FIRST DIVISION

[G.R. NO. 154514. July 28, 2005]

WHITE GOLD MARINE SERVICES, INC., Petitioners, v. PIONEER INSURANCE AND

SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION (BERMUDA) LTD., Respondents.

DECISION

QUISUMBING, J.:

This Petition for Review assails the Decision1 dated July 30, 2002 of the Court of
Appeals in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the
Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there
was no violation of the Insurance Code and the respondents do not need license as
insurer and insurance agent/broker.

The facts are undisputed.

White Gold Marine Services, Inc. (White Gold) procured a protection and
indemnity coverage for its vessels from The Steamship Mutual Underwriting
Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and
Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of
Entry and Acceptance.3 Pioneer also issued receipts evidencing payments for the
coverage. When White Gold failed to fully pay its accounts, Steamship Mutual
refused to renew the coverage.

Steamship Mutual thereafter filed a case against White Gold for collection of sum
of money to recover the latter's unpaid balance. White Gold on the other hand,
filed a complaint before the Insurance Commission claiming that Steamship
Mutual violated Sections 1864 and 1875 of the Insurance Code, while Pioneer
violated Sections 299,6 3007 and 3018 in relation to Sections 302 and 303, thereof.

The Insurance Commission dismissed the complaint. It said that there was no need
for Steamship Mutual to secure a license because it was not engaged in the
insurance business. It explained that Steamship Mutual was a Protection and
Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as
insurance agent and/or a broker for Steamship Mutual because Steamship Mutual
was not engaged in the insurance business. Moreover, Pioneer was already
licensed, hence, a separate license solely as agent/broker of Steamship Mutual
was already superfluous.

The Court of Appeals affirmed the decision of the Insurance Commissioner. In its
decision, the appellate court distinguished between P & I Clubs vis - à-
1
vis conventional insurance. The appellate court also held that Pioneer merely
acted as a collection agent of Steamship Mutual.

In this petition, petitioner assigns the following errors allegedly committed by the
appellate court,

FIRST ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT
DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS
TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT
NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE
PHILIPPINES.

SECOND ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY
EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS.

THIRD ASSIGNMENT OF ERROR

THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED
NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF
RESPONDENT STEAMSHIP.

FOURTH ASSIGNMENT OF ERROR

THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT

PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF
RESPONDENT PIONEER.9

Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club,
engaged in the insurance business in the Philippines? (2) Does Pioneer need a
license as an insurance agent/broker for Steamship Mutual?

The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits
it does not have a license to do business in the Philippines although Pioneer is its
resident agent. This relationship is reflected in the certifications issued by the
Insurance Commission.

Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance
business. To buttress its assertion, it cites the definition of a P & I Club in Hyopsung
Maritime Co., Ltd. v. Court of Appeals10 as "an association composed of shipowners
in general who band together for the specific purpose of providing insurance cover
on a mutual basis against liabilities incidental to shipowning that the members
incur in favor of third parties." It stresses that as a P & I Club, Steamship Mutual's
2
primary purpose is to solicit and provide protection and indemnity coverage and
for this purpose, it has engaged the services of Pioneer to act as its agent.

Respondents contend that although Steamship Mutual is a P & I Club, it is not

engaged in the insurance business in the Philippines. It is merely an association of
vessel owners who have come together to provide mutual protection against
liabilities incidental to shipowning.11 Respondents aver Hyopsung is inapplicable in
this case because the issue in Hyopsung was the jurisdiction of the court
over Hyopsung.

Is Steamship Mutual engaged in the insurance business?

Section 2(2) of the Insurance Code enumerates what constitutes "doing an

insurance business" or "transacting an insurance business". These are:

(a) making or proposing to make, as insurer, any insurance contract;

(b) making, or proposing to make, as surety, any contract of suretyship as a

vocation and not as merely incidental to any other legitimate business or activity
of the surety;

(c) doing any kind of business, including a reinsurance business, specifically

recognized as constituting the doing of an insurance business within the meaning
of this Code;

(d) doing or proposing to do any business in substance equivalent to any of the

foregoing in a manner designed to evade the provisions of this Code.

...

The same provision also provides, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions, or that no separate or
direct consideration is received therefor, shall not preclude the existence of an
insurance business.12

The test to determine if a contract is an insurance contract or not, depends on the

nature of the promise, the act required to be performed, and the exact nature of
the agreement in the light of the occurrence, contingency, or circumstances under
which the performance becomes requisite. It is not by what it is called.13

Basically, an insurance contract is a contract of indemnity. In it, one undertakes for

a consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event.14

3
In particular, a marine insurance undertakes to indemnify the assured against
marine losses, such as the losses incident to a marine adventure.15 Section 9916 of
the Insurance Code enumerates the coverage of marine insurance.

Relatedly, a mutual insurance company is a cooperative enterprise where the

members are both the insurer and insured. In it, the members all contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses
and liabilities are paid, and where the profits are divided among themselves, in
proportion to their interest.17 Additionally, mutual insurance associations, or clubs,
provide three types of coverage, namely, protection and indemnity, war risks, and
defense costs.18

A P & I Club is "a form of insurance against third party liability, where the third
party is anyone other than the P & I Club and the members."19 By definition then,
Steamship Mutual as a P & I Club is a mutual insurance association engaged in the
marine insurance business.

The records reveal Steamship Mutual is doing business in the country albeit
without the requisite certificate of authority mandated by Section 187 20 of the
Insurance Code. It maintains a resident agent in the Philippines to solicit insurance
and to collect payments in its behalf. We note that Steamship Mutual even
renewed its P & I Club cover until it was cancelled due to non-payment of the calls.
Thus, to continue doing business here, Steamship Mutual or through its agent
Pioneer, must secure a license from the Insurance Commission.

Since a contract of insurance involves public interest, regulation by the State is

necessary. Thus, no insurer or insurance company is allowed to engage in the
insurance business without a license or a certificate of authority from the
Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license?

Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate

of registration22 issued by the Insurance Commission. It has been licensed to do or
transact insurance business by virtue of the certificate of authority23 issued by the
same agency. However, a Certification from the Commission states that Pioneer
does not have a separate license to be an agent/broker of Steamship Mutual.24

Although Pioneer is already licensed as an insurance company, it needs a separate

license to act as insurance agent for Steamship Mutual. Section 299 of the
Insurance Code clearly states:

SEC. 299 . . .No person shall act as an insurance agent or as an insurance broker in
the solicitation or procurement of applications for insurance, or receive for
services in obtaining insurance, any commission or other compensation from any
4
insurance company doing business in the Philippines or any agent thereof, without
first procuring a license so to act from the Commissioner, which must be renewed
annually on the first day of January, or within six months thereafter. . .

Finally, White Gold seeks revocation of Pioneer's certificate of authority and

removal of its directors and officers. Regrettably, we are not the forum for these
issues.

WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30,
2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the
Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual
Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety
Corporation are ORDERED to obtain licenses and to secure proper authorizations
to do business as insurer and insurance agent, respectively. The petitioner's prayer
for the revocation of Pioneer's Certificate of Authority and removal of its directors
and officers, is DENIED. Costs against respondents.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 181132 June 5, 2009

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

PANGILINAN MARAMAG, Petitioners,
vs.
EVA VERNA DE GUZMAN MARAMAG, ODESSA DE GUZMAN MARAMAG, KARL
BRIAN DE GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR LIFE
ASSURANCE COMPANY, LTD., and GREAT PACIFIC LIFE ASSURANCE
CORPORATION, Respondents.

DECISION

NACHURA, J.:

This is a petition1 for review on certiorari under Rule 45 of the Rules, seeking to
reverse and set aside the Resolution2 dated January 8, 2008 of the Court of
Appeals (CA), in CA-G.R. CV No. 85948, dismissing petitioners’ appeal for lack of
jurisdiction.

5
The case stems from a petition3 filed against respondents with the Regional Trial
Court, Branch 29, for revocation and/or reduction of insurance proceeds for being
void and/or inofficious, with prayer for a temporary restraining order (TRO) and a
writ of preliminary injunction.

The petition alleged that: (1) petitioners were the legitimate wife and children of
Loreto Maramag (Loreto), while respondents were Loreto’s illegitimate family; (2)
Eva de Guzman Maramag (Eva) was a concubine of Loreto and a suspect in the
killing of the latter, thus, she is disqualified to receive any proceeds from his
insurance policies from Insular Life Assurance Company, Ltd. (Insular)4 and Great
Pacific Life Assurance Corporation (Grepalife);5 (3) the illegitimate children of
Loreto—Odessa, Karl Brian, and Trisha Angelie—were entitled only to one-half of
the legitime of the legitimate children, thus, the proceeds released to Odessa and
those to be released to Karl Brian and Trisha Angelie were inofficious and should
be reduced; and (4) petitioners could not be deprived of their legitimes, which
should be satisfied first.

In support of the prayer for TRO and writ of preliminary injunction, petitioners
alleged, among others, that part of the insurance proceeds had already been
released in favor of Odessa, while the rest of the proceeds are to be released in
favor of Karl Brian and Trisha Angelie, both minors, upon the appointment of their
legal guardian. Petitioners also prayed for the total amount of ₱320,000.00 as
actual litigation expenses and attorney’s fees.

In answer,6 Insular admitted that Loreto misrepresented Eva as his legitimate wife
and Odessa, Karl Brian, and Trisha Angelie as his legitimate children, and that they
filed their claims for the insurance proceeds of the insurance policies; that when it
ascertained that Eva was not the legal wife of Loreto, it disqualified her as a
beneficiary and divided the proceeds among Odessa, Karl Brian, and Trisha
Angelie, as the remaining designated beneficiaries; and that it released Odessa’s
share as she was of age, but withheld the release of the shares of minors Karl Brian
and Trisha Angelie pending submission of letters of guardianship. Insular alleged
that the complaint or petition failed to state a cause of action insofar as it sought
to declare as void the designation of Eva as beneficiary, because Loreto revoked
her designation as such in Policy No. A001544070 and it disqualified her in Policy
No. A001693029; and insofar as it sought to declare as inofficious the shares of
Odessa, Karl Brian, and Trisha Angelie, considering that no settlement of Loreto’s
estate had been filed nor had the respective shares of the heirs been determined.
Insular further claimed that it was bound to honor the insurance policies
designating the children of Loreto with Eva as beneficiaries pursuant to Section 53
of the Insurance Code.

In its own answer7 with compulsory counterclaim, Grepalife alleged that Eva was
not designated as an insurance policy beneficiary; that the claims filed by Odessa,
6
Karl Brian, and Trisha Angelie were denied because Loreto was ineligible for
insurance due to a misrepresentation in his application form that he was born on
December 10, 1936 and, thus, not more than 65 years old when he signed it in
September 2001; that the case was premature, there being no claim filed by the
legitimate family of Loreto; and that the law on succession does not apply where
the designation of insurance beneficiaries is clear.

As the whereabouts of Eva, Odessa, Karl Brian, and Trisha Angelie were not known
to petitioners, summons by publication was resorted to. Still, the illegitimate
family of Loreto failed to file their answer. Hence, the trial court, upon motion of
petitioners, declared them in default in its Order dated May 7, 2004.

During the pre-trial on July 28, 2004, both Insular and Grepalife moved that the
issues raised in their respective answers be resolved first. The trial court ordered
petitioners to comment within 15 days.

In their comment, petitioners alleged that the issue raised by Insular and Grepalife
was purely legal – whether the complaint itself was proper or not – and that the
designation of a beneficiary is an act of liberality or a donation and, therefore,
subject to the provisions of Articles 7528 and 7729 of the Civil Code.

In reply, both Insular and Grepalife countered that the insurance proceeds belong
exclusively to the designated beneficiaries in the policies, not to the estate or to
the heirs of the insured. Grepalife also reiterated that it had disqualified Eva as a
beneficiary when it ascertained that Loreto was legally married to Vicenta
Pangilinan Maramag.

On September 21, 2004, the trial court issued a Resolution, the dispositive portion
of which reads –

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

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

SO ORDERED.10

In so ruling, the trial court ratiocinated thus –

Art. 2011 of the Civil Code provides that the contract of insurance is governed by
the (sic) special laws. Matters not expressly provided for in such special laws shall
be regulated by this Code. The principal law on insurance is the Insurance Code, as
amended. Only in case of deficiency in the Insurance Code that the Civil Code may
be resorted to. (Enriquez v. Sun Life Assurance Co., 41 Phil. 269.)

7
The Insurance Code, as amended, contains a provision regarding to whom the
insurance proceeds shall be paid. It is very clear under Sec. 53 thereof that the
insurance proceeds shall be applied exclusively to the proper interest of the
person in whose name or for whose benefit it is made, unless otherwise specified
in the policy. Since the defendants are the ones named as the primary beneficiary
(sic) in the insurances (sic) taken by the deceased Loreto C. Maramag and there is
no showing that herein plaintiffs were also included as beneficiary (sic) therein the
insurance proceeds shall exclusively be paid to them. This is because the
beneficiary has a vested right to the indemnity, unless the insured reserves the
right to change the beneficiary. (Grecio v. Sunlife Assurance Co. of Canada, 48 Phil.
[sic] 63).

Neither could the plaintiffs invoked (sic) the law on donations or the rules on
testamentary succession in order to defeat the right of herein defendants to
collect the insurance indemnity. The beneficiary in a contract of insurance is not
the donee spoken in the law of donation. The rules on testamentary succession
cannot apply here, for the insurance indemnity does not partake of a donation. As
such, the insurance indemnity cannot be considered as an advance of the
inheritance which can be subject to collation (Del Val v. Del Val, 29 Phil. 534). In
the case of Southern Luzon Employees’ Association v. Juanita Golpeo, et al., the
Honorable Supreme Court made the following pronouncements[:]

"With the finding of the trial court that the proceeds to the Life Insurance Policy
belongs exclusively to the defendant as his individual and separate property, we
agree that the proceeds of an insurance policy belong exclusively to the
beneficiary and not to the estate of the person whose life was insured, and that
such proceeds are the separate and individual property of the beneficiary and not
of the heirs of the person whose life was insured, is the doctrine in America. We
believe that the same doctrine obtains in these Islands by virtue of Section 428 of
the Code of Commerce x x x."

In [the] light of the above pronouncements, it is very clear that the plaintiffs has
(sic) no sufficient cause of action against defendants Odessa, Karl Brian and Trisha
Angelie Maramag for the reduction and/or declaration of inofficiousness of
donation as primary beneficiary (sic) in the insurances (sic) of the late Loreto C.
Maramag.

However, herein plaintiffs are not totally bereft of any cause of action. One of the
named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag
is his concubine Eva Verna De Guzman. Any person who is forbidden from
receiving any donation under Article 739 cannot be named beneficiary of a life
insurance policy of the person who cannot make any donation to him, according to
said article (Art. 2012, Civil Code). If a concubine is made the beneficiary, it is
believed that the insurance contract will still remain valid, but the indemnity must
8
go to the legal heirs and not to the concubine, for evidently, what is prohibited
under Art. 2012 is the naming of the improper beneficiary. In such case, the action
for the declaration of nullity may be brought by the spouse of the donor or donee,
and the guilt of the donor and donee may be proved by preponderance of
evidence in the same action (Comment of Edgardo L. Paras, Civil Code of the
Philippines, page 897). Since the designation of defendant Eva Verna de Guzman
as one of the primary beneficiary (sic) in the insurances (sic) taken by the late
Loreto C. Maramag is void under Art. 739 of the Civil Code, the insurance
indemnity that should be paid to her must go to the legal heirs of the deceased
which this court may properly take cognizance as the action for the declaration for
the nullity of a void donation falls within the general jurisdiction of this Court.11

Insular12 and Grepalife13 filed their respective motions for reconsideration,

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

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

On June 16, 2005, the trial court issued a Resolution, disposing, as follows:

WHEREFORE, in view of the foregoing disquisitions, the Motions for

Reconsideration filed by defendants Grepalife and Insular Life are hereby
GRANTED. Accordingly, the portion of the Resolution of this Court dated 21
September 2004 which ordered the prosecution of the case against defendant Eva
Verna De Guzman, Grepalife and Insular Life is hereby SET ASIDE, and the case
against them is hereby ordered DISMISSED.

SO ORDERED.14

In granting the motions for reconsideration of Insular and Grepalife, the trial court
considered the allegations of Insular that Loreto revoked the designation of Eva in
one policy and that Insular disqualified her as a beneficiary in the other policy such
that the entire proceeds would be paid to the illegitimate children of Loreto with
Eva pursuant to Section 53 of the Insurance Code. It ruled that it is only in cases
where there are no beneficiaries designated, or when the only designated
beneficiary is disqualified, that the proceeds should be paid to the estate of the
insured. As to the claim that the proceeds to be paid to Loreto’s illegitimate
children should be reduced based on the rules on legitime, the trial court held that
9
the distribution of the insurance proceeds is governed primarily by the Insurance
Code, and the provisions of the Civil Code are irrelevant and inapplicable. With
respect to the Grepalife policy, the trial court noted that Eva was never designated
as a beneficiary, but only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the
dismissal of the case as to the illegitimate children. It further held that the matter
of Loreto’s misrepresentation was premature; the appropriate action may be filed
only upon denial of the claim of the named beneficiaries for the insurance
proceeds by Grepalife.

Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the
appeal for lack of jurisdiction, holding that the decision of the trial court dismissing
the complaint for failure to state a cause of action involved a pure question of law.
The appellate court also noted that petitioners did not file within the reglementary
period a motion for reconsideration of the trial court’s Resolution, dated
September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and
Trisha Angelie; thus, the said Resolution had already attained finality.

Hence, this petition raising the following issues:

a. In determining the merits of a motion to dismiss for failure to state a cause

of action, may the Court consider matters which were not alleged in the
Complaint, particularly the defenses put up by the defendants in their
Answer?

b. In granting a motion for reconsideration of a motion to dismiss for failure

to state a cause of action, did not the Regional Trial Court engage in the
examination and determination of what were the facts and their probative
value, or the truth thereof, when it premised the dismissal on allegations of
the defendants in their answer – which had not been proven?

c. x x x (A)re the members of the legitimate family entitled to the proceeds of

the insurance for the concubine?15

In essence, petitioners posit that their petition before the trial court should not
have been dismissed for failure to state a cause of action because the finding that
Eva was either disqualified as a beneficiary by the insurance companies or that her
designation was revoked by Loreto, hypothetically admitted as true, was raised
only in the answers and motions for reconsideration of both Insular and Grepalife.
They argue that for a motion to dismiss to prosper on that ground, only the
allegations in the complaint should be considered. They further contend that, even
assuming Insular disqualified Eva as a beneficiary, her share should not have been
distributed to her children with Loreto but, instead, awarded to them, being the
legitimate heirs of the insured deceased, in accordance with law and
jurisprudence.
10
The petition should be denied.

The grant of the motion to dismiss was based on the trial court’s finding that the
petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the
Rules of Court, which reads –

SECTION 1. Grounds. – Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on any
of the following grounds:

xxxx

(g) That the pleading asserting the claim states no cause of action.

A cause of action is the act or omission by which a party violates a right of

another.16 A complaint states a cause of action when it contains the three (3)
elements of a cause of action—(1) the legal right of the plaintiff; (2) the correlative
obligation of the defendant; and (3) the act or omission of the defendant in
violation of the legal right. If any of these elements is absent, the complaint
becomes vulnerable to a motion to dismiss on the ground of failure to state a
cause of action.17

When a motion to dismiss is premised on this ground, the ruling thereon should be
based only on the facts alleged in the complaint. The court must resolve the issue
on the strength of such allegations, assuming them to be true. The test of
sufficiency of a cause of action rests on whether, hypothetically admitting the facts
alleged in the complaint to be true, the court can render a valid judgment upon
the same, in accordance with the prayer in the complaint. This is the general rule.

However, this rule is subject to well-recognized exceptions, such that there is no

hypothetical admission of the veracity of the allegations if:

1. the falsity of the allegations is subject to judicial notice;

2. such allegations are legally impossible;

3. the allegations refer to facts which are inadmissible in evidence;

4. by the record or document in the pleading, the allegations appear

unfounded; or

5. there is evidence which has been presented to the court by stipulation of

the parties or in the course of the hearings related to the case.18

In this case, it is clear from the petition filed before the trial court that, although
petitioners are the legitimate heirs of Loreto, they were not named as
11
beneficiaries in the insurance policies issued by Insular and Grepalife. The basis of
petitioners’ claim is that Eva, being a concubine of Loreto and a suspect in his
murder, is disqualified from being designated as beneficiary of the insurance
policies, and that Eva’s children with Loreto, being illegitimate children, are
entitled to a lesser share of the proceeds of the policies. They also argued that
pursuant to Section 12 of the Insurance Code,19 Eva’s share in the proceeds should
be forfeited in their favor, the former having brought about the death of Loreto.
Thus, they prayed that the share of Eva and portions of the shares of Loreto’s
illegitimate children should be awarded to them, being the legitimate heirs of
Loreto entitled to their respective legitimes.

It is evident from the face of the complaint that petitioners are not entitled to a
favorable judgment in light of Article 2011 of the Civil Code which expressly
provides that insurance contracts shall be governed by special laws, i.e., the
Insurance Code. Section 53 of the Insurance Code states—

SECTION 53. The insurance proceeds shall be applied exclusively to the proper
interest of the person in whose name or for whose benefit it is made unless
otherwise specified in the policy.

Pursuant thereto, it is obvious that the only persons entitled to claim the insurance
proceeds are either the insured, if still alive; or the beneficiary, if the insured is
already deceased, upon the maturation of the policy.20 The exception to this rule is
a situation where the insurance contract was intended to benefit third persons
who are not parties to the same in the form of favorable stipulations or indemnity.
In such a case, third parties may directly sue and claim from the insurer.21

Petitioners are third parties to the insurance contracts with Insular and Grepalife
and, thus, are not entitled to the proceeds thereof. Accordingly, respondents
Insular and Grepalife have no legal obligation to turn over the insurance proceeds
to petitioners. The revocation of Eva as a beneficiary in one policy and her
disqualification as such in another are of no moment considering that the
designation of the illegitimate children as beneficiaries in Loreto’s insurance
policies remains valid. Because no legal proscription exists in naming as
beneficiaries the children of illicit relationships by the insured, 22 the shares of Eva
in the insurance proceeds, whether forfeited by the court in view of the
prohibition on donations under Article 739 of the Civil Code or by the insurers
themselves for reasons based on the insurance contracts, must be awarded to the
said illegitimate children, the designated beneficiaries, to the exclusion of
petitioners. It is only in cases where the insured has not designated any
beneficiary,23 or when the designated beneficiary is disqualified by law to receive
the proceeds,24 that the insurance policy proceeds shall redound to the benefit of
the estate of the insured.

12
In this regard, the assailed June 16, 2005 Resolution of the trial court should be
upheld. In the same light, the Decision of the CA dated January 8, 2008 should be
sustained. Indeed, the appellate court had no jurisdiction to take cognizance of the
appeal; the issue of failure to state a cause of action is a question of law and not of
fact, there being no findings of fact in the first place.25

WHEREFORE, the petition is DENIED for lack of merit. Costs against petitioners.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 167622 November 7, 2008

GREGORIO V. TONGKO, petitioner

vs.
THE MANUFACTURERS LIFE INSURANCE CO. (PHILS.), INC. and RENATO A.
VERGEL DE DIOS, respondents.

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the
March 29, 2005 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 88253,
entitled The Manufacturers Life Insurance Co. (Phils.), Inc. v. National Labor
Relations Commission and Gregorio V. Tongko. The assailed decision set aside the
Decision dated September 27, 2004 and Resolution dated December 16, 2004
rendered by the National Labor Relations Commission (NLRC) in NLRC NCR CA No.
040220-04.

The Facts

Manufacturers Life Insurance Co. (Phils.), Inc. (Manulife) is a domestic corporation

engaged in life insurance business. Renato A. Vergel De Dios was, during the
period material, its President and Chief Executive Officer. Gregorio V. Tongko
started his professional relationship with Manulife on July 1, 1977 by virtue of a
Career Agent's Agreement2 (Agreement) he executed with Manulife.

In the Agreement, it is provided that:

13
 It is understood and agreed that the Agent is an independent contractor and
nothing contained herein shall be construed or interpreted as creating an
employer-employee relationship between the Company and the Agent.

xxxx

a) The Agent shall canvass for applications for Life Insurance, Annuities,
Group policies and other products offered by the Company, and collect, in
exchange for provisional receipts issued by the Agent, money due or to
become due to the Company in respect of applications or policies obtained
by or through the Agent or from policyholders allotted by the Company to
the Agent for servicing, subject to subsequent confirmation of receipt of
payment by the Company as evidenced by an Official Receipt issued by the
Company directly to the policyholder.

xxxx

The Company may terminate this Agreement for any breach or violation of
any of the provisions hereof by the Agent by giving written notice to the
Agent within fifteen (15) days from the time of the discovery of the breach.
No waiver, extinguishment, abandonment, withdrawal or cancellation of the
right to terminate this Agreement by the Company shall be construed for any
previous failure to exercise its right under any provision of this Agreement.

Either of the parties hereto may likewise terminate his Agreement at any
time without cause, by giving to the other party fifteen (15) days notice in
writing. x x x

In 1983, Tongko was named as a Unit Manager in Manulife's Sales Agency

Organization. In 1990, he became a Branch Manager. As the CA found, Tongko's
gross earnings from his work at Manulife, consisting of commissions, persistency
income, and management overrides, may be summarized as follows:

January to December - P 865,096.07

10, 2002
2001 - 6,214,737.11
2000 - 8,003,180.38
1999 - 6,797,814.05
1998 - 4,805,166.34
1997 - 2,822,620.003

14
The problem started sometime in 2001, when Manulife instituted manpower
development programs in the regional sales management level. Relative thereto,
De Dios addressed a letter dated November 6, 20014 to Tongko regarding an
October 18, 2001 Metro North Sales Managers Meeting. In the letter, De Dios
stated:

The first step to transforming Manulife into a big league player has been very
clear - to increase the number of agents to at least 1,000 strong for a start.
This may seem diametrically opposed to the way Manulife was run when you
first joined the organization. Since then, however, substantial changes have
taken place in the organization, as these have been influenced by
developments both from within and without the company.

xxxx

The issues around agent recruiting are central to the intended objectives
hence the need for a Senior Managers' meeting earlier last month when
Kevin O'Connor, SVP - Agency, took to the floor to determine from our senior
agency leaders what more could be done to bolster manpower development.
At earlier meetings, Kevin had presented information where evidently, your
Region was the lowest performer (on a per Manager basis) in terms of
recruiting in 2000 and, as of today, continues to remain one of the laggards
in this area.

While discussions, in general, were positive other than for certain comments
from your end which were perceived to be uncalled for, it became clear that
a one-on-one meeting with you was necessary to ensure that you and
management, were on the same plane. As gleaned from some of your
previous comments in prior meetings (both in group and one-on-one), it was
not clear that we were proceeding in the same direction.

Kevin held subsequent series of meetings with you as a result, one of which I
joined briefly. In those subsequent meetings you reiterated certain views,
the validity of which we challenged and subsequently found as having no
basis.

With such views coming from you, I was a bit concerned that the rest of the
Metro North Managers may be a bit confused as to the directions the
company was taking. For this reason, I sought a meeting with everyone in
your management team, including you, to clear the air, so to speak.

This note is intended to confirm the items that were discussed at the said
Metro North Region's Sales Managers meeting held at the 7/F Conference
room last 18 October.
15
xxxx

Issue # 2: "Some Managers are unhappy with their earnings and would want
to revert to the position of agents."

This is an often repeated issue you have raised with me and with Kevin. For
this reason, I placed the issue on the table before the rest of your Region's
Sales Managers to verify its validity. As you must have noted, no Sales
Manager came forward on their own to confirm your statement and it took
you to name Malou Samson as a source of the same, an allegation that
Malou herself denied at our meeting and in your very presence.

This only confirms, Greg, that those prior comments have no solid basis at all.
I now believe what I had thought all along, that these allegations were simply
meant to muddle the issues surrounding the inability of your Region to meet
its agency development objectives!

Issue # 3: "Sales Managers are doing what the company asks them to do but,
in the process, they earn less."

xxxx

All the above notwithstanding, we had your own records checked and we
found that you made a lot more money in the Year 2000 versus 1999. In
addition, you also volunteered the information to Kevin when you said that
you probably will make more money in the Year 2001 compared to Year
2000. Obviously, your above statement about making "less money" did not
refer to you but the way you argued this point had us almost believing that
you were spouting the gospel of truth when you were not. x x x

xxxx

All of a sudden, Greg, I have become much more worried about your ability
to lead this group towards the new direction that we have been discussing
these past few weeks, i.e., Manulife's goal to become a major agency-led
distribution company in the Philippines. While as you claim, you have not
stopped anyone from recruiting, I have never heard you proactively push for
greater agency recruiting. You have not been proactive all these years when
it comes to agency growth.

xxxx

I cannot afford to see a major region fail to deliver on its developmental

goals next year and so, we are making the following changes in the interim:

16
 1. You will hire at your expense a competent assistant who can unload
you of much of the routine tasks which can be easily delegated. This
assistant should be so chosen as to complement your skills and help
you in the areas where you feel "may not be your cup of tea".

You have stated, if not implied, that your work as Regional Manager
may be too taxing for you and for your health. The above could solve
this problem.

xxxx

2. Effective immediately, Kevin and the rest of the Agency Operations

will deal with the North Star Branch (NSB) in autonomous fashion. x x x

I have decided to make this change so as to reduce your span of control

and allow you to concentrate more fully on overseeing the remaining
groups under Metro North, your Central Unit and the rest of the Sales
Managers in Metro North. I will hold you solely responsible for meeting
the objectives of these remaining groups.

xxxx

The above changes can end at this point and they need not go any further.
This, however, is entirely dependent upon you. But you have to understand
that meeting corporate objectives by everyone is primary and will not be
compromised. We are meeting tough challenges next year and I would want
everybody on board. Any resistance or holding back by anyone will be dealt
with accordingly.

Subsequently, De Dios wrote Tongko another letter dated December 18,

2001,5 terminating Tongko's services, thus:

It would appear, however, that despite the series of meetings and

communications, both one-on-one meetings between yourself and SVP Kevin
O'Connor, some of them with me, as well as group meetings with your Sales
Managers, all these efforts have failed in helping you align your directions
with Management's avowed agency growth policy.

xxxx

On account thereof, Management is exercising its prerogative under Section

14 of your Agents Contract as we are now issuing this notice of termination
of your Agency Agreement with us effective fifteen days from the date of this
letter.

17
Therefrom, Tongko filed a Complaint dated November 25, 2002 with the NLRC
against Manulife for illegal dismissal. The case, docketed as NLRC NCR Case No. 11-
10330-02, was raffled to Labor Arbiter Marita V. Padolina.

In the Complaint, Tongko, in a bid to establish an employer-employee relationship,

alleged that De Dios gave him specific directives on how to manage his area of
responsibility in the latter's letter dated November 6, 2001. He further claimed
that Manulife exercised control over him as follows:

Such control was certainly exercised by respondents over the herein

complainant. It was Manulife who hired, promoted and gave various
assignments to him. It was the company who set objectives as regards
productions, recruitment, training programs and all activities pertaining to its
business. Manulife prescribed a Code of Conduct which would govern in
minute detail all aspects of the work to be undertaken by employees,
including the sales process, the underwriting process, signatures, handling of
money, policyholder service, confidentiality, legal and regulatory
requirements and grounds for termination of employment. The letter of Mr.
De Dios dated 06 November 2001 left no doubt as to who was in control. The
subsequent termination letter dated 18 December 2001 again established in
no uncertain terms the authority of the herein respondents to control the
employees of Manulife. Plainly, the respondents wielded control not only as
to the ends to be achieved but the ways and means of attaining such ends.6

Tongko bolstered his argument by citing Insular Life Assurance Co., Ltd. v. NLRC
(4th Division)7 and Great Pacific Life Assurance Corporation v. NLRC,8 which Tongko
claimed to be similar to the instant case.

Tongko further claimed that his dismissal was without basis and that he was not
afforded due process. He also cited the Manulife Code of Conduct by which his
actions were controlled by the company.

Manulife then filed a Position Paper with Motion to Dismiss dated February 27,
2003,9 in which it alleged that Tongko is not its employee, and that it did not
exercise "control" over him. Thus, Manulife claimed that the NLRC has no
jurisdiction over the case.

In a Decision dated April 15, 2004, Labor Arbiter Marita V. Padolina dismissed the
complaint for lack of an employer-employee relationship. Padolina found that
applying the four-fold test in determining the existence of an employer-employee
relationship, none was found in the instant case. The dispositive portion thereof
states:

18
 WHEREFORE, premises considered, judgment is hereby rendered DISMISSING
the instant complaint for lack of jurisdiction, there being no employer-
employee relationship between the parties.

SO ORDERED.

Tongko appealed the arbiter's Decision to the NLRC which reversed the same and
rendered a Decision dated September 27, 2004 finding Tongko to have been
illegally dismissed.

The NLRC's First Division, while finding an employer-employee relationship

between Manulife and Tongko applying the four-fold test, held Manulife liable for
illegal dismissal. It further stated that Manulife exercised control over Tongko as
evidenced by the letter dated November 6, 2001 of De Dios and wrote:

The above-mentioned letter shows the extent to which respondents

controlled complainant's manner and means of doing his work and achieving
the goals set by respondents. The letter shows how respondents concerned
themselves with the manner complainant managed the Metro North Region
as Regional Sales Manager, to the point that respondents even had a say on
how complainant interacted with other individuals in the Metro North
Region. The letter is in fact replete with comments and criticisms on how
complainant carried out his functions as Regional Sales Manager.

More importantly, the letter contains an abundance of directives or orders

that are intended to directly affect complainant's authority and manner of
carrying out his functions as Regional Sales Manager.10 x x x

Additionally, the First Division also ruled that:

Further evidence of [respondents'] control over complainant can be found in

the records of the case. [These] are the different codes of conduct such as
the Agent Code of Conduct, the Manulife Financial Code of Conduct, and the
Manulife Financial Code of Conduct Agreement, which serve as the
foundations of the power of control wielded by respondents over
complainant that is further manifested in the different administrative and
other tasks that he is required to perform. These codes of conduct
corroborate and reinforce the display of respondents' power of control in
their 06 November 2001 Letter to complainant.11

The fallo of the September 27, 2004 Decision reads:

WHEREFORE, premises considered, the appealed Decision is hereby reversed

and set aside. We find complainant to be a regular employee of respondent

19
 Manulife and that he was illegally dismissed from employment by
respondents.

In lieu of reinstatement, respondent Manulife is hereby ordered to pay

complainant separation pay as above set forth. Respondent Manulife is
further ordered to pay complainant backwages from the time he was
dismissed on 02 January 2002 up to the finality of this decision also as
indicated above.

xxxx

All other claims are hereby dismissed for utter lack of merit.

From this Decision, Manulife filed a motion for reconsideration which was denied
by the NLRC First Division in a Resolution dated December 16, 2004.12

Thus, Manulife filed an appeal with the CA docketed as CA-G.R. SP No. 88253.
Thereafter, the CA issued the assailed Decision dated March 29, 2005, finding the
absence of an employer-employee relationship between the parties and deeming
the NLRC with no jurisdiction over the case. The CA arrived at this conclusion while
again applying the four-fold test. The CA found that Manulife did not exercise
control over Tongko that would render the latter an employee of Manulife. The
dispositive portion reads:

WHEREFORE, premises considered, the present petition is hereby GRANTED

and the writ prayed for accordingly GRANTED. The assailed Decision dated
September 27, 2004 and Resolution dated December 16, 2004 of the
National Labor Relations Commission in NLRC NCR Case No. 00-11-10330-
2002 (NLRC NCR CA No. 040220-04) are hereby ANNULLED and SET ASIDE.
The Decision dated April 15, 2004 of Labor Arbiter Marita V. Padolina is
hereby REINSTATED.

Hence, Tongko filed this petition and presented the following issues:

The Court of Appeals committed grave abuse of discretion in granting

respondents' petition for certiorari.

The Court of Appeals committed grave abuse of discretion in annulling and

setting aside the Decision dated September 27, 2004 and Resolution dated
December 16, 2004 in finding that there is no employer-employee
relationship between petitioner and respondent.

20
 C

The Court of Appeals committed grave abuse of discretion in annulling and

setting aside the Decision dated September 27, 2004 and Resolution dated
December 16, 2004 which found petitioner to have been illegally dismissed
and ordered his reinstatement with payment of backwages.13

Restated, the issues are: (1) Was there an employer-employee relationship

between Manulife and Tongko? and (2) If yes, was Manulife guilty of illegal
dismissal?

The Court's Ruling

This petition is meritorious.

Tongko Was An Employee of Manulife

The basic issue of whether or not the NLRC has jurisdiction over the case resolves
itself into the question of whether an employer-employee relationship existed
between Manulife and Tongko. If no employer-employee relationship existed
between the two parties, then jurisdiction over the case properly lies with the
Regional Trial Court.

In the determination of whether an employer-employee relationship exists

between two parties, this Court applies the four-fold test to determine the
existence of the elements of such relationship. In Pacific Consultants International
Asia, Inc. v. Schonfeld, the Court set out the elements of an employer-employee
relationship, thus:

Jurisprudence is firmly settled that whenever the existence of an

employment relationship is in dispute, four elements constitute the reliable
yardstick: (a) the selection and engagement of the employee; (b) the
payment of wages; (c) the power of dismissal; and (d) the employer's power
to control the employee's conduct. It is the so-called "control test" which
constitutes the most important index of the existence of the employer-
employee relationship that is, whether the employer controls or has reserved
the right to control the employee not only as to the result of the work to be
done but also as to the means and methods by which the same is to be
accomplished. Stated otherwise, an employer-employee relationship exists
where the person for whom the services are performed reserves the right to
control not only the end to be achieved but also the means to be used in
reaching such end.14

The NLRC, for its part, applied the four-fold test and found the existence of all the
elements and declared Tongko an employee of Manulife. The CA, on the other
21
hand, found that the element of control as an indicator of the existence of an
employer-employee relationship was lacking in this case. The NLRC and the CA
based their rulings on the same findings of fact but differed in their
interpretations.

The NLRC arrived at its conclusion, first, on the basis of the letter dated November
6, 2001 addressed by De Dios to Tongko. According to the NLRC, the letter
contained "an abundance of directives or orders that are intended to directly
affect complainant's authority and manner of carrying out his functions as
Regional Sales Manager." It enumerated these "directives" or "orders" as follows:

1. You will hire at your expense a competent assistant who can unload you of
much of the routine tasks which can be easily delegated. x x x

xxxx

This assistant should be hired immediately.

2. Effective immediately, Kevin and the rest of the Agency Operations will
deal with the North Star Branch (NSB) in autonomous fashion x x x.

xxxx

I have decided to make this change so as to reduce your span of control and
allow you to concentrate more fully on overseeing the remaining groups
under Metro North, your Central Unit and the rest of the Sales Managers in
Metro North. x x x

3. Any resistance or holding back by anyone will be dealt with accordingly.

4. I have been straightforward in this my letter and I know that we can

continue to work together… but it will have to be on my terms. Anything else
is unacceptable!

The NLRC further ruled that the different codes of conduct that were applicable to
Tongko served as the foundations of the power of control wielded by Manulife
over Tongko that is further manifested in the different administrative and other
tasks that he was required to perform.

The NLRC also found that Tongko was required to render exclusive service to
Manulife, further bolstering the existence of an employer-employee relationship.

Finally, the NLRC ruled that Tongko was integrated into a management structure
over which Manulife exercised control, including the actions of its officers. The
NLRC held that such integration added to the fact that Tongko did not have his
own agency belied Manulife's claim that Tongko was an independent contractor.
22
The CA, however, considered the finding of the existence of an employer-
employee relationship by the NLRC as far too sweeping having as its only basis the
letter dated November 6, 2001 of De Dios. The CA did not concur with the NLRC's
ruling that the elements of control as pointed out by the NLRC are "sufficient
indicia of control that negates independent contractorship and conclusively
establish an employer-employee relationship between"15 Tongko and Manulife.
The CA ruled that there is no employer-employee relationship between Tongko
and Manulife.

An impasse appears to have been reached between the CA and the NLRC on the
sole issue of control over an employee's conduct. It bears clarifying that such
control not only applies to the work or goal to be done but also to the means and
methods to accomplish it.16 In Sonza v. ABS-CBN Broadcasting Corporation, we
explained that not all forms of control would establish an employer-employee
relationship, to wit:

Further, not every form of control that a party reserves to himself over the
conduct of the other party in relation to the services being rendered may be
accorded the effect of establishing an employer-employee relationship. The
facts of this case fall squarely with the case of Insular Life Assurance Co., Ltd.
vs. NLRC. In said case, we held that:

Logically, the line should be drawn between rules that merely serve as
guidelines towards the achievement of the mutually desired result
without dictating the means or methods to be employed in attaining
it, and those that control or fix the methodology and bind or restrict
the party hired to the use of such means. The first, which aim only to
promote the result, create no employer-employee relationship unlike
the second, which address both the result and the means used to
achieve it.17 (Emphasis supplied.)

We ruled in Insular Life Assurance Co., Ltd. v. NLRC (Insular) that:

It is, therefore, usual and expected for an insurance company to promulgate

a set of rules to guide its commission agents in selling its policies that they
may not run afoul of the law and what it requires or prohibits. Of such a
character are the rules which prescribe the qualifications of persons who
may be insured, subject insurance applications to processing and approval by
the Company, and also reserve to the Company the determination of the
premiums to be paid and the schedules of payment. None of these really
invades the agent's contractual prerogative to adopt his own selling methods
or to sell insurance at his own time and convenience, hence cannot justifiably
be said to establish an employer-employee relationship between him and the
company.18
23
Hence, we ruled in Insular that no employer-employee relationship existed
therein. However, such ruling was tempered with the qualification that had there
been evidence that the company promulgated rules or regulations that effectively
controlled or restricted an insurance agent's choice of methods or the methods
themselves in selling insurance, an employer-employee relationship would have
existed. In other words, the Court in Insular in no way definitively held that
insurance agents are not employees of insurance companies, but rather made the
same a case-to-case basis. We held:

The respondents limit themselves to pointing out that Basiao's contract with
the Company bound him to observe and conform to such rules and
regulations as the latter might from time to time prescribe. No showing has
been made that any such rules or regulations were in fact promulgated,
much less that any rules existed or were issued which effectively controlled
or restricted his choice of methods or the methods themselves of selling
insurance. Absent such showing, the Court will not speculate that any
exceptions or qualifications were imposed on the express provision of the
contract leaving Basiao "... free to exercise his own judgment as to the
time, place and means of soliciting insurance."19 (Emphasis supplied.)

There is no conflict between our rulings in Insular and in Great Pacific Life
Assurance Corporation. We said in the latter case:

[I]t cannot be gain said that Grepalife had control over private respondents'
performance as well as the result of their efforts. A cursory reading of their
respective functions as enumerated in their contracts reveals that the
company practically dictates the manner by which their jobs are to be
carried out. For instance, the District Manager must properly account, record
and document the company's funds spot-check and audit the work of the
zone supervisors, conserve the company's business in the district through
‘reinstatements', follow up the submission of weekly remittance reports of
the debit agents and zone supervisors, preserve company property in good
condition, train understudies for the position of district manager, and
maintain his quota of sales (the failure of which is a ground for termination).
On the other hand, a zone supervisor must direct and supervise the sales
activities of the debit agents under him, conserve company property through
"reinstatements", undertake and discharge the functions of absentee debit
agents, spot-check the records of debit agents, and insure proper
documentation of sales and collections by the debit agents.20 (Emphasis
supplied.)

Based on the foregoing cases, if the specific rules and regulations that are
enforced against insurance agents or managers are such that would directly affect
the means and methods by which such agents or managers would achieve the
24
objectives set by the insurance company, they are employees of the insurance
company.

In the instant case, Manulife had the power of control over Tongko that would
make him its employee. Several factors contribute to this conclusion.

In the Agreement dated July 1, 1977 executed between Tongko and Manulife, it is
provided that:

The Agent hereby agrees to comply with all regulations and requirements of
the Company as herein provided as well as maintain a standard of knowledge
and competency in the sale of the Company's products which satisfies those
set by the Company and sufficiently meets the volume of new business
required of Production Club membership.21

Under this provision, an agent of Manulife must comply with three (3)
requirements: (1) compliance with the regulations and requirements of the
company; (2) maintenance of a level of knowledge of the company's products that
is satisfactory to the company; and (3) compliance with a quota of new businesses.

Among the company regulations of Manulife are the different codes of conduct
such as the Agent Code of Conduct, Manulife Financial Code of Conduct, and
Manulife Financial Code of Conduct Agreement, which demonstrate the power of
control exercised by the company over Tongko. The fact that Tongko was obliged
to obey and comply with the codes of conduct was not disowned by respondents.

Thus, with the company regulations and requirements alone, the fact that Tongko
was an employee of Manulife may already be established. Certainly, these
requirements controlled the means and methods by which Tongko was to achieve
the company's goals.

More importantly, Manulife's evidence establishes the fact that Tongko was
tasked to perform administrative duties that establishes his employment with
Manulife.

In its Comment (Re: Petition for Review dated 15 April 2005) dated August 5, 2005,
Manulife attached affidavits of its agents purportedly to support its claim that
Tongko, as a Regional Sales Manager, did not perform any administrative
functions. An examination of these affidavits would, however, prove the opposite.

In an Affidavit dated April 28, 2003,22 John D. Chua, a Regional Sales Manager of
Manulife, stated:

25
 4. On September 1, 1996, my services were engaged by Manulife as an
Agency Regional Sales Manager ("RSM") for Metro South Region pursuant to
an Agency Contract. As such RSM, I have the following functions:

1. Refer and recommend prospective agents to Manulife

2. Coach agents to become productive

3. Regularly meet with, and coordinate activities of agents affiliated to

my region.

While Amada Toledo, a Branch Manager of Manulife, stated in her Affidavit dated
April 29, 200323 that:

3. In January 1997, I was assigned as a Branch Manager ("BM") of Manulife

for the Metro North Sector;

4. As such BM, I render the following services:

a. Refer and recommend prospective agents to Manulife;

b. Train and coordinate activities of other commission agents;

c. Coordinate activities of Agency Managers who, in turn, train and

coordinate activites of other commission agents;

d. Achieve agreed production objectives in terms of Net Annualized

Commissions and Case Count and recruitment goals; and

e. Sell the various products of Manulife to my personal clients.

While Ma. Lourdes Samson, a Unit Manager of Manulife, stated in her Affidavit
dated April 28, 200324 that:

3. In 1977, I was assigned as a Unit Manager ("UM") of North Peaks Unit,

North Star Branch, Metro North Region;

4. As such UM, I render the following services:

a. To render or recommend prospective agents to be licensed, trained

and contracted to sell Manulife products and who will be part of my
Unit;

b. To coordinate activities of the agents under my Unit in their daily,

weekly and monthly selling activities, making sure that their respective
sales targets are met;

26
 c. To conduct periodic training sessions for my agents to further
enhance their sales skills.

d. To assist my agents with their sales activities by way of joint

fieldwork, consultations and one-on- one evaluation and analysis of
particular accounts.

e. To provide opportunities to motivate my agents to succeed like

conducting promos to increase sales activities and encouraging them to
be involved in company and industry activities.

f. To provide opportunities for professional growth to my agents by

encouraging them to be a member of the LUCAP (Life Underwriters
Association of the Philippines).

A comparison of the above functions and those contained in the Agreement with
those cited in Great Pacific Life Assurance Corporation25 reveals a striking similarity
that would more than support a similar finding as in that case. Thus, there was an
employer-employee relationship between the parties.

Additionally, it must be pointed out that the fact that Tongko was tasked with
recruiting a certain number of agents, in addition to his other administrative
functions, leads to no other conclusion that he was an employee of Manulife.

In his letter dated November 6, 2001, De Dios harped on the direction of Manulife
of becoming a major agency-led distribution company whereby greater agency
recruitment is required of the managers, including Tongko. De Dios made it clear
that agent recruitment has become the primary means by which Manulife intends
to sell more policies. More importantly, it is Tongko's alleged failure to follow this
principle of recruitment that led to the termination of his employment with
Manulife. With this, it is inescapable that Tongko was an employee of Manulife.

Tongko Was Illegally Dismissed

In its Petition for Certiorari dated January 7, 200526 filed before the CA, Manulife
argued that even if Tongko is considered as its employee, his employment was
validly terminated on the ground of gross and habitual neglect of duties,
inefficiency, as well as willful disobedience of the lawful orders of Manulife.
Manulife stated:

In the instant case, private respondent, despite the written reminder from
Mr. De Dios refused to shape up and altogether disregarded the latter's
advice resulting in his laggard performance clearly indicative of his willful
disobedience of the lawful orders of his superior. x x x

27
 xxxx

As private respondent has patently failed to perform a very fundamental

duty, and that is to yield obedience to all reasonable rules, orders and
instructions of the Company, as well as gross failure to reach at least
minimum quota, the termination of his engagement from Manulife is highly
warranted and therefore, there is no illegal dismissal to speak of.

It is readily evident from the above-quoted portions of Manulife's petition that it

failed to cite a single iota of evidence to support its claims. Manulife did not even
point out which order or rule that Tongko disobeyed. More importantly, Manulife
did not point out the specific acts that Tongko was guilty of that would constitute
gross and habitual neglect of duty or disobedience. Manulife merely cited Tongko's
alleged "laggard performance," without substantiating such claim, and equated
the same to disobedience and neglect of duty.

We cannot, therefore, accept Manulife's position.

In Quebec, Sr. v. National Labor Relations Commission, we ruled that:

When there is no showing of a clear, valid and legal cause for the termination
of employment, the law considers the matter a case of illegal dismissal and
the burden is on the employer to prove that the termination was for a valid
or authorized cause. This burden of proof appropriately lies on the shoulders
of the employer and not on the employee because a worker's job has some
of the characteristics of property rights and is therefore within the
constitutional mantle of protection. No person shall be deprived of life,
liberty or property without due process of law, nor shall any person be
denied the equal protection of the laws.

Apropos thereto, Art. 277, par. (b), of the Labor Code mandates in explicit
terms that the burden of proving the validity of the termination of
employment rests on the employer. Failure to discharge this evidential
burden would necessarily mean that the dismissal was not justified, and,
therefore, illegal.27

We again ruled in Times Transportation Co., Inc. v. National Labor Relations

Commission that:

The law mandates that the burden of proving the validity of the termination
of employment rests with the employer. Failure to discharge this evidentiary
burden would necessarily mean that the dismissal was not justified, and,
therefore, illegal. Unsubstantiated suspicions, accusations and conclusions of
employers do not provide for legal justification for dismissing employees. In

28
 case of doubt, such cases should be resolved in favor of labor, pursuant to
the social justice policy of our labor laws and Constitution.28

This burden of proof was clarified in Community Rural Bank of San Isidro (N.E.), Inc.
v. Paez to mean substantial evidence, to wit:

The Labor Code provides that an employer may terminate the services of an
employee for just cause and this must be supported by substantial evidence.
The settled rule in administrative and quasi-judicial proceedings is that proof
beyond reasonable doubt is not required in determining the legality of an
employer's dismissal of an employee, and not even a preponderance of
evidence is necessary as substantial evidence is considered sufficient.
Substantial evidence is more than a mere scintilla of evidence or relevant
evidence as a reasonable mind might accept as adequate to support a
conclusion, even if other minds, equally reasonable, might conceivably opine
otherwise.29

Here, Manulife failed to overcome such burden of proof. It must be reiterated that
Manulife even failed to identify the specific acts by which Tongko's employment
was terminated much less support the same with substantial evidence. To repeat,
mere conjectures cannot work to deprive employees of their means of livelihood.
Thus, it must be concluded that Tongko was illegally dismissed.

Moreover, as to Manulife's failure to comply with the twin notice rule, it reasons
that Tongko not being its employee is not entitled to such notices. Since we have
ruled that Tongko is its employee, however, Manulife clearly failed to afford
Tongko said notices. Thus, on this ground too, Manulife is guilty of illegal dismissal.
In Quebec, Sr., we also stated:

Furthermore, not only does our legal system dictate that the reasons for
dismissing a worker must be pertinently substantiated, it also mandates that
the manner of dismissal must be properly done, otherwise, the termination
itself is gravely defective and may be declared unlawful.30

For breach of the due process requirements, Manulife is liable to Tongko in the
amount of PhP 30,000 as indemnity in the form of nominal damages.31

Finally, Manulife raises the issue of the correctness of the computation of the
award to Tongko made by the NLRC by claiming that Songco v. National Labor
Relations Commission32 is inapplicable to the instant case, considering that Songco
was dismissed on the ground of retrenchment.

An examination of Songco reveals that it may be applied to the present case. In

that case, Jose Songco was a salesman of F.E. Zuellig (M), Inc. which terminated
the services of Songco on the ground of retrenchment due to financial losses. The
29
issue raised to the Court, however, was whether commissions are considered as
part of wages in order to determine separation pay. Thus, the fact that Songco was
dismissed due to retrenchment does not hamper the application thereof to the
instant case. What is pivotal is that we ruled in Songco that commissions are part
of wages for the determination of separation pay.

Article 279 of the Labor Code on security of tenure pertinently provides that:

In cases of regular employment the employer shall not terminate the services
of an employee except for a just cause or when authorized by this Title. An
employee who is unjustly dismissed from work shall be entitled to
reinstatement without loss of seniority rights and other privileges and to his
full backwages, inclusive of allowances, and to his other benefits or their
monetary equivalent computed from the time his compensation was
withheld from him up to the time of his actual reinstatement.

In Triad Security & Allied Services, Inc. v. Ortega, Jr. (Triad), we thus stated that an
illegally dismissed employee shall be entitled to backwages and separation pay, if
reinstatement is no longer viable:

As the law now stands, an illegally dismissed employee is entitled to two

reliefs, namely: backwages and reinstatement. These are separate and
distinct from each other. However, separation pay is granted where
reinstatement is no longer feasible because of strained relations between
the employee and the employer. In effect, an illegally dismissed employee is
entitled to either reinstatement, if viable, or separation pay if reinstatement
is no longer viable and backwages.33

Taking into consideration the cases of Songco and Triad, we find correct the
computation of the NLRC that the monthly gross wage of Tongko in 2001 was PhP
518,144.76. For having been illegally dismissed, Tongko is entitled to
reinstatement with full backwages under Art. 279 of the Labor Code. Due to the
strained relationship between Manulife and Tongko, reinstatement, however, is
no longer advisable. Thus, Tongko will be entitled to backwages from January 2,
2002 (date of dismissal) up to the finality of this decision. Moreover, Manulife will
pay Tongko separation pay of one (1) month salary for every year of service that is
from 1977 to 2001 amounting to PhP 12,435,474.24, considering that
reinstatement is not feasible. Tongko shall also be entitled to an award of
attorney's fees in the amount of ten percent (10%) of the aggregate amount of the
above awards.

WHEREFORE, the petition is hereby GRANTED. The assailed March 29, 2005
Decision of the CA in CA-G.R. SP No. 88253 is REVERSED and SET ASIDE. The

30
Decision dated September 27, 2004 of the NLRC is REINSTATED with the following
modifications:

Manulife shall pay Tongko the following:

(1) Full backwages, inclusive of allowances and other benefits or their

monetary equivalent from January 2, 2002 up to the finality of this Decision;

(2) Separation pay of one (1) month salary for every year of service from
1977 up to 2001 amounting to PhP 12,435,474.24;

(3) Nominal damages of PhP 30,000 as indemnity for violation of the due
process requirements; and

(4) Attorney's fees equivalent to ten percent (10%) of the aforementioned

backwages and separation pay.

Costs against respondent Manulife.

SO ORDERED.

FIRST DIVISION

G.R. No. 147839 June 8, 2006

GAISANO CAGAYAN, INC. Petitioner,

vs.
INSURANCE COMPANY OF NORTH AMERICA, Respondent.

DECISION

AUSTRIA-MARTINEZ, J.:

Before the Court is a petition for review on certiorari of the Decision1 dated
October 11, 2000 of the Court of Appeals (CA) in CA-G.R. CV No. 61848 which set
aside the Decision dated August 31, 1998 of the Regional Trial Court, Branch 138,
Makati (RTC) in Civil Case No. 92-322 and upheld the causes of action for damages
of Insurance Company of North America (respondent) against Gaisano Cagayan,
Inc. (petitioner); and the CA Resolution dated April 11, 2001 which denied
petitioner's motion for reconsideration.

The factual background of the case is as follows:

Intercapitol Marketing Corporation (IMC) is the maker of Wrangler Blue Jeans. Levi
Strauss (Phils.) Inc. (LSPI) is the local distributor of products bearing trademarks
31
owned by Levi Strauss & Co.. IMC and LSPI separately obtained from respondent
fire insurance policies with book debt endorsements. The insurance policies
provide for coverage on "book debts in connection with ready-made clothing
materials which have been sold or delivered to various customers and dealers of
the Insured anywhere in the Philippines."2 The policies defined book debts as the
"unpaid account still appearing in the Book of Account of the Insured 45 days after
the time of the loss covered under this Policy."3 The policies also provide for the
following conditions:

1. Warranted that the Company shall not be liable for any unpaid account in
respect of the merchandise sold and delivered by the Insured which are
outstanding at the date of loss for a period in excess of six (6) months from
the date of the covering invoice or actual delivery of the merchandise
whichever shall first occur.

2. Warranted that the Insured shall submit to the Company within twelve
(12) days after the close of every calendar month all amount shown in their
books of accounts as unpaid and thus become receivable item from their
customers and dealers. x x x4

xxxx

Petitioner is a customer and dealer of the products of IMC and LSPI. On February
25, 1991, the Gaisano Superstore Complex in Cagayan de Oro City, owned by
petitioner, was consumed by fire. Included in the items lost or destroyed in the fire
were stocks of ready-made clothing materials sold and delivered by IMC and LSPI.

On February 4, 1992, respondent filed a complaint for damages against petitioner.

It alleges that IMC and LSPI filed with respondent their claims under their
respective fire insurance policies with book debt endorsements; that as of
February 25, 1991, the unpaid accounts of petitioner on the sale and delivery of
ready-made clothing materials with IMC was P2,119,205.00 while with LSPI it
was P535,613.00; that respondent paid the claims of IMC and LSPI and, by virtue
thereof, respondent was subrogated to their rights against petitioner; that
respondent made several demands for payment upon petitioner but these went
unheeded.5

In its Answer with Counter Claim dated July 4, 1995, petitioner contends that it
could not be held liable because the property covered by the insurance policies
were destroyed due to fortuities event or force majeure; that respondent's right of
subrogation has no basis inasmuch as there was no breach of contract committed
by it since the loss was due to fire which it could not prevent or foresee; that IMC
and LSPI never communicated to it that they insured their properties; that it never
consented to paying the claim of the insured.6
32
At the pre-trial conference the parties failed to arrive at an amicable
settlement.7 Thus, trial on the merits ensued.

On August 31, 1998, the RTC rendered its decision dismissing respondent's
complaint.8 It held that the fire was purely accidental; that the cause of the fire
was not attributable to the negligence of the petitioner; that it has not been
established that petitioner is the debtor of IMC and LSPI; that since the sales
invoices state that "it is further agreed that merely for purpose of securing the
payment of purchase price, the above-described merchandise remains the
property of the vendor until the purchase price is fully paid", IMC and LSPI
retained ownership of the delivered goods and must bear the loss.

Dissatisfied, petitioner appealed to the CA.9 On October 11, 2000, the CA rendered
its decision setting aside the decision of the RTC. The dispositive portion of the
decision reads:

WHEREFORE, in view of the foregoing, the appealed decision is REVERSED and SET
ASIDE and a new one is entered ordering defendant-appellee Gaisano Cagayan,
Inc. to pay:

1. the amount of P2,119,205.60 representing the amount paid by the

plaintiff-appellant to the insured Inter Capitol Marketing Corporation, plus
legal interest from the time of demand until fully paid;

2. the amount of P535,613.00 representing the amount paid by the plaintiff-

appellant to the insured Levi Strauss Phil., Inc., plus legal interest from the
time of demand until fully paid.

With costs against the defendant-appellee.

SO ORDERED.10

The CA held that the sales invoices are proofs of sale, being detailed statements of
the nature, quantity and cost of the thing sold; that loss of the goods in the fire
must be borne by petitioner since the proviso contained in the sales invoices is an
exception under Article 1504 (1) of the Civil Code, to the general rule that if the
thing is lost by a fortuitous event, the risk is borne by the owner of the thing at the
time the loss under the principle of res perit domino; that petitioner's obligation to
IMC and LSPI is not the delivery of the lost goods but the payment of its unpaid
account and as such the obligation to pay is not extinguished, even if the fire is
considered a fortuitous event; that by subrogation, the insurer has the right to go
against petitioner; that, being a fire insurance with book debt endorsements, what
was insured was the vendor's interest as a creditor.11

33
Petitioner filed a motion for reconsideration12 but it was denied by the CA in its
Resolution dated April 11, 2001.13

Hence, the present petition for review on certiorari anchored on the following
Assignment of Errors:

THE COURT OF APPEALS ERRED IN HOLDING THAT THE INSURANCE IN THE

INSTANT CASE WAS ONE OVER CREDIT.

THE COURT OF APPEALS ERRED IN HOLDING THAT ALL RISK OVER THE SUBJECT
GOODS IN THE INSTANT CASE HAD TRANSFERRED TO PETITIONER UPON DELIVERY
THEREOF.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS AUTOMATIC

SUBROGATION UNDER ART. 2207 OF THE CIVIL CODE IN FAVOR OF
RESPONDENT.14

Anent the first error, petitioner contends that the insurance in the present case
cannot be deemed to be over credit since an insurance "on credit" belies not only
the nature of fire insurance but the express terms of the policies; that it was not
credit that was insured since respondent paid on the occasion of the loss of the
insured goods to fire and not because of the non-payment by petitioner of any
obligation; that, even if the insurance is deemed as one over credit, there was no
loss as the accounts were not yet due since no prior demands were made by IMC
and LSPI against petitioner for payment of the debt and such demands came from
respondent only after it had already paid IMC and LSPI under the fire insurance
policies.15

As to the second error, petitioner avers that despite delivery of the goods,
petitioner-buyer IMC and LSPI assumed the risk of loss when they secured fire
insurance policies over the goods.

Concerning the third ground, petitioner submits that there is no subrogation in

favor of respondent as no valid insurance could be maintained thereon by IMC and
LSPI since all risk had transferred to petitioner upon delivery of the goods; that
petitioner was not privy to the insurance contract or the payment between
respondent and its insured nor was its consent or approval ever secured; that this
lack of privity forecloses any real interest on the part of respondent in the
obligation to pay, limiting its interest to keeping the insured goods safe from fire.

For its part, respondent counters that while ownership over the ready- made
clothing materials was transferred upon delivery to petitioner, IMC and LSPI have
insurable interest over said goods as creditors who stand to suffer direct pecuniary
loss from its destruction by fire; that petitioner is liable for loss of the ready-made
clothing materials since it failed to overcome the presumption of liability under
34
Article 126516 of the Civil Code; that the fire was caused through petitioner's
negligence in failing to provide stringent measures of caution, care and
maintenance on its property because electric wires do not usually short circuit
unless there are defects in their installation or when there is lack of proper
maintenance and supervision of the property; that petitioner is guilty of gross and
evident bad faith in refusing to pay respondent's valid claim and should be liable to
respondent for contracted lawyer's fees, litigation expenses and cost of suit.17

As a general rule, in petitions for review, the jurisdiction of this Court in cases
brought before it from the CA is limited to reviewing questions of law which
involves no examination of the probative value of the evidence presented by the
litigants or any of them.18 The Supreme Court is not a trier of facts; it is not its
function to analyze or weigh evidence all over again.19 Accordingly, findings of fact
of the appellate court are generally conclusive on the Supreme Court.20

Nevertheless, jurisprudence has recognized several exceptions in which factual

issues may be resolved by this Court, such as: (1) when the findings are grounded
entirely on speculation, surmises or conjectures; (2) when the inference made is
manifestly mistaken, absurd or impossible; (3) when there is grave abuse of
discretion; (4) when the judgment is based on a misapprehension of facts; (5)
when the findings of facts are conflicting; (6) when in making its findings the CA
went beyond the issues of the case, or its findings are contrary to the admissions
of both the appellant and the appellee; (7) when the findings are contrary to the
trial court; (8) when the findings are conclusions without citation of specific
evidence on which they are based; (9) when the facts set forth in the petition as
well as in the petitioner's main and reply briefs are not disputed by the
respondent; (10) when the findings of fact are premised on the supposed absence
of evidence and contradicted by the evidence on record; and (11) when the CA
manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.21 Exceptions (4), (5), (7),
and (11) apply to the present petition.

At issue is the proper interpretation of the questioned insurance policy. Petitioner

claims that the CA erred in construing a fire insurance policy on book debts as one
covering the unpaid accounts of IMC and LSPI since such insurance applies to loss
of the ready-made clothing materials sold and delivered to petitioner.

The Court disagrees with petitioner's stand.

It is well-settled that when the words of a contract are plain and readily
understood, there is no room for construction.22 In this case, the questioned
insurance policies provide coverage for "book debts in connection with ready-
made clothing materials which have been sold or delivered to various customers
and dealers of the Insured anywhere in the Philippines."23 ; and defined book
35
debts as the "unpaid account still appearing in the Book of Account of the Insured
45 days after the time of the loss covered under this Policy."24 Nowhere is it
provided in the questioned insurance policies that the subject of the insurance is
the goods sold and delivered to the customers and dealers of the insured.

Indeed, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are
to be understood literally just as they appear on the face of the contract.25 Thus,
what were insured against were the accounts of IMC and LSPI with petitioner
which remained unpaid 45 days after the loss through fire, and not the loss or
destruction of the goods delivered.

Petitioner argues that IMC bears the risk of loss because it expressly reserved
ownership of the goods by stipulating in the sales invoices that "[i]t is further
agreed that merely for purpose of securing the payment of the purchase price the
above described merchandise remains the property of the vendor until the
purchase price thereof is fully paid."26

The Court is not persuaded.

The present case clearly falls under paragraph (1), Article 1504 of the Civil Code:

ART. 1504. Unless otherwise agreed, the goods remain at the seller's risk until the
ownership therein is transferred to the buyer, but when the ownership therein is
transferred to the buyer the goods are at the buyer's risk whether actual delivery
has been made or not, except that:

(1) Where delivery of the goods has been made to the buyer or to a bailee for the
buyer, in pursuance of the contract and the ownership in the goods has been
retained by the seller merely to secure performance by the buyer of his obligations
under the contract, the goods are at the buyer's risk from the time of such
delivery; (Emphasis supplied)

xxxx

Thus, when the seller retains ownership only to insure that the buyer will pay its
debt, the risk of loss is borne by the buyer.27 Accordingly, petitioner bears the risk
of loss of the goods delivered.

IMC and LSPI did not lose complete interest over the goods. They have an
insurable interest until full payment of the value of the delivered goods. Unlike the
civil law concept of res perit domino, where ownership is the basis for
consideration of who bears the risk of loss, in property insurance, one's interest is
not determined by concept of title, but whether insured has substantial economic
interest in the property.28
36
Section 13 of our Insurance Code defines insurable interest as "every interest in
property, whether real or personal, or any relation thereto, or liability in respect
thereof, of such nature that a contemplated peril might directly damnify the
insured." Parenthetically, under Section 14 of the same Code, an insurable interest
in property may consist in: (a) an existing interest; (b) an inchoate interest founded
on existing interest; or (c) an expectancy, coupled with an existing interest in that
out of which the expectancy arises.

Therefore, an insurable interest in property does not necessarily imply a property

interest in, or a lien upon, or possession of, the subject matter of the insurance,
and neither the title nor a beneficial interest is requisite to the existence of such
an interest, it is sufficient that the insured is so situated with reference to the
property that he would be liable to loss should it be injured or destroyed by the
peril against which it is insured.29 Anyone has an insurable interest in property who
derives a benefit from its existence or would suffer loss from its
destruction.30 Indeed, a vendor or seller retains an insurable interest in the
property sold so long as he has any interest therein, in other words, so long as he
would suffer by its destruction, as where he has a vendor's lien. 31 In this case, the
insurable interest of IMC and LSPI pertain to the unpaid accounts appearing in
their Books of Account 45 days after the time of the loss covered by the policies.

The next question is: Is petitioner liable for the unpaid accounts?

Petitioner's argument that it is not liable because the fire is a fortuitous event
under Article 117432 of the Civil Code is misplaced. As held earlier, petitioner bears
the loss under Article 1504 (1) of the Civil Code.

Moreover, it must be stressed that the insurance in this case is not for loss of
goods by fire but for petitioner's accounts with IMC and LSPI that remained unpaid
45 days after the fire. Accordingly, petitioner's obligation is for the payment of
money. As correctly stated by the CA, where the obligation consists in the
payment of money, the failure of the debtor to make the payment even by reason
of a fortuitous event shall not relieve him of his liability.33 The rationale for this is
that the rule that an obligor should be held exempt from liability when the loss
occurs thru a fortuitous event only holds true when the obligation consists in the
delivery of a determinate thing and there is no stipulation holding him liable even
in case of fortuitous event. It does not apply when the obligation is pecuniary in
nature.34

Under Article 1263 of the Civil Code, "[i]n an obligation to deliver a generic thing,
the loss or destruction of anything of the same kind does not extinguish the
obligation." If the obligation is generic in the sense that the object thereof is
designated merely by its class or genus without any particular designation or
physical segregation from all others of the same class, the loss or destruction of
37
anything of the same kind even without the debtor's fault and before he has
incurred in delay will not have the effect of extinguishing the obligation.35 This rule
is based on the principle that the genus of a thing can never perish. Genus
nunquan perit.36 An obligation to pay money is generic; therefore, it is not excused
by fortuitous loss of any specific property of the debtor.37

Thus, whether fire is a fortuitous event or petitioner was negligent are matters
immaterial to this case. What is relevant here is whether it has been established
that petitioner has outstanding accounts with IMC and LSPI.

With respect to IMC, the respondent has adequately established its claim. Exhibits
"C" to "C-22"38 show that petitioner has an outstanding account with IMC in the
amount of P2,119,205.00. Exhibit "E"39 is the check voucher evidencing payment
to IMC. Exhibit "F"40 is the subrogation receipt executed by IMC in favor of
respondent upon receipt of the insurance proceeds. All these documents have
been properly identified, presented and marked as exhibits in court. The
subrogation receipt, by itself, is sufficient to establish not only the relationship of
respondent as insurer and IMC as the insured, but also the amount paid to settle
the insurance claim. The right of subrogation accrues simply upon payment by the
insurance company of the insurance claim.41 Respondent's action against
petitioner is squarely sanctioned by Article 2207 of the Civil Code which provides:

Art. 2207. If the plaintiff's property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of the
wrong or breach of contract complained of, the insurance company shall be
subrogated to the rights of the insured against the wrongdoer or the person who
has violated the contract. x x x

Petitioner failed to refute respondent's evidence.

As to LSPI, respondent failed to present sufficient evidence to prove its cause of

action. No evidentiary weight can be given to Exhibit "F Levi Strauss", 42 a letter
dated April 23, 1991 from petitioner's General Manager, Stephen S. Gaisano, Jr.,
since it is not an admission of petitioner's unpaid account with LSPI. It only
confirms the loss of Levi's products in the amount of P535,613.00 in the fire that
razed petitioner's building on February 25, 1991.

Moreover, there is no proof of full settlement of the insurance claim of LSPI; no

subrogation receipt was offered in evidence. Thus, there is no evidence that
respondent has been subrogated to any right which LSPI may have against
petitioner. Failure to substantiate the claim of subrogation is fatal to petitioner's
case for recovery of the amount of P535,613.00.

38
WHEREFORE, the petition is partly GRANTED. The assailed Decision dated October
11, 2000 and Resolution dated April 11, 2001 of the Court of Appeals in CA-G.R. CV
No. 61848 are AFFIRMED with the MODIFICATION that the order to pay the
amount of P535,613.00 to respondent is DELETED for lack of factual basis.

No pronouncement as to costs.

SO ORDERED.

FIRST DIVISION

[G.R. No. 124520. August 18, 1997]

Spouses NILO CHA and STELLA UY CHA, and UNITED INSURANCE CO.,
INC., Petitioners, v. COURT OF APPEALS and CKS DEVELOPMENT
CORPORATION, Respondents.

DECISION

PADILLA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court seeks to
set aside a decision of respondent Court of Appeals.

The undisputed facts of the case are as follows:

1. Petitioner-spouses Nilo Cha and Stella Uy-Cha, as lessees, entered into a lease
contract with private respondent CKS Development Corporation (hereinafter CKS),
as lessor, on 5 October 1988.

2. One of the stipulations of the one (1) year lease contract states:

18. x x x. The LESSEE shall not insure against fire the chattels, merchandise,
textiles, goods and effects placed at any stall or store or space in the leased
premises without first obtaining the written consent and approval of the LESSOR. If
the LESSEE obtain(s) the insurance thereof without the consent of the LESSOR then
the policy is deemed assigned and transferred to the LESSOR for its own benefit; x
x x1chanroblesvirtuallawlibrary

3. Notwithstanding the above stipulation in the lease contract, the Cha spouses
insured against loss by fire their merchandise inside the leased premises for Five
Hundred Thousand (P500,000.00) with the United Insurance Co., Inc. (hereinafter
United) without the written consent of private respondents CKS.

39
4. On the day that the lease contract was to expire, fire broke out inside the leased
premises.

5. When CKS learned of the insurance earlier procured by the Cha spouses
(without its consent), it wrote the insurer (United) a demand letter asking that the
proceeds of the insurance contract (between the Cha spouses and United) be paid
directly to CKS, based on its lease contract with Cha spouses.

6. United refused to pay CKS. Hence, the latter filed a complaint against the Cha
spouses and United.

7. On 2 June 1992, the Regional Trial Court, Branch 6, Manila, rendered a

decision* ordering therein defendant United to pay CKS the amount
of P335,063.11 and defendant Cha spouses to pay P50,000.00 as exemplary
damages, P20,000.00 as attorneys fees and costs of suit.

8. On appeal, respondent Court of Appeals in CA GR CV No. 39328 rendered a

decision** dated 11 January 1996, affirming the trial court decision, deleting
however the awards for exemplary damages and attorneys fees. A motion for
reconsideration by United was denied on 29 March 1996.

In the present petition, the following errors are assigned by petitioners to the
Court of Appeals:

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THAT THE

STIPULATION IN THE CONTRACT OF LEASE TRANSFERRING THE PROCEEDS OF THE
INSURANCE TO RESPONDENT IS NULL AND VOID FOR BEING CONTRARY TO LAW,
MORALS AND PUBLIC POLICY

II

THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO DECLARE THE

CONTRACT OF LEASE ENTERED INTO AS A CONTRACT OF ADHESION AND
THEREFORE THE QUESTIONABLE PROVISION THEREIN TRANSFERRING THE
PROCEEDS OF THE INSURANCE TO RESPONDENT MUST BE RULED OUT IN FAVOR
OF PETITIONER

III

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN

INSURANCE POLICY TO APPELLEE WHICH IS NOT PRIVY TO THE SAID POLICY IN
CONTRAVENTION OF THE INSURANCE LAW

40
 IV

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING PROCEEDS OF AN

INSURANCE POLICY ON THE BASIS OF A STIPULATION WHICH IS VOID FOR BEING
WITHOUT CONSIDERATION AND FOR BEING TOTALLY DEPENDENT ON THE WILL OF
THE RESPONDENT CORPORATION.2chanroblesvirtuallawlibrary

The core issue to be resolved in this case is whether or not the aforequoted
paragraph 18 of the lease contract entered into between CKS and the Cha spouses
is valid insofar as it provides that any fire insurance policy obtained by the lessee
(Cha spouses) over their merchandise inside the leased premises is deemed
assigned or transferred to the lessor (CKS) if said policy is obtained without the
prior written of the latter.

It is, of course, basic in the law on contracts that the stipulations contained in a
contract cannot be contrary to law, morals, good customs, public order or public
policy.3chanroblesvirtuallawlibrary

Sec. 18 of the Insurance Code provides:

Sec. 18. No contract or policy of insurance on property shall be enforceable

except for the benefit of some person having an insurable interest in the
property insured.

A non-life insurance policy such as the fire insurance policy taken by petitioner-
spouses over their merchandise is primarily a contract of indemnity. Insurable
interest in the property insured must exist at the time the insurance takes effect
and at the time the loss occurs.4 The basis of such requirement of insurable
interest in property insured is based on sound public policy: to prevent a person
from taking out an insurance policy on property upon which he has no insurable
interest and collecting the proceeds of said policy in case of loss of the property. In
such a case, the contract of insurance is a mere wager which is void under Section
25 of the Insurance Code, which provides:

SECTION 25. Every stipulation in a policy of Insurance for the payment of

loss, whether the person insured has or has not any interest in the property
insured, or that the policy shall be received as proof of such interest, and
every policy executed by way of gaming or wagering, is void.

In the present case, it cannot be denied that CKS has no insurable interest in the
goods and merchandise inside the leased premises under the provisions of Section
17 of the Insurance Code which provide.

Section 17. The measure of an insurable interest in property is the extent to

which the insured might be damnified by loss of injury thereof."
41
Therefore, respondent CKS cannot, under the Insurance Code a special law be
validly a beneficiary of the fire insurance policy taken by the petitioner-spouses
over their merchandise. This insurable interest over said merchandise remains
with the insured, the Cha spouses. The automatic assignment of the policy to CKS
under the provision of the lease contract previously quoted is void for being
contrary to law and/or public policy. The proceeds of the fire insurance policy thus
rightfully belong to the spouses Nilo Cha and Stella Uy-Cha (herein co-petitioners).
The insurer (United) cannot be compelled to pay the proceeds of the fire insurance
policy to a person (CKS) who has no insurable interest in the property insured.

The liability of the Cha spouses to CKS for violating their lease contract in that Cha
spouses obtained a fire insurance policy over their own merchandise, without the
consent of CKS, is a separate and distinct issue which we do not resolve in this
case.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 39328 is SET
ASIDE and a new decision is hereby entered, awarding the proceeds of the fire
insurance policy to petitioners Nilo Cha and Stella Uy-Cha.

SO ORDERED.

FIRST DIVISION

G.R. No. 82036 May 22, 1997

TRAVELLERS INSURANCE & SURETY CORPORATION, Petitioner, v. HON. COURT OF

APPEALS and VICENTE MENDOZA, Respondents.

HERMOSISIMA, JR., J.:

The petition herein seeks the review and reversal of the decision 1 of respondent
Court of Appeals 2 affirming in toto the judgment 3 of the Regional Trial Court 4 in
an action for damages 5 filed by private respondent Vicente Mendoza, Jr. as heir of
his mother who was killed in a vehicular accident.

Before the trial court, the complainant lumped the erring taxicab driver, the owner
of the taxicab, and the alleged insurer of the vehicle which featured in the
vehicular accident into one complaint. The erring taxicab was allegedly covered by
a third-party liability insurance policy issued by petitioner Travellers Insurance &
Surety Corporation.

The evidence presented before the trial court established the following facts:

At about 5:30 o'clock in the morning of July 20, 1980, a 78-year old woman by the
name of Feliza Vineza de Mendoza was on her way to hear mass at the Tayuman
Cathedral. While walking along Tayuman corner Gregorio Perfecto Streets, she was
42
bumped by a taxi that was running fast. Several persons witnessed the accident,
among whom were Rolando Marvilla, Ernesto Lopez and Eulogio Tabalno. After
the bumping, the old woman was seen sprawled on the pavement. Right away, the
good Samaritan that he was, Mavilla ran towards the old woman and held her on
his lap to inquire from her what had happened, but obviously she was already in
shock and could not talk. At this moment, a private jeep stopped. With the driver
of that vehicle, the two helped board the old woman on the jeep and brought her
to the Mary Johnston Hospital in Tondo.

. . . Ernesto Lopez, a driver of a passenger jeepney plying along Tayuman Street

from Pritil, Tondo, to Rizal Avenue and vice-versa, also witnessed the incident. It
was on his return trip from Rizal Avenue when Lopez saw the plaintiff and his
brother who were crying near the scene of the accident. Upon learning that the
two were the sons of the old woman, Lopez told them what had happened. The
Mendoza brothers were then able to trace their mother at the Mary Johnston
Hospital where they were advised by the attending physician that they should
bring the patient to the National Orthopedic Hospital because of her fractured
bones. Instead, the victim was brought to the U.S.T. Hospital where she expired at
9:00 o'clock that same morning. Death was caused by "traumatic shock" as a result
of the severe injuries she sustained . . .

. . . The evidence shows that at the moment the victim was bumped by the vehicle,
the latter was running fast, so much so that because of the strong impact the old
woman was thrown away and she fell on the pavement. . . . In truth, in that related
criminal case against defendant Dumlao . . . the trial court found as a fact that
therein accused "was driving the subject taxicab in a careless, reckless and
imprudent manner and at a speed greater than what was reasonable and proper
without taking the necessary precaution to avoid accident to persons . . .
considering the condition of the traffic at the place at the time aforementioned" . .
. Moreover, the driver fled from the scene of the accident and without rendering
assistance to the victim. . . .

. . . Three (3) witnesses who were at the scene at the time identified the taxi
involved, though not necessarily the driver thereof. Marvilla saw a lone taxi
speeding away just after the bumping which, when it passed by him, said witness
noticed to be a Lady Love Taxi with Plate No. 438, painted maroon, with baggage
bar attached on the baggage compartment and with an antenae [sic] attached at
the right rear side. The same descriptions were revealed by Ernesto Lopez, who
further described the taxi to have . . . reflectorized decorations on the edges of the
glass at the back . . . A third witness in the person of Eulogio Tabalno . . . made
similar descriptions although, because of the fast speed of the taxi, he was only
able to detect the last digit of the plate number which is "8". . . . [T]he police
proceeded to the garage of Lady Love Taxi and then and there they took
43
possession of such a taxi and later impounded it in the impounding area of the
agency concerned. . . . [T]he eyewitnesses . . . were unanimous in pointing to that
Lady Love Taxi with Plate No. 438, obviously the vehicle involved herein.

. . . During the investigation, defendant Armando Abellon, the registered owner of

Lady Love Taxi bearing No. 438-HA Pilipinas Taxi 1980, certified to the fact "that
the vehicle was driven last July 20, 1980 by one Rodrigo Dumlao. . ." . . . It was on
the basis of this affidavit of the registered owner that caused the police to
apprehend Rodrigo Dumlao, and consequently to have him prosecuted and
eventually convicted of the offense . . . . . . . [S]aid Dumlao absconded in that
criminal case, specially at the time of the promulgation of the judgment therein so
much so that he is now a fugitive from justice. 6

Private respondent filed a complaint for damages against Armando Abellon as the
owner of the Lady Love Taxi and Rodrigo Dumlao as the driver of the Lady Love
taxicab that bumped private respondent's mother. Subsequently, private
respondent amended his complaint to include petitioner as the compulsory insurer
of the said taxicab under Certificate of Cover No. 1447785-3.

After trial, the trial court rendered judgment in favor of private respondent, the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, or more

particularly the "Heirs of the late Feliza Vineza de Mendoza," and against
defendants Rodrigo Dumlao, Armando Abellon and Travellers Insurance and Surety
Corporation, by ordering the latter to pay, jointly and severally, the former the
following amounts:

(a) The sum of P2,924.70, as actual and compensatory damages, with interest
thereon at the rate of 12% per annum from October 17, 1980, when the complaint
was filed, until the said amount is fully paid;

(b) P30,000.00 as death indemnity;

(c) P25,000.00 as moral damages;

(d) P10,000.00 as by way of corrective or exemplary damages; and

(e) Another P10,000.00 by way of attorney's fees and other litigation expenses.

Defendants are further ordered to pay, jointly and severally, the costs of this suit.

SO ORDERED. 7

Petitioner appealed from the aforecited decision to the respondent Court of

Appeals. The decision of the trial court was affirmed by respondent appellate
44
court. Petitioner's Motion for Reconsideration 8 of September 22, 1987 was denied
in a Resolution 9 dated February 9, 1988.

Hence this petition.

Petitioner mainly contends that it did not issue an insurance policy as compulsory
insurer of the Lady Love Taxi and that, assuming arguendo that it had indeed
covered said taxicab for third-party liability insurance, private respondent failed to
file a written notice of claim with petitioner as required by Section 384 of P.D. No.
612, otherwise known as the Insurance Code.

We find the petition to be meritorious.

When private respondent filed his amended complaint to implead petitioner as

party defendant and therein alleged that petitioner was the third-party liability
insurer of the Lady Love taxicab that fatally hit private respondent's mother,
private respondent did not attach a copy of the insurance contract to the
amended complaint. Private respondent does not deny this omission.

It is significant to point out at this juncture that the right of a third person to sue
the insurer depends on whether the contract of insurance is intended to benefit
third persons also or only the insured.

[A] policy . . . whereby the insurer agreed to indemnify the insured "against all
sums . . . which the Insured shall become legally liable to pay in respect of: a. death
of or bodily injury to any person . . . is one for indemnity against liability; from the
fact then that the insured is liable to the third person, such third person is entitled
to sue the insurer.

The right of the person injured to sue the insurer of the party at fault (insured),
depends on whether the contract of insurance is intended to benefit third persons
also or on the insured And the test applied has been this: Where the contract
provides for indemnity against liability to third persons, then third persons to
whom the insured is liable can sue the insurer. Where the contract is for indemnity
against actual loss or payment, then third persons cannot proceed against the
insurer, the contract being solely to reimburse the insured for liability actually
discharged by him thru payment to third persons, said third persons' recourse
being thus limited to the insured alone. 10

Since private respondent failed to attach a copy of the insurance contract to his
complaint, the trial court could not have been able to apprise itself of the real
nature and pecuniary limits of petitioner's liability. More importantly, the trial
court could not have possibly ascertained the right of private respondent as third
45
person to sue petitioner as insurer of the Lady Love taxicab because the trial court
never saw nor read the insurance contract and learned of its terms and conditions.

Petitioner, understandably, did not volunteer to present any insurance contract

covering the Lady Love taxicab that fatally hit private respondent's mother,
considering that petitioner precisely presented the defense of lack of insurance
coverage before the trial court. Neither did the trial court issue a subpoena duces
tecum to have the insurance contract produced before it under pain of contempt.

We thus find hardly a basis in the records for the trial court to have validly found
petitioner liable jointly and severally with the owner and the driver of the Lady
Love taxicab, for damages accruing to private respondent.

Apparently, the trial court did not distinguish between the private respondent's
cause of action against the owner and the driver of the Lady Love taxicab and his
cause of action against petitioner. The former is based on torts and quasi-
delicts while the latter is based on contract. Confusing these two sources of
obligations as they arise from the same act of the taxicab fatally hitting private
respondent's mother, and in the face of overwhelming evidence of the reckless
imprudence of the driver of the Lady Love taxicab, the trial court brushed aside its
ignorance of the terms and conditions of the insurance contract and forthwith
found all three - the driver of the taxicab, the owner of the taxicab, and the alleged
insurer of the taxicab - jointly and severally liable for actual, moral and exemplary
damages as well as attorney's fees and litigation expenses. This is clearly a
misapplication of the law by the trial court, and respondent appellate court
grievously erred in not having reversed the trial court on this ground.

While it is true that where the insurance contract provides for indemnity against
liability to third persons, such third persons can directly sue the insurer, however,
the direct liability of the insurer under indemnity contracts against third-party
liability does not mean that the insurer can be held solidarily liable with the
insured and/or the other parties found at fault. The liability of the insurer is based
on contract; that of the insured is based on tort. 11

Applying this principle underlying solidary obligation and insurance contracts, we

ruled in one case that:

In solidary obligation, the creditor may enforce the entire obligation against one of
the solidary debtors. On the other hand, insurance is defined as "a contract
whereby one undertakes for a consideration to indemnify another against loss,
damage or liability arising from an unknown or contingent event."

In the case at bar, the trial court held petitioner together with respondents Sio
Choy and San Leon Rice Mills Inc. solidarily liable to respondent Vallejos for a total
46
amount of P29,103.00, with the qualification that petitioner's liability is only up to
P20,000.00. In the context of a solidary obligation, petitioner may be compelled by
respondent Vallejos to pay the entire obligation of P29,103.00, notwithstanding
the qualification made by the trial court. But, how can petitioner be obliged to pay
the entire obligation when the amount stated in its insurance policy with
respondent Sio Choy for indemnity against third-party liability is only P20,000.00?
Moreover, the qualification made in the decision of the trial court to the effect
that petitioner is sentenced to pay up to P20,000.00 only when the obligation to
pay P29,103.00 is made solidary is an evident breach of the concept of a solidary
obligation. 12

The above principles take on more significance in the light of the counter-
allegation of petitioner that, assuming arguendo that it is the insurer of the Lady
Love taxicab in question, its liability is limited to only P50,000.00, this being its
standard amount of coverage in vehicle insurance policies. It bears repeating that
no copy of the insurance contract was ever proffered before the trial court by the
private respondent, notwithstanding knowledge of the fact that the latter's
complaint against petitioner is one under a written contract. Thus, the trial court
proceeded to hold petitioner liable for an award of damages exceeding its limited
liability of P50,000.00. This only shows beyond doubt that the trial court was
under the erroneous presumption that petitioner could be found liable absent
proof of the contract and based merely on the proof of reckless imprudence on
the part of the driver of the Lady Love taxicab that fatally hit private respondent's
mother.

II

Petitioner did not tire in arguing before the trial court and the respondent
appellate court that, assuming arguendo that it had issued the insurance contract
over the Lady Love taxicab, private respondent's cause of action against petitioner
did not successfully accrue because he failed to file with petitioner a written notice
of claim within six (6) months from the date of the accident as required by Section
384 of the Insurance Code.

At the time of the vehicular incident which resulted in the death of private
respondent's mother, during which time the Insurance Code had not yet been
amended by Batas Pambansa (B.P.) Blg. 874, Section 384 provided as follows:

Any person having any claim upon the policy issued pursuant to this chapter shall,
without any unnecessary delay, present to the insurance company concerned a
written notice of claim setting forth the amount of his loss, and/or the nature,
extent and duration of the injuries sustained as certified by a duly licensed
physician. Notice of claim must be filed within six months from date of the
accident, otherwise, the claim shall be deemed waived. Action or suit for recovery
47
of damage due to loss or injury must be brought in proper cases, with the
Commission or the Courts within one year from date of accident, otherwise the
claimant's right of action shall prescribe [emphasis supplied].

In the landmark case of Summit Guaranty and Insurance Co., Inc. v. De

Guzman, 13 we ruled that the one year prescription period to bring suit in court
against the insurer should be counted from the time that the insurer rejects the
written claim filed therewith by the insured, the beneficiary or the third person
interested under the insurance policy. We explained:

It is very obvious that petitioner company is trying to use Section 384 of the
Insurance Code as a cloak to hide itself from its liabilities. The facts of these cases
evidently reflect the deliberate efforts of petitioner company to prevent the filing
of a formal action against it. Bearing in mind that if it succeeds in doing so until
one year lapses from the date of the accident it could set up the defense of
prescription, petitioner company made private respondents believe that their
claims would be settled in order that the latter will not find it necessary to
immediately bring suit. In violation of its duties to adopt and implement
reasonable standards for the prompt investigation of claims and to effectuate
prompt, fair and equitable settlement of claims, and with manifest bad faith,
petitioner company devised means and ways of stalling the settlement proceeding
. . . [N]o steps were taken to process the claim and no rejection of said claim was
ever made even if private respondent had already complied with all the
requirements. . . .

This Court has made the observation that some insurance companies have been
inventing excuses to avoid their just obligations and it is only the State that can
give the protection which the insuring public needs from possible abuses of the
insurers. 14

It is significant to note that the aforecited Section 384 was amended by B.P. Blg.
874 to categorically provide that "action or suit for recovery of damage due to loss
or injury must be brought in proper cases, with the Commissioner or the Courts
within one year from denial of the claim, otherwise the claimant's right of action
shall prescribe" [emphasis ours]. 15

We have certainly ruled with consistency that the prescriptive period to bring suit
in court under an insurance policy, begins to run from the date of the insurer's
rejection of the claim filed by the insured, the beneficiary or any person claiming
under an insurance contract. This ruling is premised upon the compliance by the
persons suing under an insurance contract, with the indispensable requirement of
having filed the written claim mandated by Section 384 of the insurance Code
before and after its amendment. Absent such written claim filed by the person
suing under an insurance contract, no cause of action accrues under such
48
insurance contract, considering that it is the rejection of that claim that triggers
the running of the one-year prescriptive period to bring suit in court, and there can
be no opportunity for the insurer to even reject a claim if none has been filed in
the first place, as in the instant case.

The one-year period should instead be counted from the date of rejection by the
insurer as this is the time when the cause of action accrues. . . .

In Eagle Star Insurance Co., Ltd., et al. v. Chia Yu, this Court ruled:

The plaintiff's cause of action did not accrue until his claim was finally rejected by
the insurance company. This is because, before such final rejection, there was no
real necessity for bringing suit.

The philosophy of the above pronouncement was pointed out in the case of ACCFA
vs. Alpha Insurance and Surety Co., viz:

Since a cause of action requires, as essential elements, not only a legal right of the
plaintiff and a correlative obligation of the defendant but also an act or omission
of the defendant in violation of said legal right, the cause of action does not accrue
until the party obligated refuses, expressly or impliedly, to comply with its duty. 16

When petitioner asseverates, thus, that no written claim was filed by private
respondent and rejected by petitioner, and private respondent does not dispute
such asseveration through a denial in his pleadings, we are constrained to rule that
respondent appellate court committed reversible error in finding petitioner liable
under an insurance contract the existence of which had not at all been proven in
court. Even if there were such a contract, private respondent's cause of action can
not prevail because he failed to file the written claim mandated by Section 384 of
the Insurance Code. He is deemed, under this legal provision, to have waived his
rights as against petitioner-insurer.

WHEREFORE, the instant petition is HEREBY GRANTED. The decision of the Court of
Appeals in CA-G.R. CV No. 09416 and the decision of the Regional Trial Court in
Civil Case No. 135486 are REVERSED and SET ASIDE insofar as Travelers Insurance
& Surety Corporation was found jointly and severally liable to pay actual, moral
and exemplary damages, death indemnity, attorney's fees and litigation expenses
in Civil Case No. 135486. The complaint against Travellers Insurance & Surety
Corporation in said case is hereby ordered dismissed.

No pronouncement as to costs.

SO ORDERED.

49
 SECOND DIVISION

[G.R. No. 113899. October 13, 1999.]

GREAT PACIFIC LIFE ASSURANCE CORP., Petitioner, v. COURT OF APPEALS AND

MEDARDA V. LEUTERIO, Respondents.

DECISION

QUISUMBING, J.:

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:chanrobles virtual lawlibrary

"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:chanroblesvirtual|awlibrary

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

On November 11, 1983, Dr. Wilfredo Leuterio, a physician and a housing debtor of
DBP applied for membership in the group life insurance plan. In an application
form, Dr. Leuterio answered questions concerning his health condition as
follows:jgc:chanrobles.com.ph

50
"7. Have you ever had, or consulted, a physician for a heart condition, high blood
pressure, cancer, diabetes, lung, kidney or stomach disorder or any other physical
impairment?

Answer: No. If so give details ___________.

8. Are you now, to the best of your knowledge, in good health?

Answer: [ x ] Yes [ ] No." 4chanroblesvirtuallawlibrary:red

On November 15, 1983, Grepalife issued Certificate No. B-18558, as insurance

coverage of Dr. Leuterio, to the extent of his DBP mortgage indebtedness
amounting to eighty-six thousand, two hundred (P86,200.00) pesos.

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.chanroblesvirtual|awlibrary

On February 22, 1988, the trial court rendered a decision in favor of respondent
widow and against Grepalife. On May 17, 1993, the Court of Appeals sustained the
trial court’s decision. Hence, the present petition. Petitioners interposed the
following assigned errors:jgc:chanrobles.com.ph

"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-

51
APPELLANT [Petitioner Grepalife] FOR LACK OF CAUSE OF ACTION.

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

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

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

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

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

Synthesized below are the assigned errors for our resolution:chanrob1es virtual
1aw library

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

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

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

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

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

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

52
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
premium under the group insurance policy, making the loss payable to the
mortgagee, the insurance is on the mortgagor’s interest, and the mortgagor
continues to be a party to the contract. In this type of policy insurance, the
mortgagee is simply an appointee of the insurance fund, such loss-payable clause
does not make the mortgagee a party to the contract. 9

Section 8 of the Insurance Code provides:jgc:chanrobles.com.ph

"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." chanrobles.com :
virtual law library

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:jgc:chanrobles.com.ph

"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

53
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:chanrob1es
virtual 1aw library

‘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." 13chanrobles virtual lawlibrary

And since a policy of insurance upon life or health may pass by transfer, will or
succession to any person, whether he has an insurable interest or not, and such
person may recover it whatever the insured might have recovered, 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 supported by the information given by the widow of the decedent.
Grepalife asserts that Dr. Mejia’s technical diagnosis of the cause of death of Dr.
Leuterio was a duly documented hospital record, and that the widow’s declaration
that her husband had "possible hypertension several years ago" should not be
considered as hearsay, but as part of res gestae.

On the contrary the medical findings were not conclusive because Dr. Mejia did
not conduct an autopsy on the body of the decedent. As the attending physician,
Dr. Mejia stated that he had no knowledge of Dr. Leuterio’s any previous hospital
confinement. 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

54
as hearsay.chanroblesvirtual|awlibrary

The question of whether there was concealment was aptly answered by the
appellate court, thus:jgc:chanrobles.com.ph

"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."
17chanrobles.com : virtual law library

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
premium according to the coverage of his insurance, which states
that:jgc:chanrobles.com.ph
55
"The policy states that upon receipt of due proof of the Debtor’s death during the
terms of this insurance, a death benefit in the amount of P86,200.00 shall be
paid.chanroblesvirtuallawlibrary:red

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)

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

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

SO ORDERED.

56
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 128833 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, UY CHUN BING AND ELI D.

LAO, petitioners,
vs.
COURT OF APPEALS and GOYU & SONS, INC., respondents.

G.R. No. 128834 April 20, 1998

RIZAL COMMERCIAL BANKING CORPORATION, petitioners,

vs.
COURT OF APPEALS, ALFREDO C. SEBASTIAN, GOYU & SONS, INC., GO SONG
HIAP, SPOUSES GO TENG KOK and BETTY CHIU SUK YING alias BETTY
GO, respondents.

G.R. No. 128866 April 20, 1998

MALAYAN INSURANCE INC., petitioners,

vs.
GOYU & SONS, INC. respondent.

MELO, J.:

The issue relevant to the herein three consolidated petitions revolve around the
fire loss claims of respondent Goyu & Sons, Inc. (GOYU) with petitioner Malayan
Insurance Company, Inc. (MICO) in connection with the mortgage contracts
entered into by and between Rizal Commercial Banking Corporation (RCBC) and
GOYU.

The Court of Appeals ordered MICO to pay GOYU its claims in the total amount of
P74,040,518.58, plus 37% interest per annum commending July 27, 1992. RCBC
was ordered to pay actual and compensatory damages in the amount of
P5,000,000.00. MICO and RCBC were held solidarily liable to pay GOYU
P1,500,000.00 as exemplary damages and P1,500,000.00 for attorney's fees.
GOYU's obligation to RCBC was fixed at P68,785,069.04 as of April 1992, without
any interest, surcharges, and penalties. RCBC and MICO appealed separately but,
in view of the common facts and issues involved, their individual petitions were
consolidated.
57
The undisputed facts may be summarized as follows:

GOYU applied for credit facilities and accommodations with RCBC at its Binondo
Branch. After due evaluation, RCBC Binondo Branch, through its key officers,
petitioners Uy Chun Bing and Eli D. Lao, recommended GOYU's application for
approval by RCBC's executive committee. A credit facility in the amount of P30
million was initially granted. Upon GOYU's application and Uy's and Lao's
recommendation, RCBC's executive committee increased GOYU's credit facility to
P50 million, then to P90 million, and finally to P117 million.

As security for its credit facilities with RCBC, GOYU executed two real estate
mortgages and two chattel mortgages in favor of RCBC, which were registered
with the Registry of Deeds at Valenzuela, Metro Manila. Under each of these four
mortgage contracts, GOYU committed itself to insure the mortgaged property with
an insurance company approved by RCBC, and subsequently, to endorse and
deliver the insurance polices to RCBC.

GOYU obtained in its name a total of ten insurance policies from MICO. In
February 1992, Alchester Insurance Agency, Inc., the insurance agent where GOYU
obtained the Malayan insurance policies, issued nine endorsements in favor of
RCBC seemingly upon instructions of GOYU (Exhibits "1-Malayan" to "9-Malayan").

On April 27, 1992, one of GOYU's factory buildings in Valenzuela was gutted by
fire. Consequently, GOYU submitted its claim for indemnity on account of the loss
insured against. MICO denied the claim on the ground that the insurance policies
were either attached pursuant to writs of attachments/garnishments issued by
various courts or that the insurance proceeds were also claimed by other creditors
of GOYU alleging better rights to the proceeds than the insured. GOYU filed a
complaint for specific performance and damages which was docketed at the
Regional Trial Court of the National Capital Judicial Region (Manila, Branch 3) as
Civil Case No. 93-65442, now subject of the present G.R. No. 128833 and 128866.

RCBC, one of GOYU's creditors, also filed with MICO its formal claim over the
proceeds of the insurance policies, but said claims were also denied for the same
reasons that MICO denied GOYU's claims.

In an interlocutory order dated October 12, 1993 (Record, pp. 311-312), the
Regional Trial Court of Manila (Branch 3), confirmed that GOYU's other creditors,
namely, Urban Bank, Alfredo Sebastian, and Philippine Trust Company obtained
their respective writs of attachments from various courts, covering an aggregate
amount of P14,938,080.23, and ordered that the proceeds of the ten insurance
policies be deposited with the said court minus the aforementioned
P14,938,080.23. Accordingly, on January 7, 1994, MICO deposited the amount of
P50,505,594.60 with Branch 3 of the Manila RTC.
58
In the meantime, another notice of garnishment was handed down by another
Manila RTC sala (Branch 28) for the amount of P8,696,838.75 (Exhibit "22-
Malayan").

After trial, Branch 3 of the Manila RTC rendered judgment in favor of GOYU,
disposing:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and

against the defendant, Malayan Insurance Company, Inc. and Rizal
Commercial Banking Corporation, ordering the latter as follows:

1. For defendant Malayan Insurance Co., Inc.:

a. To pay the plaintiff its fire loss claims in the

total amount of P74,040,518.58 less the amount
of P50,000,000.00 which is deposited with this
Court;

b. To pay the plaintiff damages by was of interest

for the duration of the delay since July 27, 1992
(ninety days after defendant insurer's receipt of
the required proof of loss and notice of loss) at
the rate of twice the ceiling prescribed by the
Monetary Board, on the following amounts:

1) P50,000,000.00 — from July 27,

1992 up to the time said amount was
deposited with this Court on January
7, 1994;

2) P24,040,518.58 — from July 27,

1992 up to the time when the writs of
attachments were received by
defendant Malayan;

2. For defendant Rizal Commercial Banking Corporation:

a. To pay the plaintiff actual and compensatory

damages in the amount of P2,000,000.00;

3. For both defendants Malayan and RCBC:

a. To pay the plaintiff, jointly and severally, the

following amounts:

59
 1) P1,000,000.00 as exemplary
damages;

2) P1,000,000.00 as, and for,

attorney's fees;

3) Costs of suit.

and on the Counterclaim of defendant RCBC, ordering the

plaintiff to pay its loan obligations with defendant RCBC in
the amount of P68,785,069.04, as of April 27, 1992, with
interest thereon at the rate stipulated in the respective
promissory notes (without surcharges and penalties) per
computation, pp. 14-A, 14-B & 14-C.

FURTHER, the Clerk of Court of the Regional Trial Court of Manila is

hereby ordered to release immediately to the plaintiff the amount of
P50,000,000.00 deposited with the Court by defendant Malayan,
together with all the interest earned thereon.

(Record, pp. 478-479.)

From this judgment, all parties interposed their respective appeals. GOYU was
unsatisfied with the amount awarded in its favor. MICO and RCBC disputed the
trial court's findings of liability on their part. The Court of Appeals party granted
GOYU's appeal, but sustained the findings of the trial court with respect to MICO
and RCBC's liabilities, thusly:

WHEREFORE, the decision of the lower court dated June 29, 1994 is
hereby modified as follows:

1. FOR DEFENDANT MALAYAN INSURANCE CO., INC:

a) To pay the plaintiff its fire loss claim in the

total amount of P74,040,518.58 less the amount
of P50,505,594.60 (per O.R. No. 3649285) plus
deposited in court and damages by way of
interest commencing July 27, 1992 until the time
Goyu receives the said amount at the rate of
thirty-seven (37%) percent per annum which is
twice the ceiling prescribed by the Monetary
Board.

2. FOR DEFENDANT RIZAL COMMERCIAL BANKING

CORPORATION;
60
 a) To pay the plaintiff actual and compensatory
damages in the amount of P5,000,000.00.

3. FOR DEFENDANTS MALAYAN INSURANCE CO., INC., RIZAL

COMMERCIAL BANKING CORPORATION, UY CHUN BING AND
ELI D. LAO:

a) To pay the plaintiff jointly and severally the

following amounts:

1. P1,500,000.00 as exemplary damages;

2. P1,500,000.00 as and for attorney's fees.

4. And on RCBC's Counterclaim, ordering the plaintiff Goyu

& Sons, Inc. to pay its loan obligation with RCBC in the
amount of P68,785,069.04 as of April 27, 1992 without any
interest, surcharges and penalties.

The Clerk of the Court of the Regional Trial Court of Manila is hereby
ordered to immediately release to Goyu & Sons, Inc. the amount of
P50,505,594.60 (per O.R. No. 3649285) deposited with it by Malayan
Insurance Co., Inc., together with all the interests thereon.

(Rollo, p. 200.)

RCBC and MICO are now before us in G.R. No. 128833 and 128866, respectively,
seeking review and consequent reversal of the above dispositions of the Court of
Appeals.

In G.R. No. 128834, RCBC likewise appeals from the decision in C.A. G.R. No. CV-
48376, which case, by virtue of the Court of Appeals' resolution dated August 7,
1996, was consolidated with C.A. G.R. No. CV-46162 (subject of herein G.R. No.
128833). At issue in said petition is RCBC's right to intervene in the action between
Alfredo C. Sebastian (the creditor) and GOYU (the debtor), where the subject
insurance policies were attached in favor of Sebastian.

After a careful reviews of the material facts as found by the two courts below in
relation to the pertinent and applicable laws, we find merit in the submission of
RCBC and MICO.

The several causes of action pursued below by GOYU gave rise to several related
issues which are now submitted in the petitions before us. This Court, however,
discerns one primary and central issue, and this is, whether or not RCBC, as
mortgagee, has any right over the insurance policies taken by GOYU, the
mortgagor, in case of the occurrence of loss.
61
As earlier mentioned, accordant with the credit facilities extended by RCBC to
GOYU, the latter executed several mortgage contracts in favor of RCBC. It was
expressly stipulated in these mortgage contracts that GOYU shall insure the
mortgaged property with any of the insurance companies acceptable to RCBC.
GOYU indeed insured the mortgaged property with MICO, an insurance company
acceptable to RCBC. Bases on their stipulations in the mortgage contracts, GOYU
was supposed to endorse these insurance policies in favor of, and deliver them, to
RCBC. Alchester Insurance Agency, Inc., MICO's underwriter from whom GOYU
obtained the subject insurance policies, prepared the nine endorsements (see Exh.
"1-Malayan" to "9-Malayan"; also Exh. "51-RCBC" to "59-RCBC"), copies of which
were delivered to GOYU, RCBC, and MICO. However, because these endorsements
do not bear the signature of any officer of GOYU, the trial court, as well as the
Court of Appeals, concluded that the endorsements are defective.

We do not quite agree.

It is settled that a mortgagor and a mortgagee have separated and distinct

insurable interests in the same mortgaged property, such that each one of them
may insure the same property for his own sole benefit. There is no question that
GOYU could insure the mortgaged property for its own exclusive benefit. In the
present case, although it appears that GOYU obtained the subject insurance
policies naming itself as the sole payee, the intentions of the parties as shown by
their contemporaneous acts, must be given due consideration in order to better
serve the interest of justice and equity.

It is to be noted that nine endorsement documents were prepared by Alchester in

favor of RCBC. The Court is in a quandary how Alchester could arrive at the idea of
endorsing any specific insurance policy in favor of any particular beneficiary or
payee other than the insured had not such named payee or beneficiary been
specifically disclosed by the insured itself. It is also significant that GOYU
voluntarily and purposely took the insurance policies from MICO, a sister company
of RCBC, and not just from any other insurance company. Alchester would not
have found out that the subject pieces of property were mortgaged to RCBC had
not such information been voluntarily disclosed by GOYU itself. Had it not been for
GOYU, Alchester would not have known of GOYU's intention of obtaining
insurance coverage in compliance with its undertaking in the mortgage contracts
with RCBC, and verily, Alchester would not have endorsed the policies to RCBC had
it not been so directed by GOYU.

On equitable principles, particularly on the ground of estoppel, the Court is

constrained to rule in favor of mortgagor RCBC. The basis and purpose of the
doctrine was explained in Philippine National Bank vs. Court of Appeals (94 SCRA
357 [1979]), to wit:

62
 The doctrine of estoppel is based upon the grounds of public, policy,
fair dealing, good faith and justice, and its purpose is to forbid one to
speak against his own act, representations, or commitments to the
injury of one to whom they were directed and who reasonably relied
thereon. The doctrine of estoppel springs from equitable principles and
the equities in the case. It is designed to aid the law in the
administration of justice where without its aid injustice might result. It
has been applied by this Court wherever and whenever special
circumstances of a case so demand.

(p. 368.)

Evelyn Lozada of Alchester testified that upon instructions of Mr. Go, through a
certain Mr. Yam, she prepared in quadruplicate on February 11, 1992 the nine
endorsement documents for GOYU's nine insurance policies in favor of RCBC. The
original copies of each of these nine endorsement documents were sent to GOYU,
and the others were sent to RCBC and MICO, while the fourth copies were
detained for Alchester's file (tsn, February 23, pp. 7-8). GOYU has not denied
having received from Alchester the originals of these documents.

RCBC, in good faith, relied upon the endorsement documents sent to it as this was
only pursuant to the stipulation in the mortgage contracts. We find such reliance
to be justified under the circumstances of the case. GOYU failed to seasonably
repudiate the authority of the person or persons who prepared such
endorsements. Over and above this, GOYU continued, in the meantime, to enjoy
the benefits of the credit facilities extended to it by RCBC. After the occurrence of
the loss insure against, it was too late for GOYU to disown the endorsements for
any imagined or contrived lack of authority of Alchester to prepare and issue said
endorsements. If there had not been actually an implied ratification of said
endorsements by virtue of GOYU's inaction in this case, GOYU is at the very least
estopped from assailing their operative effects. To permit GOYU to capitalize on its
non-confirmation of these endorsements while it continued to enjoy the benefits
of the credit facilities of RCBC which believed in good faith that there was due
endorsement pursuant to their mortgage contracts, is to countenance grave
contravention of public policy, fair dealing, good faith, and justice. Such an unjust
situation, the Court cannot sanction. Under the peculiar circumstances obtaining
in this case, the Court is bound to recognize RCBC's right to the proceeds of the
insurance polices if not for the actual endorsement of the policies, at least on the
basis of the equitable principle of estoppel.

GOYU cannot seek relief under Section 53 of the Insurance Code which provides
that the proceeds of insurance shall exclusively apply to the interest of the person
in whose name or for whose benefit it is made. The peculiarity of the
circumstances obtaining in the instant case presents a justification to take
63
exception to the strict application of said provision, it having been sufficiently
established that it was the intention of the parties to designate RCBC as the party
for whose benefit the insurance policies were taken out. Consider thus the
following:

1. It is undisputed that the insured pieces of property were the subject of

mortgage contracts entered into between RCBC and GOYU in consideration of and
for securing GOYU's credit facilities from RCBC. The mortgage contracts contained
common provisions whereby GOYU, as mortgagor, undertook to have the
mortgaged property properly covered against any loss by an insurance company
acceptable to RCBC.

2. GOYU voluntarily procured insurance policies to cover the mortgaged property

from MICO, no less than a sister company of RCBC and definitely an acceptable
insurance company to RCBC.

3. Endorsement documents were prepared by MICO's underwriter, Alchester

Insurance Agency, Inc., and copies thereof were sent to GOYU, MICO, and RCBC.
GOYU did not assail, until of late, the validity of said endorsements.

4. GOYU continued until the occurrence of the fire, to enjoy the benefits of the
credit facilities extended by RCBC which was conditioned upon the endorsement
of the insurance policies to be taken by GOYU to cover the mortgaged properties.

This Court can not over stress the fact that upon receiving its copies of the
endorsement documents prepared by Alchester, GOYU, despite the absence of its
written conformity thereto, obviously considered said endorsement to be
sufficient compliance with its obligation under the mortgage contracts since RCBC
accordingly continued to extend the benefits of its credits facilities and GOYU
continued to benefit therefrom. Just as plain too is the intention of the parties to
constitute RCBC as the beneficiary of the various insurance policies obtained by
GOYU. The intention of the parties will have to be given full force and effect
particular case. The insurance proceeds may, therefore, be exclusively applied to
RCBC, which under the factual circumstances of the case, is truly the person or
entity for whose benefit the polices were clearly intended.

Moreover, the law's evident intention to protect the interests of the mortgage
upon the mortgaged property is expressed in Article 2127 of the Civil Code which
states:

Art. 2127. The mortgage extends to the natural accessions, to the

improvements, growing fruits, and the rents or income not yet received
when the obligation becomes due, and to the amount of the indemnity
granted or owing to the proprietor from the insurers of the property
64
 mortgaged, or in virtue of expropriation for public use, with the
declarations, amplifications and limitations established by law, whether
the estate remains in the possession of the mortgagor, or it passes into
the hands of a third person.

Significantly, the Court notes that out of the 10 insurance policies subject of this
case, only 8 of them appear to have been subject of the endorsements prepared
and delivered by Alchester for and upon instructions of GOYU as shown below:

INSURANCE POLICY PARTICULARS ENDORSEMENT

a. Policy Number F-114-07795 None

Issue Date March 18, 1992
Expiry Date April 5, 1993
Amount P9,646,224.92

b. Policy Number ACIA/F-174-07660 Exhibit "1-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P4,307,217.54

c. Policy Number ACIA/F-114-07661 Exhibit "2-Malayan"

Issue Date January 18, 1992
Expiry Date February 15, 1993
Amount P6,603,586.43

d. Policy Number ACIA/F-114-07662 Exhibit "3-Malayan"

Issue Date January 18, 1992
Expiry Date (not legible)
Amount P6,603,586.43

e. Policy Number ACIA/F-114-07663 Exhibit "4-Malayan"

Issue Date January 18, 1992
Expiry Date February 9, 1993
Amount P9,457,972.76

f. Policy Number ACIA/F-114-07623 Exhibit "7-Malayan"

Issue Date January 13, 1992
Expiry Date January 13, 1993
Amount P24,750,000.00

g. Policy Number ACIA/F-174-07223 Exhibit "6-Malayan"

Issue Date May 29, 1991
Expiry Date June 27, 1992
Amount P6,000,000.00
65
 h. Policy Number CI/F-128-03341 None
Issue Date May 3, 1991
Expiry Date May 3, 1992
Amount P10,000,000.00

i. Policy Number F-114-07402 Exhibit "8-Malayan"

Issue Date September 16, 1991
Expiry Date October 19, 1992
Amount P32,252,125.20

j. Policy Number F-114-07525 Exhibit "9-Malayan"

Issue Date November 20, 1991
Expiry Date December 5, 1992
Amount P6,603,586.43

(pp. 456-457, Record; Folder of Exhibits for MICO.)

Policy Number F-114-07795 [(a) above] has not been endorsed. This fact was
admitted by MICO's witness, Atty. Farolan (tsn, February 16, 1994, p. 25). Likewise,
the record shows no endorsement for Policy Number CI/F-128-03341 [(h) above].
Also, one of the endorsement documents, Exhibit "5-Malayan", refers to a certain
insurance policy number ACIA-F-07066, which is not among the insurance policies
involved in the complaint.

The proceeds of the 8 insurance policies endorsed to RCBC aggregate to

P89,974,488.36. Being excessively payable to RCBC by reason of the endorsement
by Alchester to RCBC, which we already ruled to have the force and effect of an
endorsement by GOYU itself, these 8 policies can not be attached by GOYU's other
creditors up to the extent of the GOYU's outstanding obligation in RCBC's favor.
Section 53 of the Insurance Code ordains that the insurance proceeds of the
endorsed policies shall be applied exclusively to the proper interest of the person
for whose benefit it was made. In this case, to the extent of GOYU's obligation with
RCBC, the interest of GOYU in the subject policies had been transferred to RCBC
effective as of the time of the endorsement. These policies may no longer be
attached by the other creditors of GOYU, like Alfredo Sebastian in the present G.R.
No. 128834, which may nonetheless forthwith be dismissed for being moot and
academic in view of the results reached herein. Only the two other policies
amounting to P19,646,224.92 may be validly attached, garnished, and levied upon
by GOYU's other creditors. To the extent of GOYU's outstanding obligation with
RCBC, all the rest of the other insurance policies above-listed which were endorsed
to RCBC, are, therefore, to be released from attachment, garnishment, and levy by
the other creditors of GOYU.

66
This brings us to the next issue to be resolved, which is, the extent of GOYU's
outstanding obligation with RCBC which the proceeds of the 8 insurance policies
will discharge and liquidate, or put differently, the actual amount of GOYU's
liability to RCBC.

The Court of Appeals simply echoed the declaration of the trial court finding that
GOYU's total obligation to RCBC was only P68,785,060.04 as of April 27, 1992, thus
sanctioning the trial court's exclusion of Promissory Note No. 421-92 (renewal of
Promissory Note No. 908-91) and Promissory Note No. 420-92 (renewal of
Promissory Note No. 952-91) on the ground that their execution is highly
questionable for not only are these dated after the fire, but also because the
signatures of either GOYU or any its representative are conspicuously absent.
Accordingly, the Court of Appeals speculated thusly:

. . . Hence, this Court is inclined to conclude that said promissory notes

were pre-signed by plaintiff in bank terms, as averred by plaintiff, in
contemplation of the speedy grant of future loans, for the same
practice of procedure has always been adopted in its previous dealings
with the bank.

(Rollo, pp. 181-182.)

The fact that the promissory notes bear dates posterior to the fire does not
necessarily mean that the documents are spurious, for it is presumed that the
ordinary course of business had been followed (Metropolitan Bank and Trust
Company vs. Quilts and All, Inc., 22 SCRA 486 [1993]). The obligor and not the
holder of the negotiable instrument has the burden of proof of showing that he no
longer owes the obligee any amount (Travel-On, Inc. vs. Court of Appeals, 210
SCRA 351 [1992]).

Even casting aside the presumption of regularity of private transactions, receipt of

the loan amounting to P121,966,058.67 (Exhibits 1-29, RCBC) was admitted by
GOYU as indicated in the testimony of Go Song Hiap when he answered the
queries of the trial court.

ATTY. NATIVIDAD

Q: But insofar as the amount stated in Exhibits 1 to 29-RCBC,

you received all the amounts stated therein?

A: Yes, sir, I received the amount.

COURT

67
 He is asking if he received all the amounts stated in Exhibits
1 to 29-RCBC?

WITNESS:

Yes, Your Honor, I received all the amounts.

COURT

Indicated in the Promissory Notes?

WITNESS

A. The promissory Notes they did not give to me but the

amount I asked which is correct, Your Honor.

COURT

Q Your mean to say the amounts indicated in Exhibits 1 to

29-RCBC is correct?

A Yes, Your Honor.

(tsn, Jan. 14, 1994, p. 26.)

Furthermore, aside from its judicial admission of having received all the proceeds
of the 29 promissory notes as hereinabove quotes, GOYU also offered and
admitted to RCBC that is obligation be fixed at P116,301,992.60 as shown in its
letter date March 9, 1993, which pertinently reads:

We wish to inform you, therefore that we are ready and willing to pay
the current past due account of this company in the amount of
P116,301,992.60 as of 21 January 1993, specified in pars. 15, p. 10, and
18, p. 13 of your affidavits of Third Party Claims in the Urban case at
Makati, Metro Manila and in the Zamboanga case at Zamboanga city,
respectively, less the total of P8,851,519.71 paid from the Seaboard
and Equitable insurance companies and other legitimate deductions.
We accept and confirm this amount of P116,301,992.60 as stated as
true and correct.

(Exhibit BB.)

The Court of Appeals erred in placing much significance on the fact that the
excluded promissory notes are dated after the fire. It failed to consider that said
notes had for their origin transactions consummated prior to the fire. Thus, careful
attention must be paid to the fact that Promissory Notes No. 420-92 and 421-92
68
are mere renewals of Promissory Notes No. 908-91 and 952-91, loans already
availed of by GOYU.

The two courts below erred in failing to see that the promissory notes which they
ruled should be excluded for bearing dates which are after that of the fire, are
mere renewals of previous ones. The proceeds of the loan represented by these
promissory notes were admittedly received by GOYU. There is ample factual and
legal basis for giving GOYU's judicial admission of liability in the amount of
P116,301,992.60 full force and effect.

It should, however, be quickly added that whatever amount RCBC may have
recovered from the other insurers of the mortgage property will, nonetheless,
have to be applied as payment against GOYU's obligation. But, contrary to the
lower courts' findings, payments effected by GOYU prior to January 21, 1993
should no longer be deducted. Such payments had obviously been duly considered
by GOYU, in its aforequoted letter date March 9, 1993, wherein it admitted that its
past due account totaled P116,301,992.60 as of January 21, 1993.

The net obligation of GOYU, after deductions, is thus reduced to P107,246,887.90

as of January 21, 1993, to wit:

Total Obligation as admitted by GOYU

as of January 21, 1993: P116,301,992.60

Broken down as follows:

Principal 1 Interest

Regular 80,535,946.32
FDU 27,548,025.17
____________
Total 108,083,971.49 8,218,021.11 2

LESS:

1) Proceeds from
Seaboard Eastern
Insurance Company 6,095,145.81

2) Proceeds from
Equitable Insurance
Company 2,756,373.00

3) Payment from
foreign department

69
 negotiation: 203,584.89
___________

9,055,104.70 3
================
NET AMOUNT as of January 21, 1993 P107,246,887.90

The need for the payment of interest due the principal amount of the obligation,
which is the cost of money to RCBC, the primary end and the ultimate reason for
RCBC's existence and being, was duly recognized by the trial court when it ruled
favorably on RCBC's counterclaim, ordering GOYU "to pay its loan obligation with
RCBC in the amount of P68,785,069.04, as of April 27, 1992, with interest thereon
at the rate stipulated in the respective promissory notes (without surcharges and
penalties) per computation, pp. 14-A, 14-B 14-C" (Record, p. 479). Inexplicably, the
Court of Appeals, without even laying down the factual or legal justification for its
ruling, modified the trial court's ruling and ordered GOYU "to pay the principal
amount of P68,785,069.04 without any interest, surcharges and penalties" (Rollo,
p. 200).

It is to be noted in this regard that even the trial court hedgingly and with much
uncertainty deleted the payment of additional interest, penalties, and charges, in
this manner:

Regarding defendant RCBC's commitment not to charge additional

interest, penalties and surcharges, the same does not require that it be
embodied in a document or some form of writing to be binding and
enforceable. The principle is well known that generally a verbal
agreement or contract is no less binding and effective than a written
one. And the existence of such a verbal agreement has been amply
established by the evidence in this case. In any event, regardless of the
existence of such verbal agreement, it would still be unjust and
inequitable for defendant RCBC to charge the plaintiff with surcharges
and penalties considering the latter's pitiful situation. (Emphasis
supplied).

(Record, p. 476)

The essence or rationale for the payment of interest or cost of money is separate
and distinct from that of surcharges and penalties. What may justify a court in not
allowing the creditor to charge surcharges and penalties despite express
stipulation therefor in a valid agreement, may not equally justify non-payment of
interest. The charging of interest for loans forms a very essential and fundamental
element of the banking business, which may truly be considered to be at the very
core of its existence or being. It is inconceivable for a bank to grant loans for which
70
it will not charge any interest at all. We fail to find justification for the Court of
Appeal's outright deletion of the payment of interest as agreed upon in the
respective promissory notes. This constitutes gross error.

For the computation of the interest due to be paid to RCBC, the following rules of
thumb laid down by this Court in Eastern Shipping Lines, Inc. vs. Court of
Appeals (234 SCRA 78 [1994]), shall apply, to wit:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for
damages. The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the actual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a

sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore,
the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest
shall be 12% per annum to be computed from default, i.e., from judicial
or extrajudicial demand under and subject to the provisions of Article
1169 of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money,

is breached, an interest on the amount of damages awarded may be
imposed at the discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims or damages
except when or until the demand can be established with reasonable
certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil Code) but
when such certainty cannot be so reasonably established at the time
the demand is made, the interest shall begin to run only from the date
of the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The
actual base for the computation of legal interest shall, in any case, be
on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes

final and executory, the rate of legal interest, whether the case falls
under paragraph 1 or paragraph 2, above, shall be 12% per annum from
71
 such finality until its satisfaction, this interim period being deemed to
be by then an equivalent to a forbearance of credit.

(pp. 95-97).

There being written stipulations as to the rate of interest owing on each specific
promissory note as summarized and tabulated by the trial court in its decision (pp.
470 and 471, Record) such agreed interest rates must be followed. This is very
clear from paragraph II, sub-paragraph 1 quoted above.

On the issue of payment of surcharges and penalties, we partly agree that GOYU's
pitiful situation must be taken into account. We do not agree, however, that
payment of any amount as surcharges and penalties should altogether be deleted.
Even assuming that RCBC, through its responsible officers, herein petitioners Eli
Lao and Uy Chun Bing, may have relayed its assurance for assistance to GOYU
immediately after the occurrence of the fire, we cannot accept the lower courts'
finding that RCBC had thereby ipso facto effectively waived collection of any
additional interests, surcharges, and penalties from GOYU. Assurances of
assistance are one thing, but waiver of additional interests, surcharges, and
penalties is another.

Surcharges and penalties agreed to be paid by the debtor in case of default

partake of the nature of liquidated damages, covered by Section 4, Chapter 3, Title
XVIII of the Civil Code. Article 2227 thereof provides:

Art. 2227. Liquidated damages, whether intended as a indemnity or

penalty, shall be equitably reduced if they are iniquitous and
unconscionable.

In exercising this vested power to determine what is iniquitous and

unconscionable, the Court must consider the circumstances of each case. It should
be stressed that the Court will not make any sweeping ruling that surcharges and
penalties imposed by banks for non-payment of the loans extended by them are
generally iniquitous and unconscionable. What may be iniquitous and
unconscionable in one case, may be totally just and equitable in another. This
provision of law will have to be applied to the established facts of any given case.
Given the circumstance under which GOYU found itself after the occurrence of the
fire, the Court rules the surcharges rates ranging anywhere from 9% to 27%, plus
the penalty charges of 36%, to be definitely iniquitous and unconscionable. The
Court tempers these rates to 2% and 3%, respectively. Furthermore, in the light of
GOYU's offer to pay the amount of P116,301,992.60 to RCBC as March 1993 (See:
Exhibit "BB"), which RCBC refused, we find it more in keeping with justice and
equity for RCBC not to charge additional interest, surcharges, and penalties from
that time onward.
72
Given the factual milieu hereover, we rule that it was error to hold MICO liable in
damages for denying or withholding the proceeds of the insurance claim to GOYU.

Firstly, by virtue of the mortgage contracts as well as the endorsements of the

insurance policies, RCBC has the right to claim the insurance proceeds, in
substitution of the property lost in the fire. Having assigned its rights, GOYU lost its
standing as the beneficiary of the said insurance policies.

Secondly, for an insurance company to be held liable for unreasonably delaying

and withholding payment of insurance proceeds, the delay must be wanton,
oppressive, or malevolent (Zenith Insurance Corporation vs. CA. 185 SCRA 403
[1990]). It is generally agreed, however, that an insurer may in good faith and
honesty entertain a difference of opinion as to its liability. Accordingly, the
statutory penalty for vexatious refusal of an insurer to pay a claim should not be
inflicted unless the evidence and circumstances show that such refusal was willful
and without reasonable cause as the facts appear to a reasonable and prudent
man (Bufallo Ins. Co. vs. Bommarito [CCA 8th] 42 F [2d] 53, 70 ALR 1211; Phoenix
Ins. Co. vs. Clay, 101 Ga. 331, 28 SE 853, 65 Am St. Rep 307; Kusnetsky vs. Security
Ins. Co., 313 Mo. 143, 281 SW 47, 45 ALR 189). The case at bar does not show that
MICO wantonly and in bad faith delayed the release of the proceeds. The problem
in the determination of who is the actual beneficiary of the insurance policies,
aggravated by the claim of various creditors who wanted to partake of the
insurance proceeds, not to mention the importance of the endorsement to RCBC,
to our mind, and as now borne out by the outcome herein, justified MICO in
withholding payment to GOYU.

In adjudging RCBC liable in damages to GOYU, the Court of Appeals said that RCBC
cannot avail itself of two simultaneous remedies in enforcing the claim of an
unpaid creditor, one for specific performance and the other for foreclosure. In
doing so, said the appellate court, the second action is deemed barred, RCBC
having split a single cause of action (Rollo, pp. 195-199). The Court of Appeals was
too accommodating in giving due consideration to this argument of GOYU, for the
foreclosure suit is still pending appeal before the same Court of Appeals in CA G.R.
CV No. 46247, the case having been elevated by RCBC.

In finding that the foreclosure suit cannot prosper, the Fifteenth Division of the
Court of Appeals pre-empted the resolution of said foreclosure case which is not
before it. This is plain reversible error if not grave abuse of discretion.

As held in Peña vs. Court of Appeals (245 SCRA 691 [1995]):

It should have been enough, nonetheless, for the appellate court to

merely set aside the questioned ordered of the trial court for having
been issued by the latter with grave abuse of discretion. In likewise
73
 enjoining permanently herein petitioner "from entering in and
interfering with the use or occupation and enjoyment of petitioner's
(now private respondent) residential house and compound," the
appellate court in effect, precipitately resolved with finality the case for
injunction that was yet to be heard on the merits by the lower court.
Elevated to the appellate court, it might be stressed, were mere
incidents of the principal case still pending with the trial court.
In Municipality of Biñan, Laguna vs. Court of Appeals, 219 SCRA 69, we
ruled that the Court of Appeals would have "no jurisdiction in
a certiorari proceeding involving an incident in a case to rule on the
merits of the main case itself which was not on appeal before it.

(pp. 701-702.)

Anent the right of RCBC to intervene in Civil Case No. 1073, before the Zamboanga
Regional Trial Court, since it has been determined that RCBC has the right to the
insurance proceeds, the subject matter of intervention is rendered moot and
academic. Respondent Sebastian must, however, yield to the preferential right of
RCBC over the MICO insurance policies. It is basic and fundamental that the first
mortgagee has superior rights over junior mortgagees or attaching creditors
(Alpha Insurance & Surety Co. vs. Reyes, 106 SCRA 274 [1981]; Sun Life Assurance
Co. of Canada vs. Gonzales Diaz, 52 Phil. 271 [1928]).

WHEREFORE, the petitions are hereby GRANTED and the decision and resolution
of December 16, 1996 and April 3, 1997 in CA-G.R. CV No. 46162 are hereby
REVERSED and SET ASIDE, and a new one entered:

1. Dismissing the Complaint of private respondent GOYU in Civil Case

No. 93-65442 before Branch 3 of the Manila Trial Court for lack of
merit;

2. Ordering Malayan Insurance Company, Inc. to deliver to Rizal

Commercial Banking Corporation the proceeds of the insurance policies
in the amount of P51,862,390.94 (per report of adjuster Toplis &
Harding (Far East), Inc., Exhibits "2" and "2-1"), less the amount of
P50,505,594.60 (per O.R. No. 3649285);

3. Ordering the Clerk of Court to release the amount of P50,505,594.60

including the interests earned to Rizal Commercial Banking
Corporation;

4. Ordering Goyu & Sons, Inc. to pay its loan obligation with Rizal
Commercial Banking Corporation in the principal amount of
P107,246,887.90, with interest at the respective rates stipulated in
74
 each promissory note from January 21, 1993 until finality of this
judgment, and surcharges at 2% and penalties at 3% from January 21,
1993 to March 9, 1993, minus payments made by Malayan Insurance
Company, Inc. and the proceeds of the amount deposited with the trial
court and its earned interest. The total amount due RCBC at the time of
the finality of this judgment shall earn interest at the legal rate of 12%
in lieu of all other stipulated interests and charges until fully paid.

The petition of Rizal Commercial Banking Corporation against the respondent

Court in CA-GR CV 48376 is DISMISSED for being moot and academic in view of the
results herein arrived at. Respondent Sebastian's right as attaching creditor must
yield to the preferential rights of Rizal Commercial Banking Corporation over the
Malayan insurance policies as first mortgagee.

SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 132607 May 5, 1999

CEBU SHIPYARD AND ENGINEERING WORKS, INC., petitioner,

vs.
WILLIAM LINES, INC. and PRUDENTIAL GUARANTEE and ASSURANCE COMPANY,
INC., respondents.

PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court seeking a reversal of the decision of the Court of Appeal1 which affirmed the
decision of the trial court of origin finding the petitioner herein, Cebu Shipyard and
Engineering Works, Inc. (CSEW) negligent and liable for damages to the private
respondent, William Lines, Inc., and to the insurer, Prudential Guarantee
Assurance Company, Inc.

The antecedent facts that matter are as follows:

Cebu Shipyard and Engineering Works, Inc. (CSEW) is a domestic corporation

engaged in the business of dry-docking and repairing of marine vessels while the
private respondent, Prudential Guarantee and Assurance, Inc. (Prudential), also a
domestic corporation is in the non-life insurance business.
75
William Lines, Inc. (plaintiff below) is in the shipping business. It the owner of M/V
Manila City, a luxury passenger-cargo vessel, which caught fire and sank on
February 16, 1991. At the time of the unfortunate occurrence sued upon, subject
vessel was insured with Prudential for P45,000,000.00 pesos for hull and
machinery. The Hull Policy included an "Additional Perils (INCHMAREE)" Clause
covering loss of or damage to the vessel through the negligence of, among others,
ship repairmen. The Policy provided as follows:

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

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers

and/or Repairers are not an Assured hereunder.

xxx xxx xxx

provided such loss or damage has not resulted from want of due
diligence by the Assured, the Owners or Managers of the Vessel, of any
of them Masters, Officers, Crew or Pilots are not to be considered
Owners within the meaning of this Clause should they hold shares in
the Vessel. 2

Petitioner CSEW was also insured by Prudential for third party liability under a
Shiprepairer's Legal Liability Insurance Policy. The policy was for P10 million only,
under the limited liability clause, to wit:

7. Limit of Liability

The limit of liability under this insurance, in respect of any one accident
or series of accidents, arising out of one occurrence, shall be [P10
million], including liability for costs and expense which are either:

(a) incurred with the written consent of the underwriters hereon, or

(b) awarded against the Assured.3

On February 5, 1991, William Lines, Inc. brought its vessel, M/V Manila City, to the
Cebu Shipyard in Lapulapu City for annual dry-docking and repair.

On February 6, 1991, an arrival conference was held between representatives of

William Lines, Inc. and CSEW to discuss the work to be undertaken on the M/V
Manila City.

76
The contracts, denominated as Work Orders, were signed thereafter, with the
following stipulations:

10. The Contractor shall replace at its own work and at its own cost any
work or material which can be shown to be defective and which is
communicated in writing within one (1) month of redelivery of the
vessel or if the vessel was not in the Contractor's Possession, the
withdrawal of the Contractor's workmen, or at its option to pay a sum
equal to the cost of such replacement at its own works. These
conditions shall apply to any such replacements.

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

(a) The total liability of the Contractor to the Customer (over

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

(b) In no circumstance whatsoever shall the liability of the

Contractor or any Sub-Contractor include any sum in respect
of loss of profit or loss of use of the vessel or damages
consequential on such loss of use

xxx xxx xxx

20. The insurance on the vessel should be maintained by the customer

and/or owner of the vessel during the period the contract is in effect.4

While the M/V Manila City was undergoing dry-docking and repairs within the
premises of CSEW, the master, officers and crew of M/V Manila City stayed in the
vessel using their cabins as living quarters. Other employees hired by William Lines
to do repairs and maintenance work on the vessel were also present during the
dry-docking.

On February 16, 1991, after subject vessel was transferred to the docking quay, it
caught fire and sank, resulting to its eventual total loss.

On February 21, 1991, William Lines, Inc. filed a complaint for damages against
CSEW, alleging that the fire which broke out in M/V Manila City was caused by
CSEW's negligence and lack of care.
77
On July 15, 1991 was filed an Amended Complaint impleading Prudential as co-
plaintiff, after the latter had paid William Lines, Inc. the value of the hull and
machinery insurance on the M/V Manila City. As a result of such payment
Prudential was subrogated to the claim of P45 million, representing the value of
the said insurance it paid.

On June 10, 1994, the trial court a quo came out with a judgment against CSEW,
disposing as follows:

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and

against the defendant, ordering the latter.

1. To pay unto plaintiff Prudential Guarantee and Assurance Inc., the

subrogee, the amount of Forty-five Million (P45 million) Pesos, with
interest at the legal rate until full payment is made.

2. To pay unto plaintiff, William Lines, Inc., the amount of Fifty-six

Million Seven Hundred Fifteen Thousand (P56,715,000.00) Pesos
representing loss of income of M/V MANILA CITY, with interest at the
legal rate until full payment is made.

3. To pay unto plaintiff, William Lines, Inc. the amount of Eleven Million
(P11 million) as payment, in addition to what it received from the
insurance company to fully cover the injury or loss, in order to replace
the M/V MANILA CITY, with interest at the legal rate until full payment
is made;

4. To pay unto plaintiff, William Lines, Inc. the sum of Nine Hundred
Twenty-Seven Thousand Thirty-nine (P927,039.00) Pesos for the loss of
fuel and lub (sic) oil on board the vessel when she was completely
gutted by fire at defendant, Cebu Shipyard's quay, with interest at the
legal rate until full payment is made;

5. To pay unto plaintiff, William Lines, Inc. the sum of Three Million
Fifty-four Thousand Six Hundred Seventy-seven Pesos and Ninety-five
centavos (P3,054.677.95) as payment for the spare parts and materials
used in the M/V MANILA CITY during dry-docking with interest at the
legal rate until full payment is made;

6. To pay unto plaintiff William Lines, Inc., the sum of Five Hundred
Thousand (P500,000 00) Pesos in moral damages;

7. To pay unto plaintiff, William Lines, Inc. the amount of Ten Million
(P10,000.000.00) Pesos in attorney's fees; and to pay the costs of this
suit.
78
CSEW (defendant below) appealed the aforesaid decision to the Court of Appeals.
During the pendency of the appeal, CSEW and William Lines presented a "Joint
Motion for Partial Dismissal" with prejudice, on the basis of the amicable
settlement inked between Cebu Shipyard and William Lines only.

On July 31, 1996, the Court of Appeals ordered the partial dismissal of the case
insofar as CSEW and William Lines were concerned.

On September 3, 1997, the Court of Appeals affirmed the appealed decision of the
trial court, ruling thus:

WHEREFORE, the judgment of the lower court ordering the defendant,

Cebu Shipyard and Engineering Works, Inc. to pay the plaintiff
Prudential Guarantee and Assurance, Inc., the subrogee, the sum of
P45 Million, with interest at the legal rate until full payment is made, as
contained in the decision of Civil Case No. CEB-9935 is hereby
AFFIRMED.

With the denial of its motion for reconsideration by the Court of Appeal's
Resolution dated February 13, 1998, CSEW found its way to this court via the
present petition, contending that:

I. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING

THAT CSEW HAD "MANAGEMENT AND SUPERVISORY CONTROL" OF
THE M/V MANILA CITY AT THE TIME THE FIRE BROKE OUT.

II THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN

APPLYING THE DOCTRINE OF RES IPSA LOQUITUR AGAINST CSEW.

III THE COURT OF APPEALS RULING HOLDING CSEW NEGLIGENT AND

THEREBY LIABLE FOR THE LOSS OF THE M/V MANILA CITY IS BASED
FINDINGS OF FACT NOT SUPPORTED BY EVIDENCE.

IV THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN

RULING CSEW'S EXPERT EVIDENCE AS INADMISSIBLE OR OF NO
PROBATIVE VALUE.

V THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN

RULING THAT PRUDENTIAL HAS THE RIGHT OF SUBROGATION AGAINST
ITS OWN INSURED.

VI ASSUMING ARGUENDO THAT PRUDENTIAL HAS THE RIGHT OF

SUBROGATION AND THAT CSEW WAS NEGLIGENT IN THE
PERFORMANCE OF ITS OBLIGATIONS UNDER THE SHIPREPAIR
CONTRACTS. THE CONTRACTUAL PROVISIONS LIMITING CSEW'S
79
 LIABILITY FOR NEGLIGENCE TO A MAXIMUM OF P 1 MILLION IS NOT
VALID, CONTRARY TO THE APPLICABLE RULINGS OF THIS HONORABLE
COURT.

Petitioner's version of the events that led to the fire runs as follows:

On February 13, 1991, the CSEW completed the drydocking of M/V

Manila City at its grave dock. It was then transferred to the docking
quay of CSEW where the remaining repair to be done was the replating
of the top of Water Ballast Tank No. 12 (Tank Top No. 12) which was
subcontracted by CSEW to JNB General Services. Tank Top No. 12 was
at the rear section of the vessel, on level with the flooring of the crew
cabins located on the vessel's second deck.

At around seven o'clock in the morning of February 16, 1991, the JNB
workers trimmed and cleaned the tank framing which involved minor
hotworks (welding/cutting works). The said work was completed at
about 10:00 a.m. The JNB workers then proceeded to rig the steel
plates, after which they had their lunch break. The rigging was resumed
at 1:00 p.m.

While in the process of rigging the second steel plate, the JNB workers
noticed smoke coming from the passageway along the crew cabins.
When one of the workers, Mr. Casas, proceeded to the passageway to
ascertain the origin of the smoke, he noticed that smoke was gathering
on the ceiling of the passageway but did not see any fire as the crew
cabins on either side of the passageway were locked. He immediately
sought out the proprietor of JNB, Mr. Buenavista, and the Safety officer
CSEW, Mr. Aves, who sounded the fire alarm. CSEW's fire brigade
immediately responded as well as the other fire fighting units in Metro
Cebu. However, there were no WLI representative, officer or crew to
guide the firemen inside the vessel.

Despite the combined efforts of the firemen of the Lapulapu City Fire
Department, Mandaue Fire Cordova Fire Department, Emergency
Rescue Unit Foundation, and fire brigade of CSEW, the fire was not
controlled until 2:00 a.m., of the following day, February 17, 1991.

On the early morning of February 17, 1991, gusty winds rekindled the
flames on the vessel and fire again broke out. Then the huge amounts
of water pumped into the vessel, coupled with the strong current,
caused the vessel to tilt until it capsized and sank.

80
 When M/V Manila City capsized, steel and angle bars were noticed to
have been newly welded along the port side of the hull of the vessel, at
the level of the crew cabins. William Lines did not previously apply for a
permit to do hotworks on the said portion of the ship as it should have
done pursuant to its work order with CSEW.5

Respondent Prudential, on the other hand, theorized that the fire broke out in the
following manner:

At around eleven o'clock in the morning of February 16, 1991, the Chief
Mate of M/V Manila City was inspecting the various works being done
by CSEW on the vessel, when he saw that some workers of CSEW were
cropping out steel plates Tank Top No. 12 using acetylene, oxygen and
welding torch. He also observed that the rubber insulation wire coming
out of the air-conditioning unit was already burning, prompting him to
scold the workers.

At 2:45 in the afternoon of the same day, witnesses saw smoke coming
from Tank No. 12. The vessel's reeferman reported such occurence to
the Chief Mate who immediately assembled the crew members to put
out the fire. When it was too hot for them to stay on board and seeing
that the fire cannot be controlled, the vessel's crew were forced to
withdraw from CSEW's docking quay.

In the morning of February 17, 1991, M/V Manila City sank. As the
vessel was insured with Prudential Guarantee, William Lines filed a
claim for constructive loss, and after a thorough investigation of the
surrounding circumstances of the tragedy, Prudential Guaranteed
found the said insurance claim to be meritorious and issued a check in
favor of William Lines in the amount of P 45 million pesos representing
the total value of M/V Manila City's hull and machinery insurance.6

The petition is unmeritorious.

Petitioner CSEW faults the Court of Appeals for adjudging it negligent and liable for
damages for the respondents, William Lines, Inc., and Prudential for the loss of
M/V Manila City. It is petitioner's submission that the finding of negligence by the
Court of Appeals is not supported by the evidence on record, and contrary to what
the Court of Appeals found, petitioner did not have management and control over
M/V Manila City. Although it was brought to the premises of CSEW for annual
repair, William Lines, Inc. retained control over the vessel as the ship captain
remained in command and the ship's crew were still present. While it imposed
certain rules and regulations on William Lines, it was in the exercise of due
diligence and not an indication of CSEW's exclusive control over subject vessel.
81
Thus, CSEW maintains that it did not have exclusive control over the M/V Manila
City and the trial court and the Court of Appeals erred in applying the doctrine
of res ipsa loquitur.

Time and again, this Court had occasion to reiterate the well-established rule that
factual findings by the Court of Appeals are conclusive on the parties and are not
reviewable by this Court. They are entitled to great weight and respect, even
finality, especially when, as in this case, the Court of Appeals affirmed the factual
findings arrived at by the trial court. 7 When supported by sufficient evidence,
findings of fact by the Court of Appeals affirming those of the trial court, are not to
be disturbed on appeal. The rationale behind this doctrine is that review of the
findings of fact of the Court of Appeals is not a function that the Supreme Court
normally undertakes.8

Here, the Court of Appeals and the Cebu Regional Trial Court of origin are agreed
that the fire which caused the total loss of subject M/V Manila City was due to the
negligence of the employees and workers of CSEW. Both courts found that the
M/V Manila City was under the custody and control of petitioner CSEW, when the
ill-fated vessel caught fire. The decisions of both the lower court and the Court of
Appeals set forth clearly the evidence sustaining their finding of actionable
negligence on the part of CSEW. This factual finding is conclusive on the parties.
The court discerns no basis for disturbing such finding firmly anchored on enough
evidence. As held in the case of Roblett Industrial Construction Corporation
vs. Court of Appeals, "in the absence of any showing that the trial court failed to
appreciate facts and circumstances of weight and substance that would have
altered its conclusion, no compelling reason exists for the Court to impinge upon
matters more appropriately within its province.9

Furthermore, in petitions for review on certiorari, only questions of law may be

put into issue. Questions of fact cannot be entertained. The finding of negligence
by the Court of Appeals is a question which this Court cannot look into as it would
entail going into factual matters on which the finding of negligence was based.
Such an approach cannot be allowed by this Court in the absence of clear showing
that the case falls under any of the exceptions 10 to the well-established principle.

The finding by the trial court and the Court of Appeals that M/V Manila City caught
fire and sank by reason of the negligence of the workers of CSEW, when the said
vessel was under the exclusive custody and control of CSEW is accordingly upheld.
Under the circumstances of the case, the doctrine of res ipsa loquitur applies. For
the doctrine of res ipsa loquitur to apply to a given situation, the following
conditions must concur (1) the accident was of a kind which does not ordinarily
occur unless someone is negligent; and (2) that the instrumentality or agency
which caused the injury was under the exclusive control of the person charged
with negligence.
82
The facts and evidence on record reveal the concurrence of said conditions in the
case under scrutiny. First, the fire that occurred and consumed M/V Manila City
would not have happened in the ordinary course of things if reasonable care and
diligence had been exercised. In other words, some negligence must have
occurred. Second, the agency charged with negligence, as found by the trial court
and the Court of Appeals and as shown by the records, is the herein petitioner,
Cebu Shipyard and Engineering Works, Inc., which had control over subject vessel
when it was docketed for annual repairs. So also, as found by the regional trial
court, "other responsible causes, including the conduct of the plaintiff, and third
persons, are sufficiently eliminated by the evidence. 11

What is more, in the present case the trial court found direct evidence to prove
that the workers and/or employees of CSEW were remiss in their duty of
exercising due diligence in the care of subject vessel. The direct evidence
substantiates the conclusion that CSEW was really negligent. Thus, even without
applying the doctrine of res ipsa loquitur, in light of the direct evidence on record,
the ineluctable conclusion is that the petitioner, Cebu Shipyard and Engineering
Works, Inc., was negligent and consequently liable for damages to the respondent,
William Lines, Inc.

Neither is there tenability in the contention of petitioner that the Court of Appeals
erroneously ruled on the inadmissibility of the expert testimonies it (petitioner)
introduced on the probable cause and origin of the fire. Petitioner maintains that
the Court of Appeals erred in disregarding the testimonies of the fire experts,
Messrs. David Grey and Gregory Michael Southeard, who testified on the probable
origin of the fire in M/V Manila City. Petitioner avers that since the said fire
experts were one in their opinion that the fire did not originate in the area of Tank
Top No. 12 where the JNB workers were doing hotworks but on the crew
accommodation cabins on the portside No. 2 deck, the trial court and the Court of
Appeals should have given weight to such finding based on the testimonies of fire
experts; petitioner argues.

But courts are not bound by the testimonies of expert witnesses. Although they
may have probative value, reception in evidence of expert testimonies is within
the discretion of the court. Section 49, Rule 130 of the Revised Rules of Court,
provides:

Sec. 49. Opinion of expert witness. — The opinion of a witness on a

matter requiring special knowledge, skill, experience or training which
he is shown to possess, may be received in evidence.

The word "may" signifies that the use of opinion of an expert witness as
evidence is a prerogative of the courts. It is never mandatory for judges to
give substantial weight to expert testimonies. If from the facts and evidence
83
 on record, a conclusion is readily ascertainable, there is no need for the
judge to resort to expert opinion evidence. In the case under consideration,
the testimonies of the fire experts were not the only available evidence on
the probable cause and origin of the fire. There were witnesses who were
actually on board the vessel when the fire occurred. Between the
testimonies of the fire experts who merely based their findings and opinions
on interviews and the testimonies of those present during the fire, the latter
are of more probative value. Verily, the trial court and the Court of Appeals
did not err in giving more weight to said testimonies.

On the issue of subrogation, petitioner contends that Prudential is not entitled to

be subrogated to the rights of William Lines, Inc., theorizing that (1) the fire which
gutted M/V Manila City was an excluded risk and (2) it is a co-assured under the
Marine Hull Insurance Policy.

It is petitioner's submission that the loss of M/V Manila City or damage thereto is
expressly excluded from the coverage of the insurance because the same resulted
from "want of due diligence by the Assured, Owners or Managers" which is not
included in the risks insured against. Again, this theory of petitioner is bereft of
any factual or legal basis. It proceeds from a wrong premise that the fire which
gutted subject vessel was caused by the negligence of the employees of William
Lines, Inc. To repeat, the issue of who between the parties was negligent has
already been resolved against Cebu Shipyard and Engineering Works, Inc. Upon
proof of payment by Prudential to William Lines, Inc. the former was subrogated
to the right of the latter to indemnification from CSEW. As aptly ruled by the Court
of Appeals, the law on the manner is succinct and clear, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of the
insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the
injury or loss the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury. 12

Thus, when Prudential, after due verification of the merit and validity of the
insurance claim of William Lines, Inc., paid the latter the total amount covered by
its insurance policy, it was subrogated to the right of the latter to recover the
insured loss from the liable party, CSEW.

Petitioner theorizes further that there can be no right of subrogation as it is

deemed a co-assured under the subject insurance policy. To buttress its stance

84
that it is a co-assured, petitioner placed reliance on Clause 20 of the Work Order
which states:

20 The insurance on the vessel should be maintained by the customer

and/or owner of the vessel during the period the contract is in effect. 13

According to petitioner, under the aforecited clause, William Lines, Inc.,

agreed to assume the risk of loss of the vessel while under dry-dock or repair
and to such extent, it is benefited and effectively constituted as a co-assured
under the policy.

This theory of petitioner is devoid of sustainable merit. Clause 20 of the Work

Order in question is clear in the sense that it requires William Lines to maintain
insurance on the vessel during the period of dry-docking or repair. Concededly,
such a stipulation works to the benefit of CSEW as the ship repairer. However, the
fact that CSEW benefits from the said stipulation does not automatically make it as
a co-assured of William Lines. The intention of the parties to make each other a co-
assured under an insurance policy is to be gleaned principally from the insurance
contract or policy itself and not from any other contract or agreement because the
insurance policy denominates the assured and the beneficiaries of the insurance.
The hull and machinery insurance procured by William Lines, Inc. from Prudential
named only "William Lines, Inc." as the assured. There was no manifestation of any
intention of William Lines, Inc. to constitute CSEW as a co-assured under subject
policy. It is axiomatic that when the terms of a contract are clear its stipulations
control. 14 Thus, when the insurance policy involved named only William Lines, Inc.
as the assured thereunder, the claim of CSEW that it is a co-assured is unfounded.

Then too, in the Additional Perils Clause of the same Marine Insurance Policy, it is
provided that:

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

xxx xxx xxx

Negligence of Charterers and/or Repairers, provided such Charterers

and/or Repairers are not an Assured hereunder 15 (emphasis supplied).

As correctly pointed out by respondent Prudential, if CSEW were deemed a co-

assured under the policy, it would nullify any claim of William Lines, Inc. from
Prudential for any loss or damage caused by the negligence of CSEW. Certainly, no
shipowner would agree to make a shiprepairer a co-assured under such insurance
policy; otherwise, any claim for loss or damage under the policy would be
invalidated. Such result could not have been intended by William Lines, Inc.

85
Finally, CSEW argues that even assuming that it was negligent and therefore liable
to William Lines Inc., by stipulation in the Contract or Work Order its liability is
limited to One Million (P1,000,000.00) Pesos only, and Prudential a mere subrogee
of William Lines, Inc., should only be entitled to collect the sum stipulated in the
said contract.

Although in this jurisdiction, contracts of adhesion have been consistently upheld

as valid per se; as binding as an ordinary contract, the Court recognizes instances
when reliance on such contracts cannot be favored especially where the facts and
circumstances warrant that subject stipulations be disregarded. 16 Thus, in ruling
on the validity and applicability of the stipulation limiting the liability of CSEW for
negligence to One Million (P1,000,000.00) Pesos only, the facts and
circumstances vis-a-vis the nature of the provision sought to be enforced should
be considered, bearing in mind the principles of equity and fair play.

It is worthy to note that M/V Manila City was insured with Prudential for Forty Five
Million (P45,000,000.00) Pesos. To determine the validity and sustainability of the
claim of William Lines, Inc., for a total loss, Prudential conducted its own inquiry.
Upon thorough investigation by its hull surveyor, M/V Manila City was found to be
beyond economical salvage and repair. 17 The evaluation of the average adjuster
also reported a constructive total loss. 18 The said claim of William Lines, Inc., was
then found to be valid and compensable such that Prudential paid the latter the
total value of its insurance claim. Furthermore, it was ascertained that the
replacement cost of the vessel (the price of a vessel similar to M/V Manila City),
amounts to Fifty Million (P 50,000,000.00) Pesos.19

Considering the aforestated circumstances, let alone the fact that negligence on
the part of petitioner has been sufficiently proven, it would indeed be unfair and
inequitable to limit the liability of petitioner to One Million Pesos only. As aptly
held by the trial court, "it is rather unconscionable if not overstrained." To allow
CSEW to limit its liability to One Million Pesos notwithstanding the fact that the
total loss suffered by the assured and paid for by Prudential amounted to Forty
Five Million (P45,000,000.00) Pesos would sanction the exercise of a degree of
diligence short of what is ordinarily required because, then, it would not be
difficult for petitioner to escape liability by the simple expedient of paying an
amount very much lower than the actual damage or loss suffered by William Lines,
Inc.

WHEREFORE, for want of merit, the petition is hereby DENIED and the decision,
dated September 3, 1997, and Resolution, dated February 13, 1998, of the Court
of Appeals AFFIRMED. No pronouncement as to costs.

SO ORDERED.

86
 FIRST DIVISION

[G.R. No. 105135. June 22, 1995.]

SUNLIFE ASSURANCE COMPANY OF CANADA, Petitioner, v. The Hon. COURT OF

APPEALS and Spouses ROLANDO and BERNARDA BACANI, Respondents.

Quasha, Asperilla, Ancheta, Pena & Nolasco for Petitioner.

Edilberio Balce for Private Respondents.

SYLLABUS
1. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF LOWER COURTS; RULE AND
EXCEPTION. — The rule that factual findings of the lower court and the appellate
court are binding on this Court is not absolute and admits of exceptions, such as
when the judgment is based on a misappreciation of the facts.

2. COMMERCIAL LAW; INSURANCE; CONCEALMENT; DEFINED. — Section 26 of The

Insurance Code is explicit in requiring a party to a contract of insurance to
communicate to the other, in good faith, all facts within his knowledge which are
material to the contract and as to which he makes no warranty, and which the
other has no means of ascertaining. Said Section provides: "A neglect to
communicate that which a party knows and ought to communicate. is called
concealment."

3. ID.; ID.; ID.; TEST OF MATERIALITY; RULE; APPLICATION IN CASE AT BAR. —

Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due,
in forming his estimate of the disadvantages of the proposed contract or in making
his inquiries (The Insurance Code, Sec. 31). The terms of the contract are clear. The
insured is specifically required to disclose to the insurer matters relating to his
health. The information which the insured failed to disclose were material and
relevant to the approval and issuance of the insurance policy. The matters
concealed would have definitely affected petitioner’s action on his application,
either by approving it with the corresponding adjustment for a higher premium or
rejecting the same. Moreover, a disclosure may have warranted a medical
examination of the insured by petitioner in order for it to reasonably assess the
risk involved in accepting the application. In Vda. de Canilang v. Court of Appeals,
223 SCRA 443 (1993), we held that materiality of the information withheld does
not depend on the state of mind of the insured. Neither does it depend on the
actual or physical events which ensue. Thus, "good faith" is no defense in
concealment. The insured’s failure to disclose the fact that he was hospitalized for
87
two weeks prior to filing his application for insurance, raises grave doubts about
his bonafides. It appears that such concealment was deliberate on his part.

4. ID.; ID.; ID.; RULE IN CASE THERE IS A WAIVER OF MEDICAL EXAMINATION. —

The argument, that petitioner’s waiver of the medical examination of the insured
debunks the materiality of the facts concealed, is untenable. We reiterate our
ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316
(1963), that "x x x the waiver of a medical examination [in a non-medical insurance
contract renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes
into consideration in deciding whether to issue the policy or not x x x." Moreover,
such argument of private respondents would make Section 27 of the Insurance
Code, which allows the injured party to rescind a contract of insurance where
there is concealment, ineffective.

5. ID.; ID.; ID.; RULE IN CASE THE FACTS CONCEALED HAD NO BEARING TO THE
CAUSE OF DEATH OF THE INSURED. — Anent the finding that the facts concealed
had no bearing to the cause of death of the insured, it is well settled that the
insured need not die of the disease he had failed to disclose to the insurer. It is
sufficient that his non-disclosure misled the insurer in forming his estimates of the
risks of the proposed insurance policy or in making inquiries.

DECISION

QUIASON, J.:

This is a petition for review on certiorari under Rule 45 of the Revised Rules of
Court to reverse and set aside the Decision dated February 21, 1992 of the Court
of Appeals in CA-G.R. CV No. 29068, and its Resolution dated April 22, 1992,
denying reconsideration thereof.

We grant the petition.

I

On April 15, 1986, Robert John B. Bacani procured a life insurance contract for
himself from petitioner. He was issued Policy No. 3-903-766-X valued P100,000.00,
with double indemnity in case of accidental death. The designated beneficiary was
his mother, respondent Bernarda Bacani.

On June 26, 1987, the insured died in a plane crash. Respondent Bernarda Bacani
88
filed a claim with petitioner, seeking the benefits of the insurance policy taken by
her son. Petitioner conducted an investigation and its findings prompted it to
reject the claim.

In its letter, petitioner informed respondent Bernarda Bacani, that the insured did
not disclosed material facts relevant to the issuance of the policy, thus rendering
the contract of insurance voidable. A check representing the total premiums paid
in the amount of P10,172.00 was attached to said letter.

Petitioner claimed that the insured gave false statements in his application when
he answered the following questions:

"5. Within the past 5 years have you: 1aw library

a) consulted any doctor or other health practitioner?

b) submitted to:chanrob1es virtual 1aw library

ECG?

X-rays?

blood tests?

other tests?

c) attended or been admitted to any hospital or other medical facility?

"6. Have you ever had or sought advice for: 1aw library
x x x

b) urine, kidney or bladder disorder?"

(Rollo, p. 53).

The deceased answered questions No. 5(a) in the affirmative but limited his
answer to a consultation with a certain Dr. Reinaldo D. Raymundo of the Chinese
General Hospital on February 1986, for cough and flu complications. The other
questions were answered in the negative (Rollo, p. 53).

Petitioner discovered that two weeks prior to his application for insurance, the
89
insured was examined and confined at the Lung Center of the Philippines, where
he was diagnosed for renal failure. During his confinement, the deceased was
subjected to urinalysis, ultra-sonography and hematology tests.

On November 17, 1988, respondent Bernarda Bacani and her husband,

respondent Rolando Bacani, filed an action for specific performance against
petitioner with the Regional Trial Court, Branch 191, Valenzuela, Metro Manila.
Petitioner filed its answer with counterclaim and a list off exhibits consisting of
medical records furnished by the Lung Center of the Philippines.

On January, 14, 1990, private respondents filed a "Proposed Stipulation with

Prayer for Summary Judgment" where they manifested that they "have no
evidence to refute the documentary evidence of concealment/misrepresentation
by the decedent of his health condition" (Rollo, p. 62).

Petitioner filed its Request for Admissions relative to the authenticity and due
execution of several documents as well as allegations regarding the health of the
insured. Private respondents failed to oppose said request or reply thereto,
thereby rendering an admission of the matters alleged.

Petitioner then moved for a summary judgment and the trial court decided in
favor of private respondents. The dispositive portion of the decision is reproduced
as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against
the defendants, condemning the latter to pay the former the amount of One
Hundred Thousand Pesos (P100,000.00) the face value of insured’s Insurance
Policy No. 3903766, and the Accidental Death Benefit in the amount of One
Hundred Thousand Pesos (P100,000.00) and further sum of P5,000.00 in the
concept of reasonable attorney’s fees and the costs of the suit.

"Defendant’s counterclaim is hereby Dismissed" (Rollo, pp. 43-44).

In the ruling of private respondents, the trial court concluded that the facts
concealed by the insured were made in good faith and under the belief that they
need not be disclosed. Moreover, it held that the health history of the insured was
immaterial since the insurance policy was "non-medical."virtua1aw library

Petitioner appealed to the Court of Appeals, which affirmed the decision of the
trial court. The appellate court ruled that petitioner cannot avoid its obligation by
claiming concealment because the cause of death was unrelated to the facts
concealed by the insured. It also sustained the finding of the trial court that the
matters relating to the health history of the insured were irrelevant since the

90
petitioner waived the medical examination prior to the approval and issuance of
the insurance policy. Moreover, the appellate court agreed with the trial court that
the policy was "non-medical" (Rollo, pp. 4-5).

Petitioner’s motion for reconsideration was denied, hence, this petition.

II
We reverse the decision of the Court of Appeals.

The rule that factual findings of the lower court and the appellate court are
binding on this Court is not absolute and admits of exceptions, such as when the
judgment is based on a misappreciation of the facts (Geronimo v. Court of
Appeals, 224 SCRA 494 [1993]).

In weighing the evidence presented, the trial court concluded that indeed there
was concealment and misrepresentation, however, the same was made in "good
faith" and the facts concealed or misrepresented were irrelevant since the policy
was "non-medical." We disagree.

Section 26 of the Insurance Code is explicit in requiring a party to a contract of

insurance to communicate to the other, in good faith, all facts within his
knowledge which are material to the contract and as to which he makes no
warranty, and which the other has no means of ascertaining. Said Section
provides:

"A neglect to communicate that which a party knows and ought to communicate,
is called concealment." library

Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due,
in forming his estimate of the disadvantages of the proposed contract or in making
his inquiries (The Insurance Code, Sec 31).

The terms of the contract are clear. The insured is specifically required to disclose
to the insurer matters relating to his health.

The information which the insured failed to disclose were material and relevant to
the approval and the issuance of the insurance policy. The matters concealed
would have definitely affected petitioner’s action on his application, either by
approving it with the corresponding adjustment for a higher premium or rejecting
the same. Moreover, a disclosure may have warranted a medical examination of
the insured by petitioner in order for it to reasonably assess the risk involved in
accepting the application.
91
In Vda. de Canilang v. Court of Appeals, 223 SCRA 443 (1993), we held that
materiality of the information withheld does not depend on the state of mind of
the insured. Neither does it depend on the actual or physical events which ensue.

Thus, "good faith" is no defense in concealment. The insured’s failure to disclose

the fact that he was hospitalized for two weeks prior to filing his application for
insurance, raises grave doubts about his bonafides. It appears that such
concealment was deliberate on his part.

The argument, that petitioner’s waiver of the medical examination of the insured
debunks the materiality of the facts concealed, is untenable. We reiterate our
ruling in Saturnino v. Philippine American Life Insurance Company, 7 SCRA 316
(1963), that." . . the waiver of a medical examination [in a non-medical insurance
contract] renders even more material the information required of the applicant
concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes
into consideration in deciding whether to issue the policy or not . . . ."cralaw
virtua1aw library

Moreover, such argument of private respondents would make Section 27 of the

Insurance Code, which allows the injured party to rescind a contract of insurance
where there is concealment, ineffective (See Vda de Canilang v. Court of Appeals,
supra).

Anent the finding that the facts concealed had no bearing to the cause of death of
the insured, it is well settled that the insured need not die of the disease he had
failed to disclose to the insurer. It is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed insurance policy or in
making inquiries (Henson v. The Philippine American Life Insurance Co., 56 O.G.
No. 48 [1960]).

We, therefore, rule that petitioner properly exercised its right to rescind the
contract of insurance by reason of the concealment employed by the insured. It
must be emphasized that rescission was exercised within the two-year
contestability period as recognized in Section 48 of The Insurance Code.

WHEREFORE, the petition is GRANTED and the Decision of the Court of Appeals is
REVERSED and SET ASIDE.

SO ORDERED.

92
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 94149 May 5, 1992

AMERICAN HOME ASSURANCE, COMPANY, petitioner,

vs.
THE COURT OF APPEALS and NATIONAL MARINE CORPORATION and/or
NATIONAL MARINE CORPORATION (Manila), respondents.

PARAS, J.:

This is a petition for review on certiorari which seeks to annul and set aside the (a)
decision 1 dated May 30, 1990 of the Court of Appeals in C.A. G.R. SP. No. 20043
entitled "American Home Assurance Company v. Hon. Domingo D. Panis, Judge of
the Regional Trial Court of Manila, Branch 41 and National Marine Corporation
and/or National Marine Corporation (Manila)", dismissing petitioner's petition
for certiorari, and (b) resolution 2 dated June 29, 1990 of the Court of Appeals
denying petitioner's motion for reconsideration.

The undisputed facts of the case are follows:

Both petitioner American Home Assurance Co. and the respondent National
Marine Corporation are foreign corporations licensed to do business in the
Philippines, the former through its branch. The American Home Assurance
Company (Philippines), Inc. and the latter through its branch. The National Marine
Corporation (Manila) (Rollo, p. 20, Annex L, p.1).

That on or about June 19, 1988, Cheng Hwa Pulp Corporation shipped 5,000 bales
(1,000 ADMT) of bleached kraft pulp from Haulien, Taiwan on board "SS
Kaunlaran", which is owned and operated by herein respondent National Marine
Corporation with Registration No. PID-224. The said shipment was consigned to
Mayleen Paper, Inc. of Manila, which insured the shipment with herein petitioner
American Home Assurance Co. as evidenced by Bill of Lading No. HLMN-01.

On June 22, 1988, the shipment arrived in Manila and was discharged into the
custody of the Marina Port Services, Inc., for eventual delivery to the consignee-
assured. However, upon delivery of the shipment to Mayleen Paper, Inc., it was

93
found that 122 bales had either been damaged or lost. The loss was calculated to
be 4,360 kilograms with an estimated value of P61,263.41.

Mayleen Paper, Inc. then duly demanded indemnification from respondent

National Marine Corporation for the aforesaid damages/losses in the shipment
but, for apparently no justifiable reason, said demand was not heeded (Petition, p.
4).

As the shipment was insured with petitioner in the amount of US$837,500.00,

Mayleen Paper, Inc. sought recovery from the former. Upon demand and
submission of proper documentation, American Home Assurance paid Mayleen
Paper, Inc. the adjusted amount of P31,506.75 for the damages/losses suffered by
the shipment, hence, the former was subrogated to the rights and interests on
Mayleen Paper, Inc.

On June 6, 1989, the petitioner, as subrogee, then brought suit against respondent
for the recovery of the amount of P31.506.75 and 25% of the total amount due as
attorney's fees, by filing a complaint for recovery of sum of money (Petition, p. 4).

Respondent, National Marine Corporation, filed a motion to dismiss dated August

7, 1989 stating that American Home Assurance Company had no cause of action
based on Article 848 of the Code of Commerce which provides "that claims for
averages shall not be admitted if they do not exceed 5% of the interest which the
claimant may have in the vessel or in the cargo if it be gross average and 1% of the
goods damaged if particular average, deducting in both cases the expenses of
appraisal, unless there is an agreement to the contrary." It contended that based
on the allegations of the complaint, the loss sustained in the case was P35,506.75
which is only .18% of P17,420,000.00, the total value of the cargo.

On the other hand, petitioner countered that Article 848 does not apply as it refers
to averages and that a particular average presupposes that the loss or damages is
due to an inherent defect of the goods, an accident of the sea, or a force
majeure or the negligence of the crew of the carrier, while claims for damages due
to the negligence of the common carrier are governed by the Civil Code provisions
on Common Carriers.

In its order dated November 23, 1989, the Regional Trial Court sustained private
respondent's contention. In part it stated:

Before the Court for resolution is a motion for reconsideration filed by

defendant through counsel dated October 6, 1989.

The record shows that last August 8, 1989, defendant through counsel
filed a motion to dismiss plaintiff's complaint.

94
Resolving the said motion last September 18, 1989, the court ruled to
defer resolution thereof until after trial on the merits. In the motion
now under consideration, defendant prays for the reconsideration of
the order of September 18, 1989 and in lieu thereof, another order be
entered dismissing plaintiff's complaint.

There appears to be good reasons for the court to take a second look at
the issues raised by the defendant.

xxx xxx xxx

It is not disputed defendants that the loss suffered by the shipment is

only .18% or less that 1% of the interest of the consignee on the cargo
Invoking the provision of the Article 848 of the Code of Commerce
which reads:

Claims for average shall not be admitted if they do not

exceed five percent of the interest which the claimant may
have in the vessels or cargo if it is gross average, and one
percent of the goods damaged if particular
average, deducting in both cases the expenses of appraisal,
unless there is an agreement to the contrary. (Emphasis
supplied)

defendant claims that plaintiff is barred from suing for recovery.

Decisive in this case in whether the loss suffered by the cargo in

question is a "particular average."

Particular average, is a loss happening to the ship, freight, or

cargo which is not be (sic) shared by contributing among all
those interested, but must be borne by the owner of the
subject to which it occurs. (Black's Law Dictionary, Revised
Fourth Edition, p. 172, citing Bargett v. Insurance Co. 3
Bosw. [N.Y.] 395).

as distinguished from general average which

is a contribution by the several interests engaged in the

maritime venture to make good the loss of one of them for
the voluntary sacrifice of a part of the ship or cargo to save
the residue of the property and the lives of those on board,
or for extraordinary expenses necessarily incurred for the
common benefit and safety of all (Ibid., citing California

95
 Canneries Co. v. Canton Ins. Office 25 Cal. App. 303, 143 p.
549-553).

From the foregoing definition, it is clear that the damage on the cargo
in question, is in the nature of the "particular average." Since the loss is
less than 1% to the value of the cargo and there appears to be no
allegations as to any agreement defendants and the consignee of the
goods to the contrary, by express provision of the law, plaintiff is
barred from suing for recovery.

WHEREOF, plaintiff's complaint is hereby dismissed for lack of cause of

action. (Rollo, p. 27; Annex A, pp. 3-4).

The petitioner then filed a motion for reconsideration of the order of dismissal but
same was denied by the court in its order dated January 26, 1990 (supra).

Instead of filing an appeal from the order of the court a quo dismissing the
complaint for recovery of a sum of money, American Home Assurance Company
filed a petition for certiorari with the Court of Appeals to set aside the two orders
or respondent judge in said court (Rollo, p. 25).

But the Court of Appeals in its decision dated May 30, 1990, dismissed the petition
as constituting plain errors of law and not grave abuse of discretion correctible
by certiorari (a Special Civil Action). If at all, respondent court ruled that there are
errors of judgment subject to correction by certiorari as a mode of appeal but the
appeal is to the Supreme Court under Section 17 of the Judiciary Act of 1948 as
amended by Republic Act No. 5440. Otherwise stated, respondent Court opined
that the proper remedy is a petition for review on certiorari with the Supreme
Court on pure questions of law (Rollo, p. 30).

Hence, this petition.

In a resolution dated December 10, 1990, this Court gave due course to the
petition and required both parties to file their respective memoranda (Rollo, p.
58).

The procedural issue in this case is whether or not certiorari was the proper
remedy in the case before the Court of Appeals.

The Court of Appeals ruled that appeal is the proper remedy, for aside from the
fact that the two orders dismissing the complaint for lack of cause of action are
final orders within the meaning of Rule 41, Section 2 of the Rules of Court, subject
petition raised questions which if at all, constituting grave abuse of discretion
correctible by certiorari.

96
Evidently, the Court of Appeals did not err in dismissing the petition
for certiorari for as ruled by this Court, an order of dismissal whether right or
wrong is a final order, hence, a proper subject of appeal, not certiorari (Marahay v.
Melicor, 181 SCRA 811 (1990]). However, where the fact remains that respondent
Court of Appeals obviously in the broader interests of justice, nevertheless
proceeded to decide the petition for certiorari and ruled on specific points raised
therein in a manner akin to what would have been done on assignments of error in
a regular appeal, the petition therein was therefore disposed of on the merits and
not on a dismissal due to erroneous choice of remedies or technicalities (Cruz v.
I.A.C., 169 SCRA 14 (1989]). Hence, a review of the decision of the Court of Appeals
on the merits against the petitioner in this case is in order.

On the main controversy, the pivotal issue to be resolved is the application of the
law on averages (Articles 806, 809 and 848 of the Code of Commerce).

Petitioner avers that respondent court failed to consider that respondent National
Marine Corporation being a common carrier, in conducting its business is
regulated by the Civil Code primarily and suppletorily by the Code of Commerce;
and that respondent court refused to consider the Bill of Lading as the law
governing the parties.

Private respondent countered that in all matters not covered by the Civil Code, the
rights and obligations of the parties shall be governed by the Code of Commerce
and by special laws as provided for in Article 1766 of the Civil Code; that Article
806, 809 and 848 of the Code of Commerce should be applied suppletorily as they
provide for the extent of the common carriers' liability.

This issue has been resolved by this Court in National Development Co. v. C.A. (164
SCRA 593 [1988]; citing Eastern Shipping Lines, Inc. v. I.A.C., 150 SCRA 469, 470
[1987] where it was held that "the law of the country to which the goods are to be
transported persons the liability of the common carrier in case of their loss,
destruction or deterioration." (Article 1753, Civil Code). Thus, for cargoes
transported to the Philippines as in the case at bar, the liability of the carrier is
governed primarily by the Civil Code and in all matters not regulated by said Code,
the rights and obligations of common carrier shall be governed by the Code of
Commerce and by special laws (Article 1766, Civil Code).

Corollary thereto, the Court held further that under Article 1733 of the Civil Code,
common carriers from the nature of their business and for reasons of public policy
are bound to observe extraordinary diligence in the vigilance over the goods and
for the safety of passengers transported by them according to all circumstances of
each case. Thus, under Article 1735 of the same Code, in all cases other than those
mentioned in Article 1734 thereof, the common carrier shall be presumed to have

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been at fault or to have acted negligently, unless it proves that it has observed the
extraordinary diligence required by law (Ibid., p. 595).

But more importantly, the Court ruled that common carriers cannot limit their
liability for injury or loss of goods where such injury or loss was caused by its own
negligence. Otherwise stated, the law on averages under the Code of Commerce
cannot be applied in determining liability where there is negligence (Ibid., p. 606).

Under the foregoing principle and in line with the Civil Code's mandatory
requirement of extraordinary diligence on common carriers in the car care of
goods placed in their stead, it is but reasonable to conclude that the issue of
negligence must first be addressed before the proper provisions of the Code of
Commerce on the extent of liability may be applied.

The records show that upon delivery of the shipment in question of Mayleen's
warehouse in Manila, 122 bales were found to be damaged/lost with straps cut or
loose, calculated by the so-called "percentage method" at 4,360 kilograms and
amounting to P61,263.41 (Rollo, p. 68). Instead of presenting proof of the exercise
of extraordinary diligence as required by law, National Marine Corporation (NMC)
filed its Motion to Dismiss dated August 7, 1989, hypothetically admitting the truth
of the facts alleged in the complaint to the effect that the loss or damage to the
122 bales was due to the negligence or fault of NMC (Rollo, p. 179). As ruled by
this Court, the filing of a motion to dismiss on the ground of lack of cause of action
carries with it the admission of the material facts pleaded in the complaint
(Sunbeam Convenience Foods, Inc. v. C.A., 181 SCRA 443 [1990]). Such being the
case, it is evident that the Code of Commerce provisions on averages cannot apply.

On the other hand, Article 1734 of the Civil Code provides that common carriers
are responsible for loss, destruction or deterioration of the goods, unless due to
any of the causes enumerated therein. It is obvious that the case at bar does not
fall under any of the exceptions. Thus, American Home Assurance Company is
entitled to reimbursement of what it paid to Mayleen Paper, Inc. as insurer.

Accordingly, it is evident that the findings of respondent Court of Appeals,

affirming the findings and conclusions of the court a quo are not supported by law
and jurisprudence.

PREMISES CONSIDERED, (1) the decisions of both the Court of Appeals and the
Regional Trial Court of Manila, Branch 41, appealed from are REVERSED; and (2)
private respondent National Marine Corporation is hereby ordered to reimburse
the subrogee, petitioner American Home Assurance Company, the amount of
P31,506.75.

SO ORDERED.
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