THIRD DIVISION

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

RIZAL SURETY & INSURANCE COMPANY, petitioner, vs. COURT OF APPEALS and
TRANSWORLD KNITTING MILLS, INC., respondents.
DECISION
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court seeking to annul
and set aside the July 15, 1993 Decision [1] and October 22, 1993 Resolution[2] of the Court of
Appeals[3] in CA-G.R. CV NO. 28779, which modified the Ruling[4] of the Regional Trial Court of
Pasig, Branch 161, in Civil Case No. 46106.
The antecedent facts that matter are as follows:
On March 13, 1980, Rizal Surety & Insurance Company (Rizal Insurance) issued Fire Insurance
Policy No. 45727 in favor of Transworld Knitting Mills, Inc. (Transworld), initially for One Million
(P1,000,000.00) Pesos and eventually increased to One Million Five Hundred Thousand
(P1,500,000.00) Pesos, covering the period from August 14, 1980 to March 13, 1981.
Pertinent portions of subject policy on the buildings insured, and location thereof, read:
"On stocks of finished and/or unfinished products, raw materials and supplies of every
kind and description, the properties of the Insureds and/or held by them in trust, on
commission or on joint account with others and/or for which they (sic) responsible in
case of loss whilst contained and/or stored during the currency of this Policy in the
premises occupied by them forming part of the buildings situate (sic) within own
Compound at MAGDALO STREET, BARRIO UGONG, PASIG, METRO MANILA, PHILIPPINES,
BLOCK NO. 601.
xxx...............xxx...............xxx
Said building of four-span lofty one storey in height with mezzanine portions is
constructed of reinforced concrete and hollow blocks and/or concrete under galvanized
iron roof and occupied as hosiery mills, garment and lingerie factory, transistor-stereo
assembly plant, offices, warehouse and caretaker's quarters.
'Bounds in front partly by one-storey concrete building under galvanized iron roof
occupied as canteen and guardhouse, partly by building of two and partly one storey
constructed of concrete below, timber above undergalvanized iron roof occupied as
garage and quarters and partly by open space and/or tracking/ packing, beyond which
is the aforementioned Magdalo Street; on its right and left by driveway, thence open
spaces, and at the rear by open spaces.'"[5]
The same pieces of property insured with the petitioner were also insured with New India
Assurance Company, Ltd., (New India).

On January 12, 1981, fire broke out in the compound of Transworld, razing the middle portion
of its four-span building and partly gutting the left and right sections thereof. A two-storey
building (behind said four-span building) where fun and amusement machines and spare parts
were stored, was also destroyed by the fire.
Transworld filed its insurance claims with Rizal Surety & Insurance Company and New India
Assurance Company but to no avail.
On May 26, 1982, private respondent brought against the said insurance companies an action
for collection of sum of money and damages, docketed as Civil Case No. 46106 before Branch
161 of the then Court of First Instance of Rizal; praying for judgment ordering Rizal Insurance
and New India to pay the amount of P2,747, 867.00 plus legal interest, P400,000.00 as
attorney's fees, exemplary damages, expenses of litigation of P50,000.00 and costs of suit.[6]
Petitioner Rizal Insurance countered that its fire insurance policy sued upon covered only the
contents of the four-span building, which was partly burned, and not the damage caused by
the fire on the two-storey annex building.[7]
On January 4, 1990, the trial court rendered its decision; disposing as follows:
"ACCORDINGLY, judgment is hereby rendered as follows:
(1)Dismissing the case as against The New India Assurance Co., Ltd.;
(2) Ordering defendant Rizal Surety And Insurance Company to pay Transwrold (sic)
Knitting Mills, Inc. the amount of P826, 500.00 representing the actual value of the
losses suffered by it; and
(3) Cost against defendant Rizal Surety and Insurance Company.
SO ORDERED."[8]
Both the petitioner, Rizal Insurance Company, and private respondent, Transworld Knitting
Mills, Inc., went to the Court of Appeals, which came out with its decision of July 15, 1993
under attack, the decretal portion of which reads:
"WHEREFORE, and upon all the foregoing, the decision of the court below is MODIFIED
in that defendant New India Assurance Company has and is hereby required to pay
plaintiff-appellant the amount of P1,818,604.19 while the other Rizal Surety has to pay
the plaintiff-appellant P470,328.67, based on the actual losses sustained by plaintiff
Transworld in the fire, totalling P2,790,376.00 as against the amounts of fire insurance
coverages respectively extended by New India in the amount of P5,800,000.00 and
Rizal Surety and Insurance Company in the amount of P1,500,000.00.
No costs.
SO ORDERED."[9]
On August 20, 1993, from the aforesaid judgment of the Court of Appeals New India appealed
to this Court theorizing inter alia that the private respondent could not be compensated for the

