Cases in Insurance period [of] July 1, 1993 up to July 1, 1994. This is evidenced by Marine Policy No.

MH93/1363 (Exhibits
"A" to "A-11"). On October 25, 1993, while the policy was in force, a fire broke out while [M/V Asia
FIRST MEETING Korea was] undergoing repairs at the port of Cebu. On October 26, 1993 plaintiff [TRANS-ASIA] filed
its notice of claim for damage sustained by the vessel. This is evidenced by a letter/formal claim of even
date (Exhibit "B"). Plaintiff [TRANS-ASIA] reserved its right to subsequently notify defendant
[PRUDENTIAL] as to the full amount of the claim upon final survey and determination by average
I. History of Insurance Law in the Philippines adjuster Richard Hogg International (Phil.) of the damage sustained by reason of fire. An adjuster’s
report on the fire in question was submitted by Richard Hogg International together with the U-Marine
Surveyor Report (Exhibits "4" to "4-115").
G.R. No. 151890 June 20, 2006
On May 29, 1995[,] plaintiff [TRANS-ASIA] executed a document denominated "Loan and Trust receipt",
PRUDENTIAL GUARANTEE and ASSURANCE INC., petitioner, a portion of which read (sic):
vs.
TRANS-ASIA SHIPPING LINES, INC., Respondent. "Received from Prudential Guarantee and Assurance, Inc., the sum of PESOS THREE MILLION ONLY
(P3,000,000.00) as a loan without interest under Policy No. MH 93/1353 [sic], repayable only in the
x- - - - - - - - - - - - - - - - - - - - - - - - - x event and to the extent that any net recovery is made by Trans-Asia Shipping Corporation, from any
person or persons, corporation or corporations, or other parties, on account of loss by any casualty for
which they may be liable occasioned by the 25 October 1993: Fire on Board." (Exhibit "4")
G.R. No. 151991 June 20, 2006

In a letter dated 21 April 1997 defendant [PRUDENTIAL] denied plaintiff’s claim (Exhibit "5"). The letter
TRANS-ASIA SHIPPING LINES, INC., petitioner, reads:
vs.
PRUDENTIAL GUARANTEE and ASSURANCE INC., Respondent.
"After a careful review and evaluation of your claim arising from the above-captioned incident, it has
been ascertained that you are in breach of policy conditions, among them "WARRANTED VESSEL
DECISION CLASSED AND CLASS MAINTAINED". Accordingly, we regret to advise that your claim is not
compensable and hereby DENIED."
CHICO-NAZARIO, J:
This was followed by defendant’s letter dated 21 July 1997 requesting the return or payment of the
This is a consolidation of two separate Petitions for Review on Certiorari filed by petitioner Prudential P3,000,000.00 within a period of ten (10) days from receipt of the letter (Exhibit "6").4
Guarantee and Assurance, Inc. (PRUDENTIAL) in G.R. No. 151890 and Trans-Asia Shipping Lines, Inc.
(TRANS-ASIA) in G.R. No. 151991, assailing the Decision1 dated 6 November 2001 of the Court of Following this development, on 13 August 1997, TRANS-ASIA filed a Complaint5 for Sum of Money
Appeals in CA G.R. CV No. 68278, which reversed the Judgment2 dated 6 June 2000 of the Regional against PRUDENTIAL with the RTC of Cebu City, docketed as Civil Case No. CEB-20709, wherein TRANS-
Trial Court (RTC), Branch 13, Cebu City in Civil Case No. CEB-20709. The 29 January 2002 ASIA sought the amount of P8,395,072.26 from PRUDENTIAL, alleging that the same represents the
Resolution3 of the Court of Appeals, denying PRUDENTIAL’s Motion for Reconsideration and TRANS- balance of the indemnity due upon the insurance policy in the total amount of P11,395,072.26. TRANS-
ASIA’s Partial Motion for Reconsideration of the 6 November 2001 Decision, is likewise sought to be ASIA similarly sought interest at 42% per annum citing Section 2436 of Presidential Decreee No. 1460,
annulled and set aside. otherwise known as the "Insurance Code," as amended.

The Facts
The material antecedents as found by the court a quo and adopted by the appellate court are as follows:
Plaintiff [TRANS-ASIA] is the owner of the vessel M/V Asia Korea. In consideration of payment of
premiums, defendant [PRUDENTIAL] insured M/V Asia Korea for loss/damage of the hull and machinery
arising from perils, inter alia, of fire and explosion for the sum of P40 Million, beginning [from] the
In its Answer,7 PRUDENTIAL denied the material allegations of the Complaint and interposed the defense
that TRANS-ASIA breached insurance policy conditions, in particular: "WARRANTED VESSEL CLASSED
AND CLASS MAINTAINED." PRUDENTIAL further alleged that it acted as facts and law require and
incurred no liability to TRANS-ASIA; that TRANS-ASIA has no cause of action; and, that its claim has
been effectively waived and/or abandoned, or it is estopped from pursuing the same. By way of a
counterclaim, PRUDENTIAL sought a refund of P3,000,000.00, which it allegedly advanced to TRANS-
ASIA by way of a loan without interest and without prejudice to the final evaluation of the claim,
including the amounts of P500,000.00, for survey fees and P200,000.00, representing attorney’s fees.
The Ruling of the Trial Court that the warranty was breached. The Court of Appeals opined that the lack of a certification does not
necessarily mean that the warranty was breached by TRANS-ASIA. Instead, the Court of Appeals
considered PRUDENTIAL’s admission that at the time the insurance contract was entered into between
On 6 June 2000, the court a quo rendered Judgment8 finding for (therein defendant) PRUDENTIAL. It
the parties, the vessel was properly classed by Bureau Veritas, a classification society recognized by
ruled that a determination of the parties’ liabilities hinged on whether TRANS-ASIA violated and
the industry. The Court of Appeals similarly gave weight to the fact that it was the responsibility of
breached the policy conditions on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED. It
Richards Hogg International (Phils.) Inc., the average adjuster hired by PRUDENTIAL, to secure a copy
interpreted the provision to mean that TRANS-ASIA is required to maintain the vessel at a certain class
of such certification to support its conclusion that mere absence of a certification does not warrant
at all times pertinent during the life of the policy. According to the court a quo, TRANS-ASIA failed to
denial of TRANS-ASIA’s claim under the insurance policy.
prove compliance of the terms of the warranty, the violation thereof entitled PRUDENTIAL, the insured
party, to rescind the contract.9
In the same token, the Court of Appeals found the subject warranty allegedly breached by TRANS-ASIA
to be a rider which, while contained in the policy, was inserted by PRUDENTIAL without the intervention
Further, citing Section 107 of the Insurance Code, the court a quo ratiocinated that the concealment
10
of TRANS-ASIA. As such, it partakes of a nature of a contract d’adhesion which should be construed
made by TRANS-ASIA that the vessel was not adequately maintained to preserve its class was a material
against PRUDENTIAL, the party which drafted the contract. Likewise, according to the Court of Appeals,
concealment sufficient to avoid the policy and, thus, entitled the injured party to rescind the contract.
PRUDENTIAL’s renewal of the insurance policy from noon of 1 July 1994 to noon of 1 July 1995, and
The court a quo found merit in PRUDENTIAL’s contention that there was nothing in the adjustment of
then again, until noon of 1 July 1996 must be deemed a waiver by PRUDENTIAL of any breach of
the particular average submitted by the adjuster that would show that TRANS-ASIA was not in breach
warranty committed by TRANS-ASIA.
of the policy. Ruling on the denominated loan and trust receipt, the court a quo said that in substance
and in form, the same is a receipt for a loan. It held that if TRANS-ASIA intended to receive the amount
of P3,000,000.00 as advance payment, it should have so clearly stated as such. Further, the Court of Appeals, contrary to the ruling of the court a quo, interpreted the transaction
between PRUDENTIAL and TRANS-ASIA as one of subrogation, instead of a loan. The Court of Appeals
concluded that TRANS-ASIA has no obligation to pay back the amount of P3,000.000.00 to PRUDENTIAL
The court a quo did not award PRUDENTIAL’s claim for P500,000.00, representing expert survey fees
based on its finding that the aforesaid amount was PRUDENTIAL’s partial payment to TRANS-ASIA’s
on the ground of lack of sufficient basis in support thereof. Neither did it award attorney’s fees on the
claim under the policy. Finally, the Court of Appeals denied TRANS-ASIA’s prayer for attorney’s fees,
rationalization that the instant case does not fall under the exceptions stated in Article 220811 of the
but held TRANS-ASIA entitled to double interest on the policy for the duration of the delay of payment
Civil Code. However, the court a quo granted PRUDENTIAL’s counterclaim stating that there is factual
of the unpaid balance, citing Section 24413 of the Insurance Code.
and legal basis for TRANS-ASIA to return the amount of P3,000,000.00 by way of loan without interest.

Finding for therein appellant TRANS-ASIA, the Court of Appeals ruled in this wise:
The decretal portion of the Judgment of the RTC reads:

WHEREFORE, judgment is hereby rendered DISMISSING the complaint for its failure to prove a cause
of action.
On defendant’s counterclaim, plaintiff is directed to return the sum of P3,000,000.00 representing the
loan extended to it by the defendant, within a period of ten (10) days from and after this judgment
shall have become final and executory.12
The Ruling of the Court of Appeals
WHEREFORE, the foregoing consideration, We find for Appellant. The instant appeal is ALLOWED and
the Judgment appealed from REVERSED. The P3,000,000.00 initially paid by appellee Prudential
Guarantee Assurance Incorporated to appellant Trans-Asia and covered by a "Loan and Trust Receipt"
dated 29 May 1995 is HELD to be in partial settlement of the loss suffered by appellant and covered by
Marine Policy No. MH93/1363 issued by appellee. Further, appellee is hereby ORDERED to pay appellant
the additional amount of P8,395,072.26 representing the balance of the loss suffered by the latter as
recommended by the average adjuster Richard Hogg International (Philippines) in its Report, with
double interest starting from the time Richard Hogg’s Survey Report was completed, or on 13 August
1996, until the same is fully paid.

On appeal by TRANS-ASIA, the Court of Appeals, in its assailed Decision of 6 November 2001, reversed
the 6 June 2000 Judgment of the RTC.
On the issue of TRANS-ASIA’s alleged breach of warranty of the policy condition CLASSED AND CLASS
MAINTAINED, the Court of Appeals ruled that PRUDENTIAL, as the party asserting the non-
compensability of the loss had the burden of proof to show that TRANS-ASIA breached the warranty,
which burden it failed to discharge. PRUDENTIAL cannot rely on the lack of certification to the effect
that TRANS-ASIA was CLASSED AND CLASS MAINTAINED as its sole basis for reaching the conclusion
All other claims and counterclaims are hereby DISMISSED.
All costs against appellee.14
Not satisfied with the judgment, PRUDENTIAL and TRANS-ASIA filed a Motion for Reconsideration and
Partial Motion for Reconsideration thereon, respectively, which motions were denied by the Court of
Appeals in the Resolution dated 29 January 2002.
The Issues VIII.

Aggrieved, PRUDENTIAL filed before this Court a Petition for Review, docketed as G.R. No. 151890, THE COURT OF APPEALS ERRRED (sic) IN REVERSING THE TRIAL COURT, IN FINDING THAT
relying on the following grounds, viz: PRUDENTIAL "UNJUSTIFIABLY REFUSED" TO PAY THE CLAIM AND IN ORDERING PRUDENTIAL TO PAY
TRANS-ASIA P8,395,072.26 PLUS DOUBLE INTEREST FROM 13 AUGUST 1996, UNTIL [THE] SAME IS
FULLY PAID.15
I.

Similarly, TRANS-ASIA, disagreeing in the ruling of the Court of Appeals filed a Petition for Review
THE AWARD IS GROSSLY UNCONSCIONABLE.
docketed as G.R. No. 151991, raising the following grounds for the allowance of the petition, to wit:

II.
I.

THE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO VIOLATION BY TRANS-ASIA OF A
MATERIAL WARRANTY, NAMELY, WARRANTY CLAUSE NO. 5, OF THE INSURANCE POLICY.
III.
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ATTORNEY’S FEES TO PETITIONER
TRANS-ASIA ON THE GROUND THAT SUCH CAN ONLY BE AWARDED IN THE CASES ENUMERATED IN
ARTICLE 2208 OF THE CIVIL CODE, AND THERE BEING NO BAD FAITH ON THE PART OF RESPONDENT
PRUDENTIAL IN DENYING HEREIN PETITIONER TRANS-ASIA’S INSURANCE CLAIM.

THE COURT OF APPEALS ERRED IN HOLDING THAT PRUDENTIAL, AS INSURER HAD THE BURDEN OF
PROVING THAT THE ASSURED, TRANS-ASIA, VIOLATED A MATERIAL WARRANTY.
IV.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE WARRANTY CLAUSE EMBODIED IN THE
INSURANCE POLICY CONTRACT WAS A MERE RIDER.
V.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ALLEGED RENEWALS OF THE POLICY
CONSTITUTED A WAIVER ON THE PART OF PRUDENTIAL OF THE BREACH OF THE WARRANTY BY
TRANS-ASIA.
II.
THE "DOUBLE INTEREST" REFERRED TO IN THE DECISION DATED 06 NOVEMBER 2001 SHOULD BE
CONSTRUED TO MEAN DOUBLE INTEREST BASED ON THE LEGAL INTEREST OF 12%, OR INTEREST AT
THE RATE OF 24% PER ANNUM.16
In our Resolution of 2 December 2002, we granted TRANS-ASIA’s Motion for Consolidation17 of G.R.
Nos. 151890 and 151991;18 hence, the instant consolidated petitions.
In sum, for our main resolution are: (1) the liability, if any, of PRUDENTIAL to TRANS-ASIA arising from
the subject insurance contract; (2) the liability, if any, of TRANS-ASIA to PRUDENTIAL arising from the
transaction between the parties as evidenced by a document denominated as "Loan and Trust Receipt,"
dated 29 May 1995; and (3) the amount of interest to be imposed on the liability, if any, of either or
both parties.

VI.
Ruling of the Court

THE COURT OF APPEALS ERRED IN HOLDING THAT THE "LOAN AND TRUST RECEIPT" EXECUTED BY
TRANS-ASIA IS AN ADVANCE ON THE POLICY, THUS CONSTITUTING PARTIAL PAYMENT THEREOF.
VII.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE ACCEPTANCE BY PRUDENTIAL OF THE
FINDINGS OF RICHARDS HOGG IS INDICATIVE OF A WAIVER ON THE PART OF PRUDENTIAL OF ANY
VIOLATION BY TRANS-ASIA OF THE WARRANTY.
Prefatorily, it must be emphasized that in a petition for review, only questions of law, and not questions
of fact, may be raised.19 This rule may be disregarded only when the findings of fact of the Court of
Appeals are contrary to the findings and conclusions of the trial court, or are not supported by the
evidence on record.20 In the case at bar, we find an incongruence between the findings of fact of the
Court of Appeals and the court a quo, thus, in our determination of the issues, we are constrained to
assess the evidence adduced by the parties to make appropriate findings of facts as are necessary.
I.
 A. PRUDENTIAL failed to establish that TRANS-ASIA violated and breached the policy condition
on WARRANTED VESSEL CLASSED AND CLASS MAINTAINED, as contained in the subject
insurance contract.
In resisting the claim of TRANS-ASIA, PRUDENTIAL posits that TRANS-ASIA violated an express and
material warranty in the subject insurance contract, i.e., Marine Insurance Policy No. MH93/1363,
specifically Warranty Clause No. 5 thereof, which stipulates that the insured vessel, "M/V ASIA KOREA"
is required to be CLASSED AND CLASS MAINTAINED. According to PRUDENTIAL, on 25 October 1993,
or at the time of the occurrence of the fire, "M/V ASIA KOREA" was in violation of the warranty as it
was not CLASSED AND CLASS MAINTAINED. PRUDENTIAL submits that Warranty Clause No. 5 was a
condition precedent to the recovery of TRANS-ASIA under the policy, the violation of which entitled
PRUDENTIAL to rescind the contract under Sec. 7421 of the Insurance Code.
The warranty condition CLASSED AND CLASS MAINTAINED was explained by PRUDENTIAL’s Senior
Manager of the Marine and Aviation Division, Lucio Fernandez. The pertinent portions of his testimony
on direct examination is reproduced hereunder, viz:
ATTY. LIM
Q Please tell the court, Mr. Witness, the result of the evaluation of this claim, what final action was
taken?
A It was eventually determined that there was a breach of the policy condition, and basically there is a
breach of policy warranty condition and on that basis the claim was denied.
Q To refer you (sic) the "policy warranty condition," I am showing to you a policy here marked as
Exhibits "1", "1-A" series, please point to the warranty in the policy which you said was breached or
violated by the plaintiff which constituted your basis for denying the claim as you testified.
A Warranted Vessel Classed and Class Maintained.
ATTY. LIM
Witness pointing, Your Honor, to that portion in Exhibit "1-A" which is the second page of the policy
below the printed words: "Clauses, Endorsements, Special Conditions and Warranties," below this are
several typewritten clauses and the witness pointed out in particular the clause reading: "Warranted
Vessel Classed and Class Maintained."
COURT
Q Will you explain that particular phrase?
A Yes, a warranty is a condition that has to be complied with by the insured. When we say a class
warranty, it must be entered in the classification society.
COURT
Slowly.
WITNESS
(continued)
A A classification society is an organization which sets certain standards for a vessel to maintain in order
to maintain their membership in the classification society. So, if they failed to meet that standard, they
are considered not members of that class, and thus breaching the warranty, that requires them to
maintain membership or to maintain their class on that classification society. And it is not sufficient that
the member of this classification society at the time of a loss, their membership must be continuous for
the whole length of the policy such that during the effectivity of the policy, their classification is
suspended, and then thereafter, they get reinstated, that again still a breach of the warranty that they
maintained their class (sic). Our maintaining team membership in the classification society thereby
maintaining the standards of the vessel (sic).
ATTY. LIM
Q Can you mention some classification societies that you know?
A Well we have the Bureau Veritas, American Bureau of Shipping, D&V Local Classification Society, The
Philippine Registration of Ships Society, China Classification, NKK and Company Classification Society,
and many others, we have among others, there are over 20 worldwide. 22
At the outset, it must be emphasized that the party which alleges a fact as a matter of defense has the
burden of proving it. PRUDENTIAL, as the party which asserted the claim that TRANS-ASIA breached
the warranty in the policy, has the burden of evidence to establish the same. Hence, on the part of
PRUDENTIAL lies the initiative to show proof in support of its defense; otherwise, failing to establish the
same, it remains self-serving. Clearly, if no evidence on the alleged breach of TRANS-ASIA of the subject
warranty is shown, a fortiori, TRANS-ASIA would be successful in claiming on the policy. It follows that
PRUDENTIAL bears the burden of evidence to establish the fact of breach.
In our rule on evidence, TRANS-ASIA, as the plaintiff below, necessarily has the burden of proof to show
proof of loss, and the coverage thereof, in the subject insurance policy. However, in the course of trial
in a civil case, once plaintiff makes out a prima facie case in his favor, the duty or the burden of evidence
shifts to defendant to controvert plaintiff’s prima facie case, otherwise, a verdict must be returned in
favor of plaintiff.23 TRANS-ASIA was able to establish proof of loss and the coverage of the loss, i.e., 25
October 1993: Fire on Board. Thereafter, the burden of evidence shifted to PRUDENTIAL to counter
TRANS-ASIA’s case, and to prove its special and affirmative defense that TRANS-ASIA was in violation
of the particular condition on CLASSED AND CLASS MAINTAINED.
We sustain the findings of the Court of Appeals that PRUDENTIAL was not successful in discharging the
burden of evidence that TRANS-ASIA breached the subject policy condition on CLASSED AND CLASS
MAINTAINED.
Foremost, PRUDENTIAL, through the Senior Manager of its Marine and Aviation Division, Lucio
Fernandez, made a categorical admission that at the time of the procurement of the insurance contract
in July 1993, TRANS-ASIA’s vessel, "M/V Asia Korea" was properly classed by Bureau Veritas, thus:
Q Kindly examine the records particularly the policy, please tell us if you know whether M/V Asia Korea
was classed at the time (sic) policy was procured perthe (sic) insurance was procured that Exhibit "1"
on 1st July 1993 (sic).
WITNESS
A I recall that they were classed.
ATTY. LIM
Q With what classification society?
A I believe with Bureau Veritas.24
As found by the Court of Appeals and as supported by the records, Bureau Veritas is a classification
society recognized in the marine industry. As it is undisputed that TRANS-ASIA was properly classed at
the time the contract of insurance was entered into, thus, it becomes incumbent upon PRUDENTIAL to
show evidence that the status of TRANS-ASIA as being properly CLASSED by Bureau Veritas had shifted
in violation of the warranty. Unfortunately, PRUDENTIAL failed to support the allegation.
We are in accord with the ruling of the Court of Appeals that the lack of a certification in PRUDENTIAL’s
records to the effect that TRANS-ASIA’s "M/V Asia Korea" was CLASSED AND CLASS MAINTAINED at
the time of the occurrence of the fire cannot be tantamount to the conclusion that TRANS-ASIA in fact
breached the warranty contained in the policy. With more reason must we sustain the findings of the
Court of Appeals on the ground that as admitted by PRUDENTIAL, it was likewise the responsibility of
the average adjuster, Richards Hogg International (Phils.), Inc., to secure a copy of such certification,
and the alleged breach of TRANS-ASIA cannot be gleaned from the average adjuster’s survey report,
or adjustment of particular average per "M/V Asia Korea" of the 25 October 1993 fire on board.
We are not unmindful of the clear language of Sec. 74 of the Insurance Code which provides that, "the
violation of a material warranty, or other material provision of a policy on the part of either party
thereto, entitles the other to rescind." It is generally accepted that "[a] warranty is a statement or
promise set forth in the policy, or by reference incorporated therein, the untruth or non-fulfillment of
which in any respect, and without reference to whether the insurer was in fact prejudiced by such
untruth or non-fulfillment, renders the policy voidable by the insurer."25 However, it is similarly
indubitable that for the breach of a warranty to avoid a policy, the same must be duly shown by the
party alleging the same. We cannot sustain an allegation that is unfounded. Consequently,
PRUDENTIAL, not having shown that TRANS-ASIA breached the warranty condition, CLASSED AND
CLASS MAINTAINED, it remains that TRANS-ASIA must be allowed to recover its rightful claims on the
policy.
B. Assuming arguendo that TRANS-ASIA violated the policy condition on WARRANTED VESSEL CLASSED
AND CLASS MAINTAINED, PRUDENTIAL made a valid waiver of the same.
The Court of Appeals, in reversing the Judgment of the RTC which held that TRANS-ASIA breached the
warranty provision on CLASSED AND CLASS MAINTAINED, underscored that PRUDENTIAL can be
deemed to have made a valid waiver of TRANS-ASIA’s breach of warranty as alleged, ratiocinating,
thus:
Third, after the loss, Prudential renewed the insurance policy of Trans-Asia for two (2) consecutive
years, from noon of 01 July 1994 to noon of 01 July 1995, and then again until noon of 01 July 1996.
This renewal is deemed a waiver of any breach of warranty.26
PRUDENTIAL finds fault with the ruling of the appellate court when it ruled that the renewal policies are
deemed a waiver of TRANS-ASIA’s alleged breach, averring herein that the subsequent policies,
designated as MH94/1595 and MH95/1788 show that they were issued only on 1 July 1994 and 3 July
1995, respectively, prior to the time it made a request to TRANS-ASIA that it be furnished a copy of
the certification specifying that the insured vessel "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. PRUDENTIAL posits that it came to know of the breach by TRANS-ASIA of the subject
warranty clause only on 21 April 1997. On even date, PRUDENTIAL sent TRANS-ASIA a letter of denial,
advising the latter that their claim is not compensable. In fine, PRUDENTIAL would have this Court
believe that the issuance of the renewal policies cannot be a waiver because they were issued without
knowledge of the alleged breach of warranty committed by TRANS-ASIA.27
We are not impressed. We do not find that the Court of Appeals was in error when it held that
PRUDENTIAL, in renewing TRANS-ASIA’s insurance policy for two consecutive years after the loss
covered by Policy No. MH93/1363, was considered to have waived TRANS-ASIA’s breach of the subject
warranty, if any. Breach of a warranty or of a condition renders the contract defeasible at the option of
the insurer; but if he so elects, he may waive his privilege and power to rescind by the mere expression
of an intention so to do. In that event his liability under the policy continues as before. 28 There can be
no clearer intention of the waiver of the alleged breach than the renewal of the policy insurance granted
by PRUDENTIAL to TRANS-ASIA in MH94/1595 and MH95/1788, issued in the years 1994 and 1995,
respectively.
To our mind, the argument is made even more credulous by PRUDENTIAL’s lack of proof to support its
allegation that the renewals of the policies were taken only after a request was made to TRANS-ASIA
to furnish them a copy of the certificate attesting that "M/V Asia Korea" was CLASSED AND CLASS
MAINTAINED. Notwithstanding PRUDENTIAL’s claim that no certification was issued to that effect, it
renewed the policy, thereby, evidencing an intention to waive TRANS-ASIA’s alleged breach. Clearly,
by granting the renewal policies twice and successively after the loss, the intent was to benefit the
insured, TRANS-ASIA, as well as to waive compliance of the warranty.
The foregoing finding renders a determination of whether the subject warranty is a rider, moot, as
raised by the PRUDENTIAL in its assignment of errors. Whether it is a rider will not effectively alter the
result for the reasons that: (1) PRUDENTIAL was not able to discharge the burden of evidence to show
that TRANS-ASIA committed a breach, thereof; and (2) assuming arguendo the commission of a breach
by TRANS-ASIA, the same was shown to have been waived by PRUDENTIAL.
II.
A. The amount of P3,000,000.00 granted by PRUDENTIAL to TRANS- ASIA via a transaction between
the parties evidenced by a document denominated as "Loan and Trust Receipt," dated 29 May 1995
constituted partial payment on the policy.
It is undisputed that TRANS-ASIA received from PRUDENTIAL the amount of P3,000,000.00. The same
was evidenced by a transaction receipt denominated as a "Loan and Trust Receipt," dated 29 May 1995,
reproduced hereunder:
LOAN AND TRUST RECEIPT
Claim File No. MH-93-025 May 29, 1995
P3,000,000.00
Check No. PCIB066755
Received FROM PRUDENTIAL GUARANTEE AND ASSURANCE INC., the sum of PESOS THREE MILLION
ONLY (P3,000,000.00) as a loan without interest, under Policy No. MH93/1353, repayable only in the
event and to the extent that any net recovery is made by TRANS ASIA SHIPPING CORP., from any
person or persons, corporation or corporations, or other parties, on account of loss by any casualty for
which they may be liable, occasioned by the 25 October 1993: Fire on Board.
As security for such repayment, we hereby pledge to PRUDENTIAL GUARANTEE AND ASSURANCE INC.
whatever recovery we may make and deliver to it all documents necessary to prove our interest in said
property. We also hereby agree to promptly prosecute suit against such persons, corporation or
corporations through whose negligence the aforesaid loss was caused or who may otherwise be
responsible therefore, with all due diligence, in our own name, but at the expense of and under the
exclusive direction and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC.
TRANS-ASIA SHIPPING CORPORATION29
PRUDENTIAL largely contends that the "Loan and Trust Receipt" executed by the parties evidenced a
loan of P3,000,000.00 which it granted to TRANS-ASIA, and not an advance payment on the policy or
a partial payment for the loss. It further submits that it is a customary practice for insurance companies
in this country to extend loans gratuitously as part of good business dealing with their assured, in order
to afford their assured the chance to continue business without embarrassment while awaiting outcome
of the settlement of their claims.30 According to PRUDENTIAL, the "Trust and Loan Agreement" did not
subrogate to it whatever rights and/or actions TRANS-ASIA may have against third persons, and it
cannot by no means be taken that by virtue thereof, PRUDENTIAL was granted irrevocable power of
attorney by TRANS-ASIA, as the sole power to prosecute lies solely with the latter.
The Court of Appeals held that the real character of the transaction between the parties as evidenced
by the "Loan and Trust Receipt" is that of an advance payment by PRUDENTIAL of TRANS-ASIA’s claim
on the insurance, thus:
The Philippine Insurance Code (PD 1460 as amended) was derived from the old Insurance Law Act No.
2427 of the Philippine Legislature during the American Regime. The Insurance Act was lifted verbatim
from the law of California, except Chapter V thereof, which was taken largely from the insurance law of
New York. Therefore, ruling case law in that jurisdiction is to Us persuasive in interpreting provisions of
our own Insurance Code. In addition, the application of the adopted statute should correspond in
fundamental points with the application in its country of origin x x x.
xxxx
Likewise, it is settled in that jurisdiction that the (sic) notwithstanding recitals in the Loan Receipt that
the money was intended as a loan does not detract from its real character as payment of claim, thus:
"The receipt of money by the insured employers from a surety company for losses on account of forgery
of drafts by an employee where no provision or repayment of the money was made except upon
condition that it be recovered from other parties and neither interest nor security for the asserted debts
was provided for, the money constituted the payment of a liability and not a mere loan, notwithstanding
recitals in the written receipt that the money was intended as a mere loan."
What is clear from the wordings of the so-called "Loan and Trust Receipt Agreement" is that appellant
is obligated to hand over to appellee "whatever recovery (Trans Asia) may make and deliver to
(Prudential) all documents necessary to prove its interest in the said property." For all intents and
purposes therefore, the money receipted is payment under the policy, with Prudential having the right
of subrogation to whatever net recovery Trans-Asia may obtain from third parties resulting from the
fire. In the law on insurance, subrogation is an equitable assignment to the insurer of all remedies which
the insured may have against third person whose negligence or wrongful act caused the loss covered
by the insurance policy, which is created as the legal effect of payment by the insurer as an assignee
in equity. The loss in the first instance is that of the insured but after reimbursement or compensation,
it becomes the loss of the insurer. It has been referred to as the doctrine of substitution and rests on
the principle that substantial justice should be attained regardless of form, that is, its basis is the doing
of complete, essential, and perfect justice between all the parties without regard to form.31
We agree. Notwithstanding its designation, the tenor of the "Loan and Trust Receipt" evidences that
the real nature of the transaction between the parties was that the amount of P3,000,000.00 was not
intended as a loan whereby TRANS-ASIA is obligated to pay PRUDENTIAL, but rather, the same was a
partial payment or an advance on the policy of the claims due to TRANS-ASIA.
First, the amount of P3,000,000.00 constitutes an advance payment to TRANS-ASIA by PRUDENTIAL,
subrogating the former to the extent of "any net recovery made by TRANS ASIA SHIPPING CORP., from
any person or persons, corporation or corporations, or other parties, on account of loss by any casualty
for which they may be liable, occasioned by the 25 October 1993: Fire on Board."32
Second, we find that per the "Loan and Trust Receipt," even as TRANS-ASIA agreed to "promptly
prosecute suit against such persons, corporation or corporations through whose negligence the
aforesaid loss was caused or who may otherwise be responsible therefore, with all due diligence" in its
name, the prosecution of the claims against such third persons are to be carried on "at the expense of
and under the exclusive direction and control of PRUDENTIAL GUARANTEE AND ASSURANCE INC."33 The
clear import of the phrase "at the expense of and under the exclusive direction and control" as used in
the "Loan and Trust Receipt" grants solely to PRUDENTIAL the power to prosecute, even as the same
is carried in the name of TRANS-ASIA, thereby making TRANS-ASIA merely an agent of PRUDENTIAL,
the principal, in the prosecution of the suit against parties who may have occasioned the loss.
Third, per the subject "Loan and Trust Receipt," the obligation of TRANS-ASIA to repay PRUDENTIAL is
highly speculative and contingent, i.e., only in the event and to the extent that any net recovery is
made by TRANS-ASIA from any person on account of loss occasioned by the fire of 25 October 1993.
The transaction, therefore, was made to benefit TRANS-ASIA, such that, if no recovery from third parties
is made, PRUDENTIAL cannot be repaid the amount. Verily, we do not think that this is constitutive of
a loan.34 The liberality in the tenor of the "Loan and Trust Receipt" in favor of TRANS-ASIA leads to the
conclusion that the amount of P3,000,000.00 was a form of an advance payment on TRANS-ASIA’s
claim on MH93/1353.
III.
A. PRUDENTIAL is directed to pay TRANS-ASIA the amount of P8,395,072.26, representing the balance
of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363.
Our foregoing discussion supports the conclusion that TRANS-ASIA is entitled to the unpaid claims
covered by Marine Policy No. MH93/1363, or a total amount of P8,395,072.26.
B. Likewise, PRUDENTIAL is directed to pay TRANS-ASIA, damages in the form of attorney’s fees
equivalent to 10% of P8,395,072.26.
The Court of Appeals denied the grant of attorney’s fees. It held that attorney’s fees cannot be awarded
absent a showing of bad faith on the part of PRUDENTIAL in rejecting TRANS-ASIA’s claim,
notwithstanding that the rejection was erroneous. According to the Court of Appeals, attorney’s fees
can be awarded only in the cases enumerated in Article 2208 of the Civil Code which finds no application
in the instant case.
We disagree. Sec. 244 of the Insurance Code grants damages consisting of attorney’s fees and other
expenses incurred by the insured after a finding by the Insurance Commissioner or the Court, as the
case may be, of an unreasonable denial or withholding of the payment of the claims due. Moreover, the
law imposes an interest of twice the ceiling prescribed by the Monetary Board on the amount of the
claim due the insured from the date following the time prescribed in Section 24235 or in Section 243,36 as
the case may be, until the claim is fully satisfied. Finally, Section 244 considers the failure to pay the
claims within the time prescribed in Sections 242 or 243, when applicable, as prima facie evidence of
unreasonable delay in payment.
To the mind of this Court, Section 244 does not require a showing of bad faith in order that attorney’s
fees be granted. As earlier stated, under Section 244, a prima facie evidence of unreasonable delay in
payment of the claim is created by failure of the insurer to pay the claim within the time fixed in both
Sections 242 and 243 of the Insurance Code. As established in Section 244, by reason of the delay and
the consequent filing of the suit by the insured, the insurers shall be adjudged to pay damages which
shall consist of attorney’s fees and other expenses incurred by the insured.37
Section 244 reads:
In case of any litigation for the enforcement of any policy or contract of insurance, it shall be the duty
of the Commissioner or the Court, as the case may be, to make a finding as to whether the payment of
the claim of the insured has been unreasonably denied or withheld; and in the affirmative case, the
insurance company shall be adjudged to pay damages which shall consist of attorney’s fees and other
expenses incurred by the insured person by reason of such unreasonable denial or withholding of
payment plus interest of twice the ceiling prescribed by the Monetary Board of the amount of the claim
due the insured, from the date following the time prescribed in section two hundred forty-two or in
section two hundred forty-three, as the case may be, until the claim is fully satisfied; Provided, That
the failure to pay any such claim within the time prescribed in said sections shall be considered prima
facie evidence of unreasonable delay in payment.
Sections 243 and 244 of the Insurance Code apply when the court finds an unreasonable delay or refusal
in the payment of the insurance claims.
In the case at bar, the facts as found by the Court of Appeals, and confirmed by the records show that
there was an unreasonable delay by PRUDENTIAL in the payment of the unpaid balance of
P8,395,072.26 to TRANS-ASIA. On 26 October 1993, a day after the occurrence of the fire in "M/V Asia
Korea", TRANS-ASIA filed its notice of claim. On 13 August 1996, the adjuster, Richards Hogg
International (Phils.), Inc., completed its survey report recommending the amount of P11,395,072.26
as the total indemnity due to TRANS-ASIA.38 On 21 April 1997, PRUDENTIAL, in a letter39 addressed to
TRANS-ASIA denied the latter’s claim for the amount of P8,395,072.26 representing the balance of the
total indemnity. On 21 July 1997, PRUDENTIAL sent a second letter 40 to TRANS-ASIA seeking a return
of the amount of P3,000,000.00. On 13 August 1997, TRANS-ASIA was constrained to file a complaint
for sum of money against PRUDENTIAL praying, inter alia, for the sum of P8,395,072.26 representing
the balance of the proceeds of the insurance claim.
As can be gleaned from the foregoing, there was an unreasonable delay on the part of PRUDENTIAL to
pay TRANS-ASIA, as in fact, it refuted the latter’s right to the insurance claims, from the time proof of
loss was shown and the ascertainment of the loss was made by the insurance adjuster. Evidently,
PRUDENTIAL’s unreasonable delay in satisfying TRANS-ASIA’s unpaid claims compelled the latter to file
a suit for collection.
Succinctly, an award equivalent to ten percent (10%) of the unpaid proceeds of the policy as attorney’s
fees to TRANS-ASIA is reasonable under the circumstances, or otherwise stated, ten percent (10%) of
P8,395,072.26. In the case of Cathay Insurance, Co., Inc. v. Court of Appeals,41 where a finding of an
unreasonable delay under Section 244 of the Insurance Code was made by this Court, we grant an
award of attorney’s fees equivalent to ten percent (10%) of the total proceeds. We find no reason to
deviate from this judicial precedent in the case at bar.
C. Further, the aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be imposed
double interest in accordance with Section 244 of the Insurance Code.
PRUDENTIAL assails the award of interest, granted by the Court of Appeals, in favor of TRANS-ASIA in
the assailed Decision of 6 November 2001. It is PRUDENTIAL’s stance that the award is extortionate
and grossly unsconscionable. In support thereto, PRUDENTIAL makes a reference to TRANS-ASIA’s
prayer in the Complaint filed with the court a quo wherein the latter sought, "interest double the
prevailing rate of interest of 21% per annum now obtaining in the banking business or plus 42% per
annum pursuant to Article 243 of the Insurance Code x x x."42
The contention fails to persuade. It is settled that an award of double interest is lawful and justified
under Sections 243 and 244 of the Insurance Code.43 In Finman General Assurance Corporation v. Court
of Appeals,44 this Court held that the payment of 24% interest per annum is authorized by the Insurance
Code.45 There is no gainsaying that the term "double interest" as used in Sections 243 and 244 can only
be interpreted to mean twice 12% per annum or 24% per annum interest, thus:
The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of twelve per
centum per annum (12%) as prescribed by the Monetary Board in C.B. Circular No. 416, pursuant to
P.D. No. 116, amending the Usury Law; so that when Sections 242, 243 and 244 of the Insurance Code
provide that the insurer shall be liable to pay interest "twice the ceiling prescribed by the Monetary
Board", it means twice 12% per annum or 24% per annum interest on the proceeds of the insurance.46

E. The payment of double interest should be counted from 13 September 1996.

Section 244 of the Insurance Code is categorical in imposing an interest twice the ceiling prescribed by
the Monetary Board due the insured, from the date following the time prescribed in Section 242 or in
Section 243, as the case may be, until the claim is fully satisfied. In the case at bar, we find Section The Court of Appeals, in imposing double interest for the duration of the delay of the payment of the
243 to be applicable as what is involved herein is a marine insurance, clearly, a policy other than life unpaid balance due TRANS-ASIA, computed the same from 13 August 1996 until such time when the
insurance. amount is fully paid. Although not raised by the parties, we find the computation of the duration of the
delay made by the appellate court to be patently erroneous.
Section 243 is hereunder reproduced:
To be sure, Section 243 imposes interest on the proceeds of the policy for the duration of the delay at
the rate of twice the ceiling prescribed by the Monetary Board. Significantly, Section 243 mandates the
SEC. 243. The amount of any loss or damage for which an insurer may be liable, under any policy other
payment of any loss or damage for which an insurer may be liable, under any policy other than life
than life insurance policy, shall be paid within thirty days after proof of loss is received by the insurer
insurance policy, within thirty days after proof of loss is received by the insurer and ascertainment of
and ascertainment of the loss or damage is made either by agreement between the insured and the
the loss or damage is made either by agreement between the insured and the insurer or by arbitration.
insurer or by arbitration; but if such ascertainment is not had or made within sixty days after such
It is clear that under Section 243, the insurer has until the 30th day after proof of loss and ascertainment
receipt by the insurer of the proof of loss, then the loss or damage shall be paid within ninety days after
of the loss or damage to pay its liability under the insurance, and only after such time can the insurer
such receipt. Refusal or failure to pay the loss or damage within the time prescribed herein will entitle
be held to be in delay, thereby necessitating the imposition of double interest.
the assured to collect interest on the proceeds of the policy for the duration of the delay at the rate of
twice the ceiling prescribed by the Monetary Board, unless such failure or refusal to pay is based on the
ground that the claim is fraudulent. In the case at bar, it was not disputed that the survey report on the ascertainment of the loss was
completed by the adjuster, Richard Hoggs International (Phils.), Inc. on 13 August 1996. PRUDENTIAL
had thirty days from 13 August 1996 within which to pay its liability to TRANS-ASIA under the insurance
As specified, the assured is entitled to interest on the proceeds for the duration of the delay at the rate
policy, or until 13 September 1996. Therefore, the double interest can begin to run from 13 September
of twice the ceiling prescribed by the Monetary Board except when the failure or refusal of the insurer
1996 only.
to pay was founded on the ground that the claim is fraudulent.

IV.
D. The term "double interest" as used in the Decision of the Court of Appeals must be interpreted to
mean 24% per annum.
A. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged in SO ORDERED.
section III herein, computed from the time of finality of judgment until the full satisfaction thereof in
conformity with this Court’s ruling in Eastern Shipping Lines, Inc. v. Court of Appeals.

This Court in Eastern Shipping Lines, Inc. v. Court of Appeals,47 inscribed the rule of thumb48 in the
application of interest to be imposed on obligations, regardless of their source. Eastern emphasized G.R. No. L-1669 August 31, 1950
beyond cavil that when the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, regardless of whether the obligation involves a loan or forbearance PAZ LOPEZ DE CONSTANTINO, plaintiff-appellant,
of money, shall be 12% per annum from such finality until its satisfaction, this interim period being vs.
deemed to be by then an equivalent to a forbearance49 of credit. ASIA LIFE INSURANCE COMPANY, defendant-appellee.

We find application of the rule in the case at bar proper, thus, a rate of 12% per annum from the finality x---------------------------------------------------------x
of judgment until the full satisfaction thereof must be imposed on the total amount of liability adjudged
to PRUDENTIAL. It is clear that the interim period from the finality of judgment until the satisfaction of
G.R. No. L-1670 August 31, 1950
the same is deemed equivalent to a forbearance of credit, hence, the imposition of the aforesaid
interest.
AGUSTINA PERALTA, plaintiff-appellant,
vs.
Fallo
ASIA LIFE INSURANCE COMPANY, defendant-appellee.

WHEREFORE, the Petition in G.R. No. 151890 is DENIED. However, the Petition in G.R. No. 151991 is
Mariano Lozada for appellant Constantino.
GRANTED, thus, we award the grant of attorney’s fees and make a clarification that the term "double
Cachero and Madarang for appellant Peralta.
interest" as used in the 6 November 2001 Decision of the Court of Appeals in CA GR CV No. 68278
Dewitt, Perkins and Ponce Enrile for appellee.
should be construed to mean interest at the rate of 24% per annum, with a further clarification, that
Ramirez and Ortigas and Padilla, Carlos and Fernando as amici curiae.
the same should be computed from 13 September 1996 until fully paid. The Decision and Resolution of
the Court of Appeals, in CA-G.R. CV No. 68278, dated 6 November 2001 and 29 January 2002,
respectively, are, thus, MODIFIED in the following manner, to wit: BENGZON, J.:

1. PRUDENTIAL is DIRECTED to PAY TRANS-ASIA the amount of P8,395,072.26, representing
the balance of the loss suffered by TRANS-ASIA and covered by Marine Policy No. MH93/1363;
2. PRUDENTIAL is DIRECTED further to PAY TRANS-ASIA damages in the form of attorney’s
fees equivalent to 10% of the amount of P8,395,072.26;
3. The aggregate amount (P8,395,072.26 plus 10% thereof as attorney’s fees) shall be
imposed double interest at the rate of 24% per annum to be computed from 13 September
1996 until fully paid; and
4. An interest of 12% per annum is similarly imposed on the TOTAL amount of liability adjudged
as abovestated in paragraphs (1), (2), and (3) herein, computed from the time of finality of
judgment until the full satisfaction thereof.
These two cases, appealed from the Court of First Instance of Manila, call for decision of the question
whether the beneficiary in a life insurance policy may recover the amount thereof although the insured
died after repeatedly failing to pay the stipulated premiums, such failure having been caused by the
last war in the Pacific.
The facts are these:
First case. In consideration of the sum of P176.04 as annual premium duly paid to it, the Asia Life
Insurance Company (a foreign corporation incorporated under the laws of Delaware, U.S.A.), issued on
September 27, 1941, its Policy No. 93912 for P3,000, whereby it insured the life of Arcadio Constantino
for a term of twenty years. The first premium covered the period up to September 26, 1942. The plaintiff
Paz Lopez de Constantino was regularly appointed beneficiary. The policy contained these stipulations,
among others:

This POLICY OF INSURANCE is issued in consideration of the written and printed application
No costs.
here for a copy of which is attached hereto and is hereby made a part hereof made a part
hereof, and of the payment in advance during the lifetime and good health of the Insured of
 the annual premium of One Hundred fifty-eight and 4/100 pesos Philippine currency1 and of
the payment of a like amount upon each twenty-seventh day of September hereafter during
the term of Twenty years or until the prior death of the Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any unpunctuality in making any such payment
shall cause this policy to lapse unless and except as kept in force by the Grace Period condition
or under Option 4 below. (Grace of 31 days.)
After that first payment, no further premiums were paid. The insured died on September 22, 1944.
It is admitted that the defendant, being an American corporation , had to close its branch office in
Manila by reason of the Japanese occupation, i.e. from January 2, 1942, until the year 1945.
Second case. On August 1, 1938, the defendant Asia Life Insurance Company issued its Policy No.
78145 (Joint Life 20-Year Endowment Participating with Accident Indemnity), covering the lives of the
spouses Tomas Ruiz and Agustina Peralta, for the sum of P3,000. The annual premium stipulated in the
policy was regularly paid from August 1, 1938, up to and including September 30, 1941. Effective
August 1, 1941, the mode of payment of premiums was changed from annual to quarterly, so that
quarterly premiums were paid, the last having been delivered on November 18, 1941, said payment
covering the period up to January 31, 1942. No further payments were handed to the insurer. Upon the
Japanese occupation, the insured and the insurer became separated by the lines of war, and it was
impossible and illegal for them to deal with each other. Because the insured had borrowed on the policy
an mount of P234.00 in January, 1941, the cash surrender value of the policy was sufficient to maintain
the policy in force only up to September 7, 1942. Tomas Ruiz died on February 16, 1945. The plaintiff
Agustina Peralta is his beneficiary. Her demand for payment met with defendant's refusal, grounded on
non-payment of the premiums.
The policy provides in part:
This POLICY OF INSURANCE is issued in consideration of the written and printed application
herefor, a copy of which is attached hereto and is hereby made apart hereof, and of the
payment in advance during the life time and good health of the Insured of the annual premium
of Two hundred and 43/100 pesos Philippine currency and of the payment of a like amount
upon each first day of August hereafter during the term of Twenty years or until the prior death
of either of the Insured. (Emphasis supplied.)
xxx xxx xxx
All premium payments are due in advance and any unpunctuality in making any such payment
shall cause this policy to lapse unless and except as kept in force by the Grace Period condition
or under Option 4 below. (Grace of days.) . . .
Plaintiffs maintain that, as beneficiaries, they are entitled to receive the proceeds of the policies minus
all sums due for premiums in arrears. They allege that non-payment of the premiums was caused by
the closing of defendant's offices in Manila during the Japanese occupation and the impossible
circumstances created by war.
Defendant on the other hand asserts that the policies had lapsed for non-payment of premiums, in
accordance with the contract of the parties and the law applicable to the situation.
The lower court absolved the defendant. Hence this appeal.
The controversial point has never been decided in this jurisdiction. Fortunately, this court has had the
benefit of extensive and exhaustive memoranda including those of amici curiae. The matter has received
careful consideration, inasmuch as it affects the interest of thousands of policy-holders and the
obligations of many insurance companies operating in this country.
Since the year 1917, the Philippine law on Insurance was found in Act No. 2427, as amended, and the
Civil Code.2 Act No. 2427 was largely copied from the Civil Code of California.3 And this court has
heretofore announced its intention to supplement the statutory laws with general principles prevailing
on the subject in the United State.4
In Young vs. Midland Textile Insurance Co. (30 Phil., 617), we said that "contracts of insurance are
contracts of indemnity upon the terms and conditions specified in the policy. The parties have a right
to impose such reasonable conditions at the time of the making of the contract as they may deem wise
and necessary. The rate of premium is measured by the character of the risk assumed. The insurance
company, for a comparatively small consideration, undertakes to guarantee the insured against loss or
damage, upon the terms and conditions agreed upon, and upon no other, and when called upon to pay,
in case of loss, the insurer, therefore, may justly insists upon a fulfillment of these terms. If the insured
cannot bring himself within the conditions of the policy, he is not entitled for the loss. The terms of the
policy constitute the measure of the insurer's liability, and in order to recover the insured must show
himself within those terms; and if it appears that the contract has been terminated by a violation, on
the part of the insured, of its conditions, then there can be no right of recovery. The compliance of the
insured with the terms of the contract is a condition precedent to the right of recovery."
Recall of the above pronouncements is appropriate because the policies in question stipulate that "all
premium payments are due in advance and any unpunctuality in making any such payment shall cause
this policy to lapse." Wherefore, it would seem that pursuant to the express terms of the policy, non-
payment of premium produces its avoidance.
The conditions of contracts of Insurance, when plainly expressed in a policy, are binding upon
the parties and should be enforced by the courts, if the evidence brings the case clearly within
their meaning and intent. It tends to bring the law itself into disrepute when, by astute and
subtle distinctions, a plain case is attempted to be taken without the operation of a clear,
reasonable and material obligation of the contract. Mack vs. Rochester German Ins. Co., 106
N.Y., 560, 564. (Young vs. Midland Textile Ins. Co., 30 Phil., 617, 622.)
In Glaraga vs. Sun Life Ass. Co. (49 Phil., 737), this court held that a life policy was avoided because
the premium had not been paid within the time fixed, since by its express terms, non-payment of any
premium when due or within the thirty-day period of grace, ipso facto caused the policy to lapse. This
goes to show that although we take the view that insurance policies should be conserved 5 and should
not lightly be thrown out, still we do not hesitate to enforce the agreement of the parties.
Forfeitures of insurance policies are not favored, but courts cannot for that reason alone refuse
to enforce an insurance contract according to its meaning. (45 C.J.S., p. 150.)
Nevertheless, it is contended for plaintiff that inasmuch as the non-payment of premium was the
consequence of war, it should be excused and should not cause the forfeiture of the policy.
Professor Vance of Yale, in his standard treatise on Insurance, says that in determining the effect of
non-payment of premiums occasioned by war, the American cases may be divided into three groups,
according as they support the so-called Connecticut Rule, the New York Rule, or the United States Rule.
The first holds the view that "there are two elements in the consideration for which the annual premium
is paid — First, the mere protection for the year, and second, the privilege of renewing the contract for
each succeeding year by paying the premium for that year at the time agreed upon. According to this
view of the contract, the payment of premiums is a condition precedent, the non-performance would
be illegal necessarily defeats the right to renew the contract."
The second rule, apparently followed by the greater number of decisions, hold that "war between states
in which the parties reside merely suspends the contracts of the life insurance, and that, upon tender
of all premiums due by the insured or his representatives after the war has terminated, the contract
revives and becomes fully operative."
The United States rule declares that the contract is not merely suspended, but is abrogated by reason
of non-payments is peculiarly of the essence of the contract. It additionally holds that it would be unjust
to allow the insurer to retain the reserve value of the policy, which is the excess of the premiums paid
over the actual risk carried during the years when the policy had been in force. This rule was announced
in the well-known Statham6 case which, in the opinion of Professor Vance, is the correct rule.7
The appellants and some amici curiae contend that the New York rule should be applied here. The
appellee and other amici curiae contend that the United States doctrine is the orthodox view.
We have read and re-read the principal cases upholding the different theories. Besides the respect and
high regard we have always entertained for decisions of the Supreme Court of the United States, we
cannot resist the conviction that the reasons expounded in its decision of the Statham case are logically
and judicially sound. Like the instant case, the policy involved in the Statham decision specifies that
non-payment on time shall cause the policy to cease and determine. Reasoning out that punctual
payments were essential, the court said:
. . . it must be conceded that promptness of payment is essential in the business of life
insurance. All the calculations of the insurance company are based on the hypothesis of prompt
payments. They not only calculate on the receipt of the premiums when due, but on
compounding interest upon them. It is on this basis that they are enabled to offer assurance
at the favorable rates they do. Forfeiture for non-payment is an necessary means of protecting
themselves from embarrassment. Unless it were enforceable, the business would be thrown
into confusion. It is like the forfeiture of shares in mining enterprises, and all other hazardous
undertakings. There must be power to cut-off unprofitable members, or the success of the
whole scheme is endangered. The insured parties are associates in a great scheme. This
associated relation exists whether the company be a mutual one or not. Each is interested in
the engagements of all; for out of the co-existence of many risks arises the law of average,
which underlies the whole business. An essential feature of this scheme is the mathematical
calculations referred to, on which the premiums and amounts assured are based. And these
calculations, again, are based on the assumption of average mortality, and of prompt payments
and compound interest thereon. Delinquency cannot be tolerated nor redeemed, except at the
option of the company. This has always been the understanding and the practice in this
department of business. Some companies, it is true, accord a grace of thirty days, or other
fixed period, within which the premium in arrear may be paid, on certain conditions of
continued good health, etc. But this is a matter of stipulation, or of discretion, on the part of
the particular company. When no stipulation exists, it is the general understanding that time
is material, and that the forfeiture is absolute if the premium be not paid. The extraordinary
and even desperate efforts sometimes made, when an insured person is in extremes to meet
a premium coming due, demonstrates the common view of this matter.
The case, therefore, is one in which time is material and of the essence and of the essence of
the contract. Non-payment at the day involves absolute forfeiture if such be the terms of the
contract, as is the case here. Courts cannot with safety vary the stipulation of the parties by
introducing equities for the relief of the insured against their own negligence.
In another part of the decision, the United States Supreme Court considers and rejects what is, in effect,
the New York theory in the following words and phrases:
The truth is, that the doctrine of the revival of contracts suspended during the war is one based
on considerations of equity and justice, and cannot be invoked to revive a contract which it
would be unjust or inequitable to revive.
In the case of Life insurance, besides the materiality of time in the performance of the contract,
another strong reason exists why the policy should not be revived. The parties do not stand
on equal ground in reference to such a revival. It would operate most unjustly against the
company. The business of insurance is founded on the law of average; that of life insurance
eminently so. The average rate of mortality is the basis on which it rests. By spreading their
risks over a large number of cases, the companies calculate on this average with reasonable
certainty and safety. Anything that interferes with it deranges the security of the business. If
every policy lapsed by reason of the war should be revived, and all the back premiums should
be paid, the companies would have the benefit of this average amount of risk. But the good
risks are never heard from; only the bar are sought to be revived, where the person insured
 is either dead or dying. Those in health can get the new policies cheaper than to pay arrearages For the plaintiffs, it is again argued that in view of the enormous growth of insurance business since
on the old. To enforce a revival of the bad cases, whilst the company necessarily lose the cases the Statham decision, it could now be relaxed and even disregarded. It is stated "that the relaxation of
which are desirable, would be manifestly unjust. An insured person, as before stated, does not rules relating to insurance is in direct proportion to the growth of the business. If there were only 100
stand isolated and alone. His case is connected with and co-related to the cases of all others men, for example, insured by a Company or a mutual Association, the death of one will distribute the
insured by the same company. The nature of the business, as a whole, must be looked at to insurance proceeds among the remaining 99 policy-holders. Because the loss which each survivor will
understand the general equities of the parties. bear will be relatively great, death from certain agreed or specified causes may be deemed not a
compensable loss. But if the policy-holders of the Company or Association should be 1,000,000
individuals, it is clear that the death of one of them will not seriously prejudice each one of the 999,999
The above consideration certainly lend themselves to the approval of fair-minded men. Moreover, if, as
surviving insured. The loss to be borne by each individual will be relatively small."
alleged, the consequences of war should not prejudice the insured, neither should they bear down on
the insurer.
The answer to this is that as there are (in the example) one million policy-holders, the "losses" to be
considered will not be the death of one but the death of ten thousand, since the proportion of 1 to 100
Urging adoption of the New York theory, counsel for plaintiff point out that the obligation of the insured
should be maintained. And certainly such losses for 10,000 deaths will not be "relatively small."
to pay premiums was excused during the war owing to impossibility of performance, and that
consequently no unfavorable consequences should follow from such failure.
After perusing the Insurance Act, we are firmly persuaded that the non-payment of premiums is such
a vital defense of insurance companies that since the very beginning, said Act no. 2427 expressly
The appellee answers, quite plausibly, that the periodic payment of premiums, at least those after the
preserved it, by providing that after the policy shall have been in force for two years, it shall become
first, is not an obligation of the insured, so much so that it is not a debt enforceable by action of the
incontestable (i.e. the insurer shall have no defense) except for fraud, non-payment of premiums, and
insurer.
military or naval service in time of war (sec. 184 [b], Insurance Act). And when Congress recently
amended this section (Rep. Act No. 171), the defense of fraud was eliminated, while the defense of
Under an Oklahoma decision, the annual premium due is not a debt. It is not an obligation nonpayment of premiums was preserved. Thus the fundamental character of the undertaking to pay
upon which the insurer can maintain an action against insured; nor is its settlement governed premiums and the high importance of the defense of non-payment thereof, was specifically recognized.
by the strict rule controlling payments of debts. So, the court in a Kentucky case declares, in
the opinion, that it is not a debt. . . . The fact that it is payable annually or semi-annually, or
In keeping with such legislative policy, we feel no hesitation to adopt the United States Rule, which is
at any other stipulated time, does not of itself constitute a promise to pay, either express or
in effect a variation of the Connecticut rule for the sake of equity. In this connection, it appears that
implied. In case of non-payment the policy is forfeited, except so far as the forfeiture may be
the first policy had no reserve value, and that the equitable values of the second had been practically
saved by agreement, by waiver, estoppel, or by statute. The payment of the premium is
returned to the insured in the form of loan and advance for premium.
entirely optional, while a debt may be enforced at law, and the fact that the premium is agreed
to be paid is without force, in the absence of an unqualified and absolute agreement to pay a
specified sum at some certain time. In the ordinary policy there is no promise to pay, but it is For all the foregoing, the lower court's decision absolving the defendant from all liability on the policies
optional with the insured whether he will continue the policy or forfeit it. (3 Couch, Cyc. on in question, is hereby affirmed, without costs.
Insurance, Sec. 623, p. 1996.)
II. Contract of Insurance
It is well settled that a contract of insurance is sui generis. While the insured by an observance
of the conditions may hold the insurer to his contract, the latter has not the power or right to
compel the insured to maintain the contract relation with it longer than he chooses. Whether G.R. No. 82036 May 22, 1997
the insured will continue it or not is optional with him. There being no obligation to pay for the
premium, they did not constitute a debt. (Noble vs. Southern States M.D. Ins. Co., 157 Ky., TRAVELLERS INSURANCE & SURETY CORPORATION, petitioner,
46; 162 S.W., 528.) (Emphasis ours.) vs.
HON. COURT OF APPEALS and VICENTE MENDOZA, respondents.
It should be noted that the parties contracted not only for peacetime conditions but also for times of
war, because the policies contained provisions applicable expressly to wartime days. The logical
inference, therefore, is that the parties contemplated uninterrupted operation of the contract even if
armed conflict should ensue.
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
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 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 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.
I obligations as they arise from the same act of the taxicab fatally hitting private respondent's mother,
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 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
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 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 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 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. vs. 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.