclose that he had hypertension, which might have caused his death. Concealment exists where the assured had knowledge of a fact material to the risk, and honesty, good faith, and fair dealing requires that he should communicate it to the assured, but he designedly and intentionally withholds the same. 15 Petitioner merely relied on the testimony of the attending physician, Dr. Hernando Mejia, as ed by the information given by the widow of the decedent. Grepalife asserts that Dr. Mejia’s technical diagnosis of the cause of death of Dr. Leuterio was a duly documented hospital record, and that the widow’s declaration that her husband had "possible hypertension several years ago" should not be considered as hearsay, but as part of res

gestae. On the contrary the medical findings were not conclusive because Dr. Mejia did not conduct an autopsy on the body of the decedent. As the attending physician, Dr. Mejia stated that he had no knowledge of Dr. Leuterio’s any previous hospital confinement. 16 Dr. Leuterio’s death certificate stated that hypertension was only "the possible cause of death." The private respondent’s statement, as to the medical history of her husband, was due to her unreliable recollection of events. Hence, the statement of the physician was properly considered by the trial court as hearsay. The question of whether there was concealment was aptly answered by the appellate court, thus: "The insured, Dr. Leuterio, had answered in his insurance application that he was in good health and that he had not consulted a doctor or any of the enumerated ailments, including hypertension; when he died the attending physician had certified in the death certificate that the former died of cerebral hemorrhage, probably secondary to hypertension. From this report, the appellant insurance company refused to pay the insurance claim. Appellant alleged that the insured had concealed the fact that he had hypertension. Contrary to appellant’s allegations, there was no sufficient proof that the insured had suffered from hypertension. Aside from the statement of the insured’s widow who was not even sure if the medicines taken by Dr. Leuterio were for hypertension, the appellant had not proven nor produced any witness who could attest to Dr. Leuterio’s medical history. . . x

x

x

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

of the claim." 17 The fraudulent intent on the part of the insured must be established to entitle the insurer to rescind the contract. 18 Misrepresentation as a defense of the insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the insurer. 19 In the case at bar, the petitioner failed to clearly and satisfactorily establish its defense, and is therefore liable to pay the proceeds of the insurance. And that brings us to the last point in the review of the case at bar. Petitioner claims that there was no evidence as to the amount of Dr. Leuterio’s outstanding indebtedness to DBP at the time of the mortgagor’s death. Hence, for private respondent’s failure to establish the same, the action for specific performance should be dismissed. Petitioner’s claim is without merit. A life insurance policy is a valued policy. 20 Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. 21 The mortgagor paid the according to the coverage of his insurance, which states that:

lot, in satisfaction of mortgagor’s outstanding loan. Considering this supervening event, the insurance proceeds shall inure to the benefit of the heirs of the deceased person or his beneficiaries. Equity dictates that DBP should not unjustly enrich itself at the expense of another (Nemo cum alterius detrimenio protest). Hence, it cannot collect the insurance proceeds, after it already foreclosed on the mortgage. The proceeds now rightly belong to Dr. Leuterio’s heirs represented by his widow, herein private respondent Medarda Leuterio. WHEREFORE, the petition is hereby DENIED. The Decision and Resolution of the Court of Appeals in CA-G.R. CV 18341 is AFFIRMED with MODIFICATION that the petitioner is ORDERED to pay the insurance proceeds amounting to Eighty-six thousand, two hundred (P86,200.00) pesos to the heirs of the insured, Dr. Wilfredo Leuterio (deceased), upon presentation of proof of prior settlement of mortgagor’s indebtedness to Development Bank of the Philippines. Costs against petitioner. SO ORDERED.

G.R. No. 14300. January 19, 1920

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

SAN MIGUEL BREWERY, ETC v. LAW UNION AND ROCK INSURANCE CO. (LTD.) ET AL., Defendants-Appellees. HENRY HARDING, Defendant-Appellant.

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

SYLLABUS

However, we noted that the Court of Appeals’ decision was promulgated on May 17, 1993. In private respondent’s memorandum, she states that DBP foreclosed in 1995 their residential

1. INSURANCE; INSURABLE INTEREST; EXTENT OF RECOVERY BY MORTGAGEE. — A brewery company, as mortgagee of real property, procured a policy of insurance to be written thereon payable to itself, in case of loss. The insurer was notified that the brewery was merely a mortgagee, but no information was asked or given as to the personality of the owner. Held: That the brewery company had an insurable interest but could recover on the policy only to the extent of the credit secured

by the mortgage. 2. ID.; SALE OF INSURED PROPERTY; SUSPENSION OF INSURANCE. — A purchaser of insured property who does not take the precaution to obtain a transfer of the policy of insurance cannot, in case of loss, recover upon such contract, as the transfer of the property has the effect of suspending the insurance until the purchaser becomes owner of the policy as well as of the property insured. 3. ID.; MISTAKE OF PARTIES IN EXPRESSION OF INTENTION; REFORMATION. — If during the negotiations leading up to the writing of a policy of insurance the contracting parties agree that the insurance shall be so written as to protect not only the interest of the applicant for the policy, as mortgagee, but also the residuary interest of the owner, and the policy is, by inadvertence, ignorance, or mistake, so written as to protect only the interest of the applicant, the court has the power to reform the contract and give effect to it in the sense in which the parties intended to be bound. 4. ID.; ID.; ID.; CERTAINTY OF PROOF REQUIRED. — In order to justify the reformation of a contract of insurance on the ground of failure of the contract to express the intention of the contracting parties, the proof must be of the most satisfactory character, and it must be made clearly to appear that the minds of the contracting parties did actually meet in agreement and that there was some mutual mistake in the expression of their purpose. DECISION This action was begun on October 8, 1917, in the Court of First Instance of the city of Manila by the plaintiff, the San Miguel Brewery, for the purpose of recovering upon two policies of insurance underwritten respectively by the Law Union and Rock Insurance Company (Ltd.) , and the "Filipinas" Compañia de Seguros, for

the sum of P7,500 each, insuring certain property which has been destroyed by fire. The plaintiff, the San Miguel Brewery, is named as the party assured in the two policies referred to, but it is alleged in the complaint that said company was in reality interested in the property which was the subject of insurance in the character of a mortgage creditor only, and that the owner of said property upon the date the policies were issued was one D. P. Dunn who was later succeeded as owner by one Henry Harding. Accordingly said Harding was made a defendant, as a person interested in the subject of the litigation. The prayer of the complaint is that judgment be entered in favor of the plaintiff against the two companies named for the sum of P15,000, with interest and costs, and further that upon satisfaction of the balance of P4,505.30 due to the plaintiff upon the mortgage debt, and upon the cancellation of the mortgage, the plaintiff be absolved from liability to the defendants or any of them. The peculiar form of the latter part of the prayer is evidently due to the design of the plaintiff to lay a foundation for Harding to recover the difference between the plaintiff’s credit and the amount for which the property was insured. Accordingly, as was to be expected, Harding answered, itting the material allegations of the complaint and claiming for himself the right to recover the difference between the plaintiff’s mortgage credit and the face value of the policies. The two insurance companies also answered, itting in effect their liability to the San Miguel Brewery to the extent of its mortgage credit, but denying liability to Harding on the ground that under the contracts of insurance the liability of the insurance companies was limited to the insurable interest of the plaintiff therein. Soon after the action was begun the insurance companies effected a settlement with the San Miguel Brewery by paying the full amount of the credit claimed by it, with the result that the litigation as between the original plaintiff and the two insurance companies came to an end, leaving the action to be prosecuted to final judgment by the

defendant Harding with respect to the balance claimed to be due to him upon the policies. Upon hearing the evidence the trial judge came to the conclusion that Harding had no right of action whatever against the companies and absolved them from liability without special finding as to costs. From this decision the said Henry Harding has appealed. The two insurance companies who are named as defendants do not dispute their liability to the San Miguel Brewery, to the extent already stated, and the only question here under discussion is that of the liability of the insurance companies to Harding. It is therefore necessary to take of such facts only as bear upon this aspect of the case. In this connection it appears that on January 12, 1916, D. P. Dunn, then the owner of the property to which the insurance relates, mortgaged the same to the San Miguel Brewery to secure a debt of P10.000. In the contract of mortgage Dunn agreed to keep the property insured at his expense to the full amount of its value in companies to be selected by the Brewery Company and authorized the latter in case of loss to receive the proceeds of the insurance and to retain such part as might be necessary to cover the mortgage debt. At the same time, in order more conveniently to accomplish the end in view, Dunn authorized and requested the Brewery Company to effect said insurance itself. Accordingly on the same date Antonio Brias, general manager of the Brewery, made a verbal application to the Law Union and Rock Insurance Company for insurance to the extent of P15,000 upon said property. In reply to a question of the company’s agent as to whether the Brewery was the owner of the property, he stated that the company was interested only as a mortgagee. No information was asked as to who was the owner of the property, and no information upon this point was given. It seems that the insurance company to whom this application was directed did not want to

carry more than one-half the risk. It therefore issued its own policy for P7,500 and procured a policy in a like amount to be issued by the "Filipinas" Compañia de Seguros. Both policies were issued in the name of the San Miguel Brewery as the assured, and contained no reference to any other interest in the property. Both policies contain the usual clause requiring assignments to be approved and noted on the policy. The s were paid by the Brewery and charged to Dunn. A year later the policies were renewed, without change, the renewal s being paid by the Brewery, supposedly for the of the owner. In the month of March of the year 1917 Dunn sold the insured property to the defendant Henry Harding, but no assignment of the insurance, or of the insurance policies, was at any time made to him. We agree with the trial court that no cause of action in Henry Harding against the insurance companies is shown. He is not a party to the contracts of insurance and cannot directly maintain an action thereon. (Uy Tam and Uy Yet v. Leonard, 30 Phil. Rep., 471.) His claim is merely of an equitable and subsidiary nature and must be made effective, if at all, through the San Miguel Brewery in whose name the contracts are written. Now the Brewery, as mortgagee of the insured property, undoubtedly had an insurable interest therein; but it could not, in any event, recover upon these policies an amount in excess of its mortgage credit. In this connection it will be ed that Antonio Brias, upon making application for the insurance, informed the company with which the insurance was placed that the Brewery was interested only as a mortgagee. It would, therefore, be impossible for the Brewery to recover anything beyond the amount secured by its mortgage on the insured property. This conclusion is not only deducible from the principles governing the operation and effect of insurance contracts in general but the point is clearly covered by the express provisions of sections 16 and 50 of the Insurance Act (Act

No. 2427). In the first of the sections cited, it is declared that "the measure of an insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof" (sec. 16); while in the other it is stated that "the insurance shall be applied exclusively to the proper interest of the person in whose name it is made unless otherwise specified in the policy" (sec. 50). These provisions would have been fatal to any attempt at recovery even by D. P. Dunn, if the ownership of the property had continued in him up to the time of the loss; and as regards Hardings an additional insuperable obstacle is found in the fact that the ownership of the property had been changed, prior to the loss, without any corresponding change having been effected in the policy of insurance. In section 19 of the Insurance Act we find it stated that "a change of interest in any part of a thing insured unaccompanied by a corresponding change of interest in the insurance, suspends the insurance to an equivalent extent, until the interest in the thing and the interest in the insurance are vested in the same person." Again in section 55 it is declared that "the mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured." Undoubtedly these policies of insurance might have been so framed as to have been "payable to the San Miguel Brewery, mortgagee, as its interest may appear, remainder to whomsoever, during the continuance of the risk, may become the owner of the interest insured." (Sec. 54, Act No. 2427.) Such a clause would have proved an intention to insure the entire interest in the property, not merely the insurable interest of the San Miguel Brewery, and would have shown exactly to whom the money, in case of loss, should be paid. But the policies are not so written. It is easy to collect from the facts stated in the decision of the trial judge, no less than from the testimony of Brias, the manager of the San

Miguel Brewery, that, as the insurance was written up, the obligation of the insurance companies was different from that contemplated by Dunn, at whose request the insurance was written, and Brias. In the contract of mortgage Dunn had agreed, at his own expense, to insure the mortgaged property for its full value and to indorse the policies in such manner as to authorize the Brewery Company to receive the proceeds in case of loss and to retain such part thereof as might be necessary to satisfy the remainder then due upon the mortgage debt. Instead, however, of effecting the insurance himself Dunn authorized and requested the Brewery Company to procure insurance on the property in the amount of P15,000 at Dunn’s expense. The Brewery Company undertook to carry this mandate into effect, and it of course became its duty to procure insurance of the character contemplated, that is, to have the policies so written as to protect not only the insurable interest of the Brewery, but also the owner. Brias seems to have supposed that the policies as written had this effect, but in this he was mistaken. It was certainly a hardship on the owner to be required to pay the s upon P15,000 of insurance when he was receiving no benefit whatever except in protection to the extent of his indebtedness to the Brewery. The blame for the situation thus created rests, however, with the Brewery rather than with the insurance companies, and there is nothing in the record to indicate that the insurance companies were requested to write insurance upon the insurable interest of the owner or intended to make themselves liable to that extent. If during the negotiations which resulted in the writing of this insurance, it had been agreed between the contracting parties that the insurance should be so written as to protect not only the interest of the mortgagee but also the residuary interest of the owner, and the policies had been, by inadvertence, ignorance, or mistake written in the form in which they were issued, a court would have the power to reform the contracts and give effect to them in

the sense in which the parties intended to be bound. But in order to justify this, it must be made clearly to appear that the minds of the contracting parties did actually meet in agreement and that they labored under some mutual error or mistake in respect to the expression of their purpose. Thus, in Bailey v. American Central Insurance Co. (13 Fed., 250), it appeared that a mortgagee desiring to insure his own insurable interest only, correctly stated his interest, and asked that the same be insured. The insurance company agreed to accept the risk, but the policy was issued in the name of the owner, because of the mistaken belief of the company’s agent that the law required it to be so drawn. It was held that a court of equity had the power, at the suit of the mortgagee, to reform the instrument and give judgment in his favor for the loss thereunder, although it had been agreed by both parties that the policy should be written exactly as it was. Said the court: "If the applicant correctly states his interest and distinctly asks for an insurance thereon, and the agent of the insurer agrees to comply with his request, and assumes to decide upon the form of the policy to be written for that purpose, and by mistake of law adopts the wrong form, a court of equity will reform the instrument so as to make it insurance upon the interest named." (See also Fink v. Queens Insurance Co., 24 Fed., 318; Esch v. Home Insurance Co., 78 Iowa, 334; 16 Am. St. Rep., 443; Woodbury Savings etc., Co., v. Charter Oack Insurance Co., 31 Conn., 517; Balen v. Hanover Fire Insurance Co., 67 Mich., 179.) Similarly, in cases where the mortgagee is by mistake described as owner, the court may grant reformation and permit a recovery by the mortgagee in his character as such. (Dalton v. Milwaukee etc. Insurance Co., 126 Iowa, 377; Spare v. Home Mutual Insurance Co., 17 Fed., 568.) In Thompson v. Phenix Insurance Co. (136 U. S., 287, 34 L. ed., 408), it appeared that one Kearney made application to an insurance company for insurance on certain property in his hands as receiver and it was understood between him and the company’s

agent that, in case of loss, the proceeds of the policy should accrue to him and his successors as receiver and to others whom it might concern. However, the policy, as issued, was so worded as to be payable only to him as receiver. In an action brought on the policy by a successor of Kearney, it was alleged that the making of the contract in this form was due to inadvertence, accident, and mistake upon the part of both Kearney and the company. Said the court: "If by inadvertence, accident, or mistake the of the contract were not fully set forth in the policy, the plaintiff is entitled to have it reformed." In another case the same court said: "We have before us a contract from which, by mistake, material stipulations have been omitted, whereby the true intent and meaning of the parties are not fully or accurately expressed. There was a definite concluded agreement as to insurance, which, in point of time, preceded the preparation and delivery of the policy, and this is demonstrated by legal and exact evidence, which removes all doubt as to the sense and undertaking of the parties. In the agreement there has been a mutual mistake, caused chiefly by that contracting party who now seeks to limit the insurance to an interest in the property less than that agreed to be insured. The written agreement did not effect that which the parties intended. That a court of equity can afford relief in such a case, is, we think, well settled by the authorities." (Smell v. Atlantic, etc., Ins. Co., 98 U. S., 85, 89; 25 L. ed., 52.) But to justify the reformation of a contract, the proof must be of the most satisfactory character, and it must clearly appear that the contract failed to express the real agreement between the parties. (Philippine Sugar Estates Development Company v. Government of the Philippine Islands, 62 L. ed., 1177, reversing Government of Philippine Islands v. Philippine

Sugar Estates Development Co., 30 In the case now before us the proof is entirely insufficient to authorize the application of the doctrine stated in the foregoing cases, for it is by no means clear from the testimony of Brias — and none other was offered —that the parties intended for the policy to cover the risk of the owner in addition to that of the mortgagee. It results that the defendant Harding is not entitied to relief in any aspect of the case. The judgment is therefore affirmed, with costs against the appellant. So ordered.

G.R. No. L-15184 May 31, 1963 SAURA IMPORT & EXPORT CO., INC., vs. PHILIPPINE INTERNATIONAL SURETY CO., INC., and PHILIPPINE NATIONAL BANK Instant case was certified by the Court of Appeals to Us, it appearing that the issues involved are purely of law. On December 26, 1952, the Saura Import & Export Co Inc., mortgaged to the Phil. National Bank, a parcel of land covered by T.C.T. No. 40445 of the Registry of Deeds of Davao, issued in its name, to secure the payment of promissory note of P27,000.00 (Exhs. P, B-2). On April 30, 1953, the mortgage was amended to guarantee an increased amount, bringing the total mortgaged debt to P37,000.00 (Exhs. P-2, B-3). The provisions of the mortgaged , pertinent to the resolution of the present case, provide as follows 2. . . . he shall insure the mortgaged property at all times against fire and earthquake for an amount and with such company satisfactory to the Mortgagee, indorsing to the latter the corresponding policies; he shall keep the mortgaged property in good condition, making

repairs and protecting walls that may be necessary; . . . xxx

xxx

xxx

Erected on the land mortgaged, was a building of strong materials owned by the mortgagor Saura Import & Export Co., Inc., which had always been covered by insurance, many years prior to the mortgage contract. Pursuant to the requirement, Saura insured the building and its contents with the Philippine International Surety, an insurance firm acceptable to mortgagee Bank, for P29,000.00 against fire for the period of one year from October 2, 1954. As required therefor, the insurance policy was endorsed to the mortgagee PNB, in a Memo which states Loss if any, payable to the Philippine National Bank as their interest may appear, subject to the , conditions and warranties of this policy (Exh. A). The policy was delivered to the mortgagee Bank by Saura. On October 15, 1954, barely thirteen (13) days after the issuance of the fire insurance policy (October 2, 1954), the insurer cancelled the same, effective as of the date of issue (Exh. A-2). Notice of the cancellation was given to appellee bank in writing, sent by ed Mail and personally addressed to Fortunato Domingo, Branch Manager of the appellee Bank's Davao Branch, and was received by the Bank on November 8, 1954. On April 6, 1955, the building and its contents, worth P40,685.69 were burned. On April 11, 1955, Saura filed a claim with the Insurer and mortgagee Bank. Upon the presentation of notice of loss with the PNB, Saura learned for the first time that the policy had previously been cancelled on October 2, 1954, by the insurer, when Saura's folder in the Bank's filed was opened and the notice of cancellation (original and duplicate) sent by the Insurer to the Bank, was found. Upon refusal of the Insurer Philippine International Surety to pay the amount of the insurance, Civil Case No.

26847 was filed with the Manila CFI against the Insurer, and the PNB was later included as party defendant, after it had refused to prosecute the case tly with Saura Import & Export Co., Inc. At the trial, it was established that neither the Insurer nor the mortgagee Bank informed the plaintiff Saura of the cancellation of the policy. On April 30, 1957, the court a quo rendered the following judgment . . . IN VIEW WHEREOF, complaint dismissed; costs against the plaintiff; but as there is no proof on the counterclaim of the Philippines International Surety, the same is also dismissed. Wherefore, the parties respectfully pray that the foregoing stipulation of facts be itted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts. A motion to reconsider the above judgment, seasonably presented on May 14, 1957, was subsequently denied. The decision rendered and the resolution denying the motion for reconsideration constitute the subject of the instant appeal by plaintiff Saura on the three alleged errors, which converge on the correctness of the ruling, wholly dismissing the complaint absolving both the insurance company and the bank from liability. In the determination of liabilities of the parties herein, let us look into the general principles of insurance, in matters of cancellations of policy by the insurer. Fire insurance policies and other contracts of insurance upon property, in addition to the common provision for cancellation of the policy upon request of the insured, generally provide for cancellation by the insurer by notice to the insured for a prescribed period, which is usually 5 days, and the return of the unearned portion of the

paid by the insured, such provision for cancellation upon notice being authorized by statutes in some jurisdiction, either specifically or as a provision of an adopted standard form of policy. The purpose of provisions or stipulations for notice to the insured, is to prevent the cancellation of the policy, without allowing the insured ample opportunity to negotiate for other insurance in its stead. The form and sufficiency of a notice of cancellation is determined by policy provisions. In order to form the basis for the cancellation of a policy, notice to the insured n not be in any particular form, in the absence of a statute or policy provision prescribing such form, and it is sufficient, so long as it positively and unequivocally indicates to the insured, that it is the intention of the company that the policy shall cease to be binding. Where the policy contains no provisions that a certain number of days notice shall be given, a reasonable notice and opportunity to obtain other insurance must be given. Actual personal notice to the insured is essential to a cancellation under a provision for cancellation by notice. The actual receipt by the insured of a notice of cancellation is universally recognized as a condition precedent to a cancellation of the policy by the insurer, and consequently a letter containing notice of cancellation which is mailed by the insurer but not received by the insured, is ineffective as cancellation (29 Am. Jur. pp. 732-741). The policy in question (Exh. A), does not provide for the notice, its form or period. The Insurance Law, Act No. 2427, does not likewise provide for such notice. This being the case, it devolves upon the Court to apply the generally accepted principles of insurance, regarding cancellation of the insurance policy by the insurer. From what has been heretofore stated, actual notice of cancellation in a clear and unequivocal manner, preferably in writing, in view of the importance of an insurance contract, should be given by the insurer to the insured, so that the latter might be given an opportunity to obtain other insurance for his own protection. The notice should be personal

to the insured and not to and/or through any unauthorized person by the policy. In the case at bar, the defendant insurance company, must have realized the paramount importance of sending a notice of cancellation, when it sent the notice of cancellation of the policy to the defendant bank (as mortgagee), but not to the insured with which it (insurance company) had direct dealing. It was the primary duty of the defendant-appellee insurance company to notify the insured, but it did not. It should be stated that the house and its contents were burned on April 6, 1955, at the time when the policy was enforced (October 2, 1954 to October 2, 1955); and that under the facts, as found by the trial court, to which We are bound, it is evident that both the insurance company and the appellee bank failed, wittingly or unwittingly, to notify the insured appellant Saura of the cancellation made. Of course, the defendant insurance company contends that it gave notice to the defendantappellee bank as mortgagee of the property, and that was already a substantial compliance with its duty to notify the insured of the cancellation of the policy. But notice to the bank, as far appellant herein is concerned, is not effective notice. If a mortgage or lien exists against the property insured, and the policy contains a clause stating that loss, if any, shall be payable to such mortgagee or the holder of such lien as interest may appear, notice of cancellation to the mortgagee or lienholder alone is ineffective as a cancellation of the policy to the owner of the property. (Connecticut Ins. Co. v. Caumisar, 218 Ky. 378, 391 SW 776, cited in 29 Am. Jur. p. 743). Upon authority of the above case, therefore, the liability of the insurance company becomes a fact. It may be argued that in the appeal brief of appellant, no error has been assigned against the insurance company and no prayer is found

therein asking that it be made liable. It must be noted, however, that the case was dismissed the lower court and the main object of the appeal is to secure a reversal of the said judgment. This Court is clothed with ample authority to review matters, even if they are not assigned as errors in the appeal, if it finds that their consideration is necessary in arriving at a just decision of the case. Thus it was held: While an assignment of error which is required by law or rule of court has been held essential to appellate review, only those assigned will be considered, there are a number of cases which appear to accord to the appellate court a broad discretionary power to waive the lack of proper assignment of errors and consider errors not assigned. And an unassigned error closely related to an error properly assigned, or upon which the determination of the question raised by the error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to assign it as error. (Hernandez v. Andal, 78 Phil. 198-199). Although assigned errors apparently appear to be directed against the appellee bank alone, they in essence, seek a reversal of the decision on dismissal, entered by the lower court, which in the main has for its purpose the finding of liability on the policy. In the course of our examination of the records of the case, the decision and the errors assigned, We found that liability attached principally the insurance company, for its failure to give notice of the cancellation of the policy to herein appellant itself. Because of the conclusions reached, We find it unnecessary to discuss the errors assigned against appellee bank. WHEREFORE, the decision appealed from is hereby reversed, and another is entered, condemning the defendant-appellee Philippine International Surety Co., Inc., to pay Saura Import & Export Co., Inc., appellant herein, the sum of P29,000.00, the amount involved in

Policy No. 429, subject-matter of the instant case. Without costs.

G.R. No. L-7667 November 28, 1955 CHERIE PALILEO v. BEATRIZ COSIO, SYLLABUS

2. INSURANCE; WHERE MORTGAGED PROPERTY WAS INSURED BY MORTGAGEE IN HIS OWN NAME; EFFECT OF. — Where a mortgagee, indecently of the mortgagor, insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance proceeds in case of loss, but in such case , he is not allowed to retain his claim against the mortgagor, but is ed by subrogation to the insurer to the extent of the money paid. (Vance on Insurance, 2d ed., p. 654.) DECISION Plaintiff filed a complaint against defendant in the Court of First Instance of Manila praying that (1) the transaction entered into between them on December 18, 1951 be declared as one of loan, and the document executed covering the transaction as one of equitable mortgage to secure the payment of said loan; (2) the defendant be ordered to credit to the plaintiff with the necessary amount from the sum received by the defendant from the Associated Insurance & Surety Co., Inc. and to apply the same to the payment of plaintiff’s obligation thus considering it as fully paid; and (3) the defendant be ordered to pay to plaintiff the difference between the alleged indebtedness of plaintiff and the sum received by defendant from the aforementioned

insurance company, plus the sum allegedly paid to defendant as interest on the alleged indebtedness. On December 19, 1952, defendant filed her answer setting up as special defense that the transaction entered into between the plaintiff and defendant is one of sale with option to repurchase but that the period for repurchase had expired without plaintiff having returned the price agreed upon as a result of which the ownership of the property had become consolidated in the defendant. Defendant also set up certain counterclaims which involve a total amount of P4,900. On April 7, 1953, the case was set for trial on the merits, but because of several postponements asked by the parties, the same has to be set anew for trial on January 12, 1954. On this date, neither the defendant nor her counsel appeared, even if the latter had been notified of the postponement almost a month earlier, and so the court received the evidence of the plaintiff. On January 18, 1954, the court, having in view the evidence presented, rendered judgment granting the relief prayed for in the complaint. On February 2, 1954, the original counsel for the defendant was substituted and the new counsel immediately moved that the judgment be set aside on the ground that, due to mistake or excusable negligence, defendant was unable to present her evidence and the decision was contrary to law, and this motion having been denied, defendant took the present appeal. The important issue to be determined in this appeal is whether the lower court committed a grave abuse of discretion in not reopening the case to give defendant an opportunity to present her evidence considering that the failure of her original counsel to appear was due to mistake or excusable negligence which ordinary prudence could not have guarded against.

The original counsel of defendant was Atty. Leon Ma. Guerrero. As early as February 11, 1953, said counsel showed interest in the early disposal of this case by moving the court to have it set for trial. The first date set was April 7, 1953, but no hearing was had on that date because plaintiff had moved to postpone it. The case was next set for hearing on April 28, 1953, but on motion again of plaintiff, the hearing was transferred to November 6, 1953. Then, upon petition of defendant, the trial had to be moved to December 15, 1953, and because Atty. Guerrero could not appear on said date because of a case he had in Cebu City, the hearing was postponed to January 18, 1954. And on January 4, 1954, or nineteen days after receiving the notice of hearing, Atty. Guerrero was appointed Undersecretary of Foreign Affairs. It is now contended that the appointment was so sudden and unexpected that Atty. Guerrero, after taking his oath, was unable to wind up his private cases or make any preparation at all. It is averred that "The days that followed his appointment were very busy days for defendant’s former counsel. There was an immediate need for clearing the backlog of official business, including the reorganization of the Department of Foreign Affairs and our Foreign Service, and more importantly, he had to assist the Secretary of Foreign Affairs in negotiations of national importance like the Japanese reparations, and the revision of the trade agreement with the United States, that, Atty. Guerrero had to work as much as fourteen hours daily . . . Because of all these unavoidable confusion that followed in the wake of Atty. Guerrero’s sudden and unexpected appointment, the trial of this case scheduled for January 18, 1954 escaped his memory, and consequently, Atty. Guerrero and the defendant were unable to appear when the case was called for trial." These reasons, — it is intimated, — constitute excusable negligence which ordinary prudence could not have guarded against and should have been considered by the trial court as sufficient justification to grant the petition of defendant

for a rehearing. It is a well-settled rule that the granting of a motion to set aside a judgment or order on the ground of mistake or excusable negligence is addressed to the sound discretion of the court (See Coombs v. Santos, 24 Phil., 446; Daipan v. Sigabu, 25 Phil., 184). And an order issued in the exercise of such discretion is ordinarily not to be disturbed unless it is shown that the court has gravely abused such discretion. (See Tell v. Tell, 48 Phil., 70; Macke v. Camps, 5 Phil., 185; Calvo v. De Gutierrez, 4 Phil., 203; Manzanares v. Moreta, 38 Phil., 821; Salva v. Palacio and Leuterio, 90 Phil., 731.) In denying the motion for reopening the trial court said: "After going over the same arguments, this Court is of the opinion, and so holds that the decision of this Court of January 18, 1954 should not be disturbed." Considering the stature, ability and experience of counsel Leon Ma. Guerrero, and the fact that he was given almost one month notice before the date set for trial, we are persuaded to conclude that the trial court did not abuse its discretion in refusing to reconsider its decision. Coming now to the merits of the case, we note that the lower court made the following findings: On December 18, 1951, plaintiff obtained from defendant a loan in the sum of P12,000 subject to the following conditions: (a) that plaintiff shall pay to defendant an interest in the amount of P250 a month; (b) that defendant shall deduct from the loan certain obligations of plaintiff to third persons amounting to P4,550, plus the sum of P250 as interest for the first month; and (c) that after making the above deductions, defendant shall deliver to plaintiff only the balance of the loan of P12,000. Pursuant to their agreement, plaintiff paid to defendant as interest on the loan a total of P2,250.00 corresponding to nine months from December 18, 1951, on the basis of P250.00 a month, which is more than the maximum interest authorized by law. To secure the payment of the aforesaid loan, defendant

required plaintiff to sign a document known as "Conditional Sale of Residential Building", purporting to convey to defendant, with right to repurchase, a two-story building of strong materials belonging to plaintiff. This document did not express the true intention of the parties which was merely to place said property as security for the payment of the loan. After the execution of the aforesaid document, defendant insured the building against fire with the Associated Insurance & Surety Co., Inc. for the sum of P15,000, the insurance policy having been issued in the name of defendant. The building was partly destroyed by fire and, after proper demand, defendant collected from the insurance company an indemnity of P13,107.00 Plaintiff demanded from defendant that she be credited with the necessary amount to pay her obligation out of the insurance proceeds but defendant refused to do so. And on the strength of these facts, the court rendered decision the dispositive part of which reads as follows: "Wherefore, judgment is hereby rendered declaring the transaction had between plaintiff and defendant, as shown in Exhibit A, an equitable mortgage to secure the payment of the sum of P12,000 loaned by the defendant to plaintiff; ordering the defendant to credit the sum of P13,107 received by the defendant from the Associated Insurance & Surety Co., Inc. to the payment of plaintiff’s obligation in the sum of P12,000.00 as stated in the complaint, thus considering the agreement of December 18, 1951 between the herein plaintiff and defendant completely paid and leaving still a balance in the sum of P1,107 from the insurance collected by defendant; that as plaintiff had paid to the defendant the sum of P2,250.00 for nine months as interest on the sum of P12,000 loaned to plaintiff and the legal interest allowed by law in this transaction does not exceed 12 per cent per annum, or the sum of P1,440 for one year, so the herein plaintiff and overpaid the sum of P810 to the defendant, which this Court hereby likewise orders the said defendant to refund to herein plaintiff, plus the balance of P1,107

representing the difference of the sum loan of P12,000 and the collected insurance of P13,107 from the insurance company above mentioned to which the herein plaintiff is entitled to receive, and to pay the costs." The question that now arises is: Is the trial court justified in considering the obligation of plaintiff fully compensated by the insurance amount and in ordering defendant to refund to plaintiff the sum of P1,107 representing the difference of the loan of P12,000 and the sum of P13,107 collected by said defendant from the insurance company notwithstanding the fact that it was not proven that the insurance was taken for the benefit of the mortgagor? It is our opinion that on this score the court is in error for its ruling runs counter to the rule governing an insurance taken by a mortgagee independently of the mortgagor. The rule is that "where a mortgagee, independently of the mortgagor, insures the mortgaged property in his own name and for his own interest, he is entitled to the insurance proceeds in case of loss, but in such case, he is not allowed to retain his claim against the mortgagor, but is ed by subrogation to the insurer to the extent of the money paid." (Vance on Insurance, 2d ed., p. 654) Or, stated in another way, "the mortgagee may insure his interest in the property independently of the mortgagor. In that event, upon the destruction of the property the insurance money paid to the mortgagee will not inure to the benefit of the mortgagor, and the amount due under the mortgage debt remains unchanged. The mortgagee, however, is not allowed to retain his claim against the mortgagor, but it es by subrogation to the insurer, to the extent of the insurance money paid." (Vance on Insurance, 3rd ed., pp. 772-773) This is the same rule upheld by this Court in a case that arose in this jurisdiction. In the case mentioned, an insurance contract was taken out by the mortgagee upon his own interest, it being stipulated that the proceeds would be paid to him only and when the case came up for decision, this Court held that the mortgagee, in case of loss, may only recover

upon the policy to the extent of his credit at the time of the loss. It was declared that the mortgaged had no right of action against the mortgagee on the policy. (San Miguel Brewery v. Law Union, 40 Phil., 674.) It is true that there are authorities which hold that "if a mortgagee procures insurance on his separate interest at his own expense and for his own benefit, without any agreement with the mortgagor with respect thereto, the mortgagor has no interest in the policy, and is not entitled to have the insurance proceeds applied in reduction of the mortgage debt" (19 R. C. L., p. 405), and that, furthermore, the mortgagee "has still a right to recover his whole debt of the mortgagor." (King v. State Mut. F. Ins. Co., 7 Cush. 1; Suffolk F. Ins. Co. v. Boyden, 9 Allen, 123; See also Loomis v. Eagle Life & Health Ins. Co., 6 Gray, 396; Washington Mills Emery Mfg. Co. v. Weymouth & B. Mut. F. Ins. Co., 135 Mass. 506; Foster v. Equitable Mut. F. Ins. Co., 2 Gray 216.) But these authorities merely represent the minority view (See case note, 3 Lawyers’ Report Annotated, new series, p. 79). "The general rule and the weight of authority is, that the insurer is thereupon subrogated to the rights of the mortgagee under the mortgage. This is put upon the analogy of the situation of the insurer to that of a surety." (Jones on Mortgages, Vol. I, pp. 671-672.) Considering the foregoing rules, it would appear that the lower court erred in declaring that the proceeds of the insurance taken out by the defendant on the property mortgaged inured to the benefit of the plaintiff and in ordering said defendant to deliver to the plaintiff the difference between her indebtedness and the amount of insurance received by the defendant, for, in the light of the majority rule we have above enunciated, the correct solution should be that the proceeds of the insurance should be delivered to the defendant but that her claim against the plaintiff should be considered assigned to the insurance company who is deemed subrogated to the rights of the defendant to the extent of

the money paid as indemnity. Consistent with the foregoing pronouncement, we therefore modify the judgment of the lower court as follows: (1) the transaction had between the plaintiff and defendant as shown in Exhibit A is merely an equitable mortgage intended to secure the payment of the loan of P12,000; (2) that the proceeds of the insurance amounting to P13,107.00 was properly collected by defendant who is not required to for it to the plaintiff; (3) that the collection of said insurance proceeds shall not be deemed to have compensated the obligation of the plaintiff to the defendant, but bars the latter from claiming its payment from the former; and (4) defendant shall pay to the plaintiff the sum of P810.00 representing the overpayment made by plaintiff by way of interest on the loan. No pronouncement as to costs.

G.R. NO. 168115

:June 8, 2007

VICENTE ONG LIM SING, JR. v. FEB LEASING & FINANCE CORPORATION This is a Petition for Review on Certiorari assailing the Decision1 dated March 15, 2005 and the Resolution2 dated May 23, 2005 of the Court of Appeals (CA) in CAG.R. CV No. 77498. The facts are as follows: On March 9, 1995, FEB Leasing and Finance Corporation (FEB) entered into a lease3 of equipment and motor vehicles with JVL Food Products (JVL). On the same date, Vicente Ong Lim Sing, Jr. (Lim) executed an Individual Guaranty Agreement4 with FEB to guarantee the prompt and faithful performance of the and conditions of the aforesaid lease agreement. Corresponding Lease Schedules with Delivery and Acceptance Certificates5 over the equipment and motor vehicles formed part

of the agreement. Under the contract, JVL was obliged to pay FEB an aggregate gross monthly rental of One Hundred Seventy Thousand Four Hundred Ninety-Four Pesos (P170,494.00). JVL defaulted in the payment of the monthly rentals. As of July 31, 2000, the amount in arrears, including penalty charges and insurance s, amounted to Three Million Four Hundred Fourteen Thousand Four Hundred Sixty-Eight and 75/100 Pesos (P3,414,468.75). On August 23, 2000, FEB sent a letter to JVL demanding payment of the said amount. However, JVL failed to pay.6 On December 6, 2000, FEB filed a Complaint7 with the Regional Trial Court of Manila, docketed as Civil Case No. 00-99451, for sum of money, damages, and replevin against JVL, Lim, and John Doe. Answer,8

In the Amended JVL and Lim itted the existence of the lease agreement but asserted that it is in reality a sale of equipment on installment basis, with FEB acting as the financier. JVL and Lim claimed that this intention was apparent from the fact that they were made to believe that when full payment was effected, a Deed of Sale will be executed by FEB as vendor in favor of JVL and Lim as vendees.9 FEB purportedly assured them that documenting the transaction as a lease agreement is just an industry practice and that the proper documentation would be effected as soon as full payment for every item was made. They also contended that the lease agreement is a contract of adhesion and should, therefore, be construed against the party who prepared it, i.e., FEB. In upholding JVL and Lim's stance, the trial court stressed the contradictory it found in the lease agreement. The pertinent portions of the Decision dated November 22, 2002 read:

A profound scrutiny of the provisions of the contract which is a contract of adhesion at once exposed the use of several contradictory . To name a few, in Section 9 of the said contract - disclaiming warranty, it is stated that the lessor is not the manufacturer nor the latter's agent and therefore does not guarantee any feature or aspect of the object of the contract as to its merchantability. Merchantability is a term applied in a contract of sale of goods where conditions and warranties are made to apply. Article 1547 of the Civil Code provides that unless a contrary intention appears an implied warranty on the part of the seller that he has the right to sell and to ownership of the object is furnished by law together with an implied warranty that the thing shall be free from hidden faults or defects or any charge or encumbrance not known to the buyer. In an adhesion contract which is drafted and printed in advance and parties are not given a real arms' length opportunity to transact, the Courts treat this kind of contract strictly against their architects for the reason that the party entering into this kind of contract has no choice but to accept the and conditions found therein even if he is not in accord therewith and for that matter may not have understood all the and stipulations prescribed thereat. Contracts of this character are prepared unilaterally by the stronger party with the best legal talents at its disposal. It is upon that thought that the Courts are called upon to analyze closely said contracts so that the weaker party could be fully protected. Another instance is when the alleged lessee was required to insure the thing against loss, damage or destruction. In property insurance against loss or other accidental causes, the assured must have an insurable interest, 32 Corpus Juris 1059. xxx

It has also been held that the test of insurable interest in property is whether the assured has a right, title or interest therein that he will be benefited by its preservation and continued existence or suffer a direct pecuniary loss from its destruction or injury by the peril insured against. If the defendants were to be regarded as only a lessee, logically the lessor who asserts ownership will be the one directly benefited or injured and therefore the lessee is not supposed to be the assured as he has no insurable interest. There is also an observation from the records that the actual value of each object of the contract would be the result after computing the monthly rentals by multiplying the said rentals by the number of months specified when the rentals ought to be paid. Still another observation is the existence in the records of a Deed of Absolute Sale by and between the same parties, plaintiff and defendants which was an exhibit of the defendant where the plaintiff sold to the same defendants one unit 1995 Mitsubishi L-200 STRADA DC PICK UP and in said Deed, The Court noticed that the same as in the alleged lease were used in respect to warranty, as well as liability in case of loss and other conditions. This action of the plaintiff unequivocally exhibited their real intention to execute the corresponding Deed after the defendants have paid in full and as heretofore discussed and for the sake of emphasis the obscurity in the written contract cannot favor the party who caused the obscurity. Based on substantive Rules on Interpretation, if the are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. If the words appear to be contrary to the evident intention of the parties, their contemporaneous and subsequent acts shall be principally considered. If the doubts are cast upon the principal object of the contract in such a way that it cannot be known what may

have been the intention or will of the parties, the contract shall be null and void.10 Thus, the court concluded with the following disposition: In this case, which is held by this Court as a sale on installment there is no chattel mortgage on the thing sold, but it appears amongst the Complaint's prayer, that the plaintiff elected to exact fulfillment of the obligation. For the vehicles returned, the plaintiff can only recover the unpaid balance of the price because of the previous payments made by the defendants for the reasonable use of the units, specially so, as it appears, these returned vehicles were sold at auction and that the plaintiff can apply the proceeds to the balance. However, with respect to the unreturned units and machineries still in the possession of the defendants, it is this Court's view and so hold that the defendants are liable therefore and accordingly are ordered tly and severally to pay the price thereof to the plaintiff together with attorney's fee and the costs of suit in the sum of Php25,000.00. SO ORDERED.11 On December 27, 2002, FEB filed its Notice of Appeal.12 Accordingly, on January 17, 2003, the court issued an Order13 elevating the entire records of the case to the CA. FEB averred that the trial court erred: A. When it ruled that the agreement between the Parties-Litigants is one of sale of personal properties on installment and not of lease;

price because of the previous payments made by the defendants for the reasonable use of the units; D. When it failed to make a ruling or judgment on the t and Solidary Liability of Vicente Ong Lim, Jr. to the Plaintiff-Appellant.14

C. When it ruled that the Plaintiff-Appellant can no longer recover the unpaid balance of the

The Honorable Court of Appeals erred when it failed to strictly apply Section 7, Rule 18 of the 1997 Rules of Civil Procedure and now Item 1, A(8) of A.M. No. 03-1-09 SC (June 8, 2004). III

On March 15, 2005, the CA issued its Decision15 declaring the transaction between the parties as a financial lease agreement under Republic Act (R.A.) No. 8556.16 The fallo of the assailed Decision reads: WHEREFORE, the instant appeal is GRANTED and the assailed Decision dated 22 November 2002 rendered by the Regional Trial Court of Manila, Branch 49 in Civil Case No. 00-99451 is REVERSED and SET ASIDE, and a new judgment is hereby ENTERED ordering appellees JVL Food Products and Vicente Ong Lim, Jr. to solidarily pay appellant FEB Leasing and Finance Corporation the amount of Three Million Four Hundred Fourteen Thousand Four Hundred Sixty Eight Pesos and 75/100 (Php3,414,468.75), with interest at the rate of twelve percent (12%) per annum starting from the date of judicial demand on 06 December 2000, until full payment thereof. Costs against appellees.

The Honorable Court of Appeals erred in not dismissing the appeal for failure of the respondent to file on time its appellant's brief and to separately rule on the petitioner's motion to dismiss. IV The Honorable Court of Appeals erred in finding that the contract between the parties is one of a financial lease and not of a contract of sale. V The Honorable Court of Appeals ERRED IN ruling that the payments paid by the petitioner to the respondent are "rentals" and not installments paid for the purchase price of the subject motor vehicles, heavy machines and equipment. VI

SO ORDERED.17 Lim filed the instant Petition for Review on Certiorari under Rule 45 contending that:

The Honorable Court of Appeals erred in ruling that the previous contract of sale involving the pick-up vehicle is of no consequence. VII

I B. When it ruled that the applicable law on the case is Article 1484 (of the Civil Code) and not R.A. No. 8556;

II

The Honorable Court of Appeals erred when it failed to consider that the undated complaint was filed by Saturnino J. Galang, Jr., without any authority from respondent's Board of Directors and/or Secretary's Certificate.

The Honorable Court of Appeals failed to take into consideration that the contract of lease, a contract of adhesion, concealed the true intention of the parties, which is a contract of sale. VIII

The Honorable Court of Appeals erred in ruling that the petitioner is a lessee with insurable interest over the subject personal properties. IX The Honorable Court of Appeals erred in construing the intentions of the Court a quo in its usage of the term merchantability.18 We affirm the ruling of the appellate court. First, Lim can no longer question Galang's authority as FEB's authorized representative in filing the suit against Lim. Galang was the representative of FEB in the proceedings before the trial court up to the appellate court. Petitioner never placed in issue the validity of Galang's representation before the trial and appellate courts. Issues raised for the first time on appeal are barred by estoppel. Arguments not raised in the original proceedings cannot be considered on review; otherwise, it would violate basic principles of fair play.19 Second, there is no legal basis for Lim to question the authority of the CA to go beyond the matters agreed upon during the pre-trial conference, or in not dismissing the appeal for failure of FEB to file its brief on time, or in not ruling separately on the petitioner's motion to dismiss. Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity.20 In Aguam v. Court of Appeals, the Court explained: The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on the court, not a duty. The

"discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities, however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts." Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is to encourage hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice. It is a far better and more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of justice.21 Third, while we affirm that the subject lease agreement is a contract of adhesion, such a contract is not void per se. It is as binding as any ordinary contract. A party who enters into an adhesion contract is free to reject the stipulations entirely.22 If the thereof are accepted without objection, then the contract serves as the law between the parties. In Section 23 of the lease contract, it was expressly stated that:

SECTION 23. ENTIRE AGREEMENT; SEVERABILITY CLAUSE 23.1. The LESSOR and the LESSEE agree this instrument constitute the entire agreement between them, and that no representations have been made other than as set forth herein. This Agreement shall not be amended or altered in any manner, unless such amendment be made in writing and signed by the parties hereto. Petitioner's claim that the real intention of the parties was a contract of sale of personal property on installment basis is more likely a mere afterthought in order to defeat the rights of the respondent. The Lease Contract with corresponding Lease Schedules with Delivery and Acceptance Certificates is, in point of fact, a financial lease within the purview of R.A. No. 8556. Section 3(d) thereof defines "financial leasing" as: [A] mode of extending credit through a noncancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

FEB leased the subject equipment and motor vehicles to JVL in consideration of a monthly periodic payment of P170,494.00. The periodic payment by petitioner is sufficient to amortize at least 70% of the purchase price or acquisition cost of the said movables in accordance with the Lease Schedules with Delivery and Acceptance Certificates. "The basic purpose of a financial leasing transaction is to enable the prospective buyer of equipment, who is unable to pay for such equipment in cash in one lump sum, to lease such equipment in the meantime for his use, at a fixed rental sufficient to amortize at least 70% of the acquisition cost (including the expenses and a margin of profit for the financial lessor) with the expectation that at the end of the lease period the buyer/financial lessee will be able to pay any remaining balance of the purchase price."23 The allegation of petitioner that the rent for the use of each movable constitutes the value of the vehicle or equipment leased is of no moment. The law on financial lease does not prohibit such a circumstance and this alone does not make the transaction between the parties a sale of personal property on installment. In fact, the value of the lease, usually constituting the value or amount of the property involved, is a benefit allowed by law to the lessor for the use of the property by the lessee for the duration of the lease. It is recognized that the value of these movables depreciates through wear and tear upon use by the lessee. In Beltran v. PAIC Finance Corporation,24 we stated that: Generally speaking, a financing company is not a buyer or seller of goods; it is not a trading company. Neither is it an ordinary leasing company; it does not make its profit by buying equipment and repeatedly leasing out such equipment to different s thereof. But a financial lease must be preceded by a purchase and sale contract covering the equipment which becomes the subject matter of the financial lease. The financial lessor takes the

role of the buyer of the equipment leased. And so the formal or documentary tie between the seller and the real buyer of the equipment, i.e., the financial lessee, is apparently severed. In economic reality, however, that relationship remains. The sale of the equipment by the supplier thereof to the financial lessor and the latter's legal ownership thereof are intended to secure the repayment over time of the purchase price of the equipment, plus financing charges, through the payment of lease rentals; that legal title is the upfront security held by the financial lessor, a security probably superior in some instances to a chattel mortgagee's lien.25 Fourth, the validity of Lease No. 27:95:20 between FEB and JVL should be upheld. JVL entered into the lease contract with full knowledge of its and conditions. The contract was in force for more than four years. Since its inception on March 9, 1995, JVL and Lim never questioned its provisions. They only attacked the validity of the contract after they were judicially made to answer for their default in the payment of the agreed rentals. It is settled that the parties are free to agree to such stipulations, clauses, , and conditions as they may want to include in a contract. As long as such agreements are not contrary to law, morals, good customs, public policy, or public order, they shall have the force of law between the parties.26Contracting parties may stipulate on and conditions as they may see fit and these have the force of law between them.27 The stipulation in Section 1428 of the lease contract, that the equipment shall be insured at the cost and expense of the lessee against loss, damage, or destruction from fire, theft, accident, or other insurable risk for the full term of the lease, is a binding and valid stipulation. Petitioner, as a lessee, has an insurable interest in the equipment and motor vehicles leased. Section 17 of the Insurance Code provides that the measure of an

insurable interest in property is the extent to which the insured might be damnified by loss or injury thereof. It cannot be denied that JVL will be directly damnified in case of loss, damage, or destruction of any of the properties leased. Likewise, the stipulation in Section 9.1 of the lease contract that the lessor does not warrant the merchantability of the equipment is a valid stipulation. Section 9.1 of the lease contract is stated as: 9.1 IT IS UNDERSTOOD BETWEEN THE PARTIES THAT THE LESSOR IS NOT THE MANUFACTURER OR SUPPLIER OF THE EQUIPMENT NOR THE AGENT OF THE MANUFACTURER OR SUPPLIER THEREOF. THE LESSEE HEREBY ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT AND THE SUPPLIER THEREOF AND THAT THERE ARE NO WARRANTIES, CONDITIONS, , REPRESENTATION OR INDUCEMENTS, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, MADE BY OR ON BEHALF OF THE LESSOR AS TO ANY FEATURE OR ASPECT OF THE EQUIPMENT OR ANY PART THEREOF, OR AS TO ITS FITNESS, SUITABILITY, CAPACITY, CONDITION OR MERCHANTABILITY, NOR AS TO WHETHER THE EQUIPMENT WILL MEET THE REQUIREMENTS OF ANY LAW, RULE, SPECIFICATIONS OR CONTRACT WHICH PROVIDE FOR SPECIFIC MACHINERY OR APPARATUS OR SPECIAL METHODS.29 In the financial lease agreement, FEB did not assume responsibility as to the quality, merchantability, or capacity of the equipment. This stipulation provides that, in case of defect of any kind that will be found by the lessee in any of the equipment, recourse should be made to the manufacturer. "The financial lessor, being a financing company, i.e., an extender of credit rather than an ordinary equipment rental company, does not extend a warranty of the fitness of the equipment for any particular use. Thus, the financial lessee was precisely in a position to enforce such

warranty directly against the supplier of the equipment and not against the financial lessor. We find nothing contra legem or contrary to public policy in such a contractual arrangement."30 Fifth, petitioner further proffers the view that the real intention of the parties was to enter into a contract of sale on installment in the same manner that a previous transaction between the parties over a 1995 Mitsubishi L200 Strada DC-Pick-Up was initially covered by an agreement denominated as a lease and eventually became the subject of a Deed of Absolute Sale. We the CA in rejecting this view because to allow the transaction involving the pick-up to be read into the of the lease agreement would expand the coverage of the agreement, in violation of Article 1372 of the New Civil Code.31 The lease contract subject of the complaint speaks only of a lease. Any agreement between the parties after the lease contract has ended is a different transaction altogether and should not be included as part of the lease. Furthermore, it is a cardinal rule in the interpretation of contracts that if the of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of its stipulations shall control. No amount of extrinsic aid is necessary in order to determine the parties' intent.32 WHEREFORE, in the light of all the foregoing, the petition is DENIED. The Decision of the CA in CA-G.R. CV No. 77498 dated March 15, 2005 and Resolution dated May 23, 2005 are AFFIRMED. Costs against petitioner. SO ORDERED.