loss of the fun and amusement machines and spare parts stored at the two-storey building
because it (Transworld) had no insurable interest in said goods or items.
On February 2, 1994, the Court denied the appeal with finality in G.R. No. L-111118 (New India
Assurance Company Ltd. vs. Court of Appeals).
Petitioner Rizal Insurance and private respondent Transworld, interposed a Motion for
Reconsideration before the Court of Appeals, and on October 22, 1993, the Court of Appeals
reconsidered its decision of July 15, 1993, as regards the imposition of interest, ruling thus:
"WHEREFORE, the Decision of July 15, 1993 is amended but only insofar as the
imposition of legal interest is concerned, that, on the assessment against New India
Assurance Company on the amount of P1,818,604.19 and that against Rizal Surety &
Insurance Company on the amount of P470,328.67, from May 26, 1982 when the
complaint was filed until payment is made. The rest of the said decision is retained in
all other respects.
SO ORDERED."[10]
Undaunted, petitioner Rizal Surety & Insurance Company found its way to this Court via the
present Petition, contending that:
I.....SAID DECISION (ANNEX A) ERRED IN ASSUMING THAT THE ANNEX BUILDING
WHERE THE BULK OF THE BURNED PROPERTIES WERE STORED, WAS INCLUDED IN THE
COVERAGE OF THE INSURANCE POLICY ISSUED BY RIZAL SURETY TO TRANSWORLD.
II.....SAID DECISION AND RESOLUTION (ANNEXES A AND B) ERRED IN NOT
CONSIDERING THE PICTURES (EXHS. 3 TO 7-C-RIZAL SURETY), TAKEN IMMEDIATELY
AFTER THE FIRE, WHICH CLEARLY SHOW THAT THE PREMISES OCCUPIED BY
TRANSWORLD, WHERE THE INSURED PROPERTIES WERE LOCATED, SUSTAINED PARTIAL
DAMAGE ONLY.
III. SAID DECISION (ANNEX A) ERRED IN NOT HOLDING THAT TRANSWORLD HAD ACTED
IN PALPABLE BAD FAITH AND WITH MALICE IN FILING ITS CLEARLY UNFOUNDED CIVIL
ACTION, AND IN NOT ORDERING TRANSWORLD TO PAY TO RIZAL SURETY MORAL AND
PUNITIVE DAMAGES (ART. 2205, CIVIL CODE), PLUS ATTORNEY'S FEES AND EXPENSES
OF LITIGATION (ART. 2208 PARS. 4 and 11, CIVIL CODE). [11]
The Petition is not impressed with merit.
It is petitioner's submission that the fire insurance policy litigated upon protected only the
contents of the main building (four-span),[12] and did not include those stored in the two-storey
annex building. On the other hand, the private respondent theorized that the so called "annex"
was not an annex but was actually an integral part of the four-span building [13] and therefore,
the goods and items stored therein were covered by the same fire insurance policy.
Resolution of the issues posited here hinges on the proper interpretation of the stipulation in
subject fire insurance policy regarding its coverage, which reads:
"xxx contained and/or stored during the currency of this Policy in the premises
occupied by them forming part of the buildings situate (sic) within own Compound xxx"

Therefrom, it can be gleaned unerringly that the fire insurance policy in question did not limit
its coverage to what were stored in the four-span building. As opined by the trial court of
origin, two requirements must concur in order that the said fun and amusement machines and
spare parts would be deemed protected by the fire insurance policy under scrutiny, to wit:
"First, said properties must be contained and/or stored in the areas occupied by
Transworld and second, said areas must form part of the building described in the
policy xxx"[14]
'Said building of four-span lofty one storey in height with mezzanine
portions is constructed of reinforced concrete and hollow blocks and/or
concrete under galvanized iron roof and occupied as hosiery mills,
garment and lingerie factory, transistor-stereo assembly plant, offices,
ware house and caretaker's quarter.'
The Court is mindful of the well-entrenched doctrine that factual findings by the Court of
Appeals are conclusive on the parties and not reviewable by this Court, and the same carry
even more weight when the Court of Appeals has affirmed the findings of fact arrived at by the
lower court.[15]
In the case under consideration, both the trial court and the Court of Appeals found that the so
called "annex " was not an annex building but an integral and inseparable part of the four-span
building described in the policy and consequently, the machines and spare parts stored therein
were covered by the fire insurance in dispute. The letter-report of the Manila Adjusters and
Surveyor's Company, which petitioner itself cited and invoked, describes the "annex" building
as follows:
"Two-storey building constructed of partly timber and partly concrete hollow blocks
under g.i. roof which is adjoining and intercommunicating with the repair of the first
right span of the lofty storey building and thence by property fence wall." [16]
Verily, the two-storey building involved, a permanent structure which adjoins and
intercommunicates with the "first right span of the lofty storey building", [17] formed part
thereof, and meets the requisites for compensability under the fire insurance policy sued upon.
So also, considering that the two-storey building aforementioned was already existing when
subject fire insurance policy contract was entered into on January 12, 1981, having been
constructed sometime in 1978,[18] petitioner should have specifically excluded the said twostorey building from the coverage of the fire insurance if minded to exclude the same but if did
not, and instead, went on to provide that such fire insurance policy covers the products, raw
materials and supplies stored within the premises of respondent Transworld which was an
integral part of the four-span building occupied by Transworld, knowing fully well the existence
of such building adjoining and intercommunicating with the right section of the four-span
building.
After a careful study, the Court does not find any basis for disturbing what the lower courts
found and arrived at.
Indeed, the stipulation as to the coverage of the fire insurance policy under controversy has
created a doubt regarding the portions of the building insured thereby. Article 1377 of the New
Civil Code provides:

"Art.1377. The interpretation of obscure words or stipulations in a contract shall not

favor the party who caused the obscurity"
Conformably, it stands to reason that the doubt should be resolved against the petitioner, Rizal
Surety Insurance Company, whose lawyer or managers drafted the fire insurance policy
contract under scrutiny. Citing the aforecited provision of law in point, the Court in Landicho vs.
Government Service Insurance System,[19] ruled:
"This is particularly true as regards insurance policies, in respect of which it is settled
that the 'terms in an insurance policy, which are ambiguous, equivocal, or uncertain x
x x are to be construed strictly and most strongly against the insurer, and liberally in
favor of the insured so as to effect the dominant purpose of indemnity or payment to
the insured, especially where forfeiture is involved' (29 Am. Jur., 181), and the reason
for this is that the 'insured usually has no voice in the selection or arrangement of the
words employed and that the language of the contract is selected with great care and
deliberation by experts and legal advisers employed by, and acting exclusively in the
interest of, the insurance company.' (44 C.J.S., p. 1174)."" [20]
Equally relevant is the following disquisition of the Court in Fieldmen's Insurance Company,
Inc. vs. Vda. De Songco,[21] to wit:
"'This rigid application of the rule on ambiguities has become necessary in view of
current business practices. The courts cannot ignore that nowadays monopolies,
cartels and concentration of capital, endowed with overwhelming economic power,
manage to impose upon parties dealing with them cunningly prepared 'agreements'
that the weaker party may not change one whit, his participation in the 'agreement'
being reduced to the alternative to 'take it or leave it' labelled since Raymond Saleilles
'contracts by adherence' (contrats [sic] d'adhesion), in contrast to these entered into
by parties bargaining on an equal footing, such contracts (of which policies of
insurance and international bills of lading are prime example) obviously call for greater
strictness and vigilance on the part of courts of justice with a view to protecting the
weaker party from abuses and imposition, and prevent their becoming traps for the
unwary (New Civil Code, Article 24; Sent. of Supreme Court of Spain, 13 Dec. 1934, 27
February 1942.)'"[22]
The issue of whether or not Transworld has an insurable interest in the fun and amusement
machines and spare parts, which entitles it to be indemnified for the loss thereof, had been
settled in G.R. No. L-111118, entitled New India Assurance Company, Ltd., vs. Court of Appeals,
where the appeal of New India from the decision of the Court of Appeals under review, was
denied with finality by this Court on February 2, 1994.
The rule on conclusiveness of judgment, which obtains under the premises, precludes the
relitigation of a particular fact or issue in another action between the same parties based on a
different claim or cause of action. "xxx the judgment in the prior action operates as estoppel
only as to those matters in issue or points controverted, upon the determination of which the
finding or judgment was rendered. In fine, the previous judgment is conclusive in the second
case, only as those matters actually and directly controverted and determined and not as to
matters merely involved therein."[23]
Applying the abovecited pronouncement, the Court, in Smith Bell and Company (Phils.), Inc.
vs. Court of Appeals,[24] held that the issue of negligence of the shipping line, which issue had
already been passed upon in a case filed by one of the insurers, is conclusive and can no

longer be relitigated in a similar case filed by another insurer against the same shipping line on
the basis of the same factual circumstances. Ratiocinating further, the Court opined:
"In the case at bar, the issue of which vessel ('Don Carlos' or 'Yotai Maru') had been
negligent, or so negligent as to have proximately caused the collision between them,
was an issue that was actually, directly and expressly raised, controverted and
litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision
and held the 'Don Carlos' to have been negligent rather than the 'Yotai Maru' and, as
already noted, that Decision was affirmed by this Court in G.R. No. L-48839 in a
Resolution dated 6 December 1987. The Reyes Decision thus became final and
executory approximately two (2) years before the Sison Decision, which is assailed in
the case at bar, was promulgated. Applying the rule of conclusiveness of judgment, the
question of which vessel had been negligent in the collision between the two (2)
vessels, had long been settled by this Court and could no longer be relitigated in C.A.G.R. No. 61206-R. Private respondent Go Thong was certainly bound by the ruling or
judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals fell into clear
and reversible error when it disregarded the Decision of this Court affirming the Reyes
Decision."[25]
The controversy at bar is on all fours with the aforecited case. Considering that private
respondent's insurable interest in, and compensability for the loss of subject fun and
amusement machines and spare parts, had been adjudicated, settled and sustained by the
Court of Appeals in CA-G.R. CV NO. 28779, and by this Court in G.R. No. L-111118, in a
Resolution, dated February 2, 1994, the same can no longer be relitigated and passed upon in
the present case. Ineluctably, the petitioner, Rizal Surety Insurance Company, is bound by the
ruling of the Court of Appeals and of this Court that the private respondent has an insurable
interest in the aforesaid fun and amusement machines and spare parts; and should be
indemnified for the loss of the same.
So also, the Court of Appeals correctly adjudged petitioner liable for the amount of
P470,328.67, it being the total loss and damage suffered by Transworld for which petitioner
Rizal Insurance is liable.[26]
All things studiedly considered and viewed in proper perspective, the Court is of the irresistible
conclusion, and so finds, that the Court of Appeals erred not in holding the petitioner, Rizal
Surety Insurance Company, liable for the destruction and loss of the insured buildings and
articles of the private respondent.
WHEREFORE, the Decision, dated July 15, 1993, and the Resolution, dated October 22, 1993,
of the Court of Appeals in CA-G.R. CV NO. 28779 are AFFIRMED in toto. No pronouncement as
to costs.
SO ORDERED.
Melo, (Chairman), Vit

SECOND DIVISION
[G.R. No. 156167. May 16, 2005]
GULF RESORTS, INC., petitioner, vs. PHILIPPINE CHARTER INSURANCE
CORPORATION, respondent.
DECISION
PUNO, J.:
Before the Court is the petition for certiorari under Rule 45 of the Revised Rules of Court by petitioner
GULF RESORTS, INC., against respondent PHILIPPINE CHARTER INSURANCE CORPORATION. Petitioner
assails the appellate court decision [1] which dismissed its two appeals and affirmed the judgment of the
trial court.
For review are the warring interpretations of petitioner and respondent on the scope of the insurance
companys liability for earthquake damage to petitioners properties. Petitioner avers that, pursuant to
its earthquake shock endorsement rider, Insurance Policy No. 31944 covers all damages to the
properties within its resort caused by earthquake. Respondent contends that the rider limits its liability
for loss to the two swimming pools of petitioner.
The facts as established by the court a quo, and affirmed by the appellate court are as follows:
[P]laintiff is the owner of the Plaza Resort situated at Agoo, La Union and had its properties in said
resort insured originally with the American Home Assurance Company (AHAC-AIU). In the first four
insurance policies issued by AHAC-AIU from 1984-85; 1985-86; 1986-1987; and 1987-88 (Exhs. C, D, E
and F; also Exhs. 1, 2, 3 and 4 respectively), the risk of loss from earthquake shock was extended only
to plaintiffs two swimming pools, thus, earthquake shock endt. (Item 5 only) (Exhs. C-1; D-1, and E and
two (2) swimming pools only (Exhs. C-1; D-1, E and F-1). Item 5 in those policies referred to the two (2)
swimming pools only (Exhs. 1-B, 2-B, 3-B and F-2); that subsequently AHAC(AIU) issued in plaintiffs
favor Policy No. 206-4182383-0 covering the period March 14, 1988 to March 14, 1989 (Exhs. G also G1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E
and F-1 was deleted and the entry under Endorsements/Warranties at the time of issue read that
plaintiff renewed its policy with AHAC (AIU) for the period of March 14, 1989 to March 14, 1990 under
Policy No. 206-4568061-9 (Exh. H) which carried the entry under Endorsement/Warranties at Time of
Issue, which read Endorsement to Include Earthquake Shock (Exh. 6-B-1) in the amount of P10,700.00
and paid P42,658.14 (Exhs. 6-A and 6-B) as premium thereof, computed as follows:
Item -P7,691,000.00 - on the Clubhouse only
@ .392%;
1,500,000.00 - on the furniture, etc.
contained in the building
above-mentioned@ .490%;
393,000.00- on the two swimming
pools, only (against the
peril of earthquake

shock only) @ 0.100%

116,600.00- other buildings include
as follows:
a) Tilter House- P19,800.00- 0.551%
b) Power House- P41,000.00- 0.551%
c) House Shed- P55,000.00 -0.540%
P100,000.00 for furniture, fixtures,
lines air-con and
operating equipment
that plaintiff agreed to insure with defendant the properties covered by AHAC (AIU) Policy No. 2064568061-9 (Exh. H) provided that the policy wording and rates in said policy be copied in the policy to
be issued by defendant; that defendant issued Policy No. 31944 to plaintiff covering the period of
March 14, 1990 to March 14, 1991 for P10,700,600.00 for a total premium of P45,159.92 (Exh. I); that
in the computation of the premium, defendants Policy No. 31944 (Exh. I), which is the policy in
question, contained on the right-hand upper portion of page 7 thereof, the following:
Rate-Various
Premium - P37,420.60 F/L
2,061.52 Typhoon
1,030.76 EC
393.00 ES
Doc. Stamps 3,068.10
F.S.T. 776.89
Prem. Tax 409.05
TOTAL 45,159.92;
that the above break-down of premiums shows that plaintiff paid only P393.00 as premium against
earthquake shock (ES); that in all the six insurance policies (Exhs. C, D, E, F, G and H), the premium
against the peril of earthquake shock is the same, that is P393.00 (Exhs. C and 1-B; 2-B and 3-B-1 and
3-B-2; F-02 and 4-A-1; G-2 and 5-C-1; 6-C-1; issued by AHAC (Exhs. C, D, E, F, G and H) and in Policy
No. 31944 issued by defendant, the shock endorsement provide(sic):
In consideration of the payment by the insured to the company of the sum included additional
premium the Company agrees, notwithstanding what is stated in the printed conditions of this policy
due to the contrary, that this insurance covers loss or damage to shock to any of the property insured
by this Policy occasioned by or through or in consequence of earthquake (Exhs. 1-D, 2-D, 3-A, 4-B, 5-A,
6-D and 7-C);
that in Exhibit 7-C the word included above the underlined portion was deleted; that on July 16, 1990
an earthquake struck Central Luzon and Northern Luzon and plaintiffs properties covered by Policy No.

31944 issued by defendant, including the two swimming pools in its Agoo Playa Resort were damaged.
[2]

After the earthquake, petitioner advised respondent that it would be making a claim under its
Insurance Policy No. 31944 for damages on its properties. Respondent instructed petitioner to file a
formal claim, then assigned the investigation of the claim to an independent claims adjuster, Bayne
Adjusters and Surveyors, Inc.[3] On July 30, 1990, respondent, through its adjuster, requested petitioner
to submit various documents in support of its claim. On August 7, 1990, Bayne Adjusters and
Surveyors, Inc., through its Vice-President A.R. de Leon, [4] rendered a preliminary report[5] finding
extensive damage caused by the earthquake to the clubhouse and to the two swimming pools. Mr. de
Leon stated that except for the swimming pools, all affected items have no coverage for earthquake
shocks.[6] On August 11, 1990, petitioner filed its formal demand[7] for settlement of the damage to all
its properties in the Agoo Playa Resort. On August 23, 1990, respondent denied petitioners claim on
the ground that its insurance policy only afforded earthquake shock coverage to the two swimming
pools of the resort.[8] Petitioner and respondent failed to arrive at a settlement. [9] Thus, on January 24,
1991, petitioner filed a complaint[10] with the regional trial court of Pasig praying for the payment of the
following:
1.) The sum of P5,427,779.00, representing losses sustained by the insured properties, with interest
thereon, as computed under par. 29 of the policy (Annex B) until fully paid;
2.) The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on
account of defendants refusal to pay the claims;
3.) The sum of P500,000.00, by way of exemplary damages;
4.) The sum of P500,000.00 by way of attorneys fees and expenses of litigation;
5.) Costs.[11]
Respondent filed its Answer with Special and Affirmative Defenses with Compulsory Counterclaims. [12]
On February 21, 1994, the lower court after trial ruled in favor of the respondent, viz:
The above schedule clearly shows that plaintiff paid only a premium of P393.00 against the peril of
earthquake shock, the same premium it paid against earthquake shock only on the two swimming
pools in all the policies issued by AHAC(AIU) (Exhibits C, D, E, F and G). From this fact the Court must
consequently agree with the position of defendant that the endorsement rider (Exhibit 7-C) means that
only the two swimming pools were insured against earthquake shock.
Plaintiff correctly points out that a policy of insurance is a contract of adhesion hence, where the
language used in an insurance contract or application is such as to create ambiguity the same should
be resolved against the party responsible therefor, i.e., the insurance company which prepared the
contract. To the mind of [the] Court, the language used in the policy in litigation is clear and
unambiguous hence there is no need for interpretation or construction but only application of the
provisions therein.
From the above observations the Court finds that only the two (2) swimming pools had earthquake
shock coverage and were heavily damaged by the earthquake which struck on July 16, 1990.
Defendant having admitted that the damage to the swimming pools was appraised by defendants
adjuster at P386,000.00, defendant must, by virtue of the contract of insurance, pay plaintiff said
amount.
Because it is the finding of the Court as stated in the immediately preceding paragraph that defendant
is liable only for the damage caused to the two (2) swimming pools and that defendant has made

known to plaintiff its willingness and readiness to settle said liability, there is no basis for the grant of
the other damages prayed for by plaintiff. As to the counterclaims of defendant, the Court does not
agree that the action filed by plaintiff is baseless and highly speculative since such action is a lawful
exercise of the plaintiffs right to come to Court in the honest belief that their Complaint is meritorious.
The prayer, therefore, of defendant for damages is likewise denied.
WHEREFORE, premises considered, defendant is ordered to pay plaintiffs the sum of THREE HUNDRED
EIGHTY SIX THOUSAND PESOS (P386,000.00) representing damage to the two (2) swimming pools,
with interest at 6% per annum from the date of the filing of the Complaint until defendants obligation
to plaintiff is fully paid.
No pronouncement as to costs.[13]
Petitioners Motion for Reconsideration was denied. Thus, petitioner filed an appeal with the Court of
Appeals based on the following assigned errors:[14]
A. THE TRIAL COURT ERRED IN FINDING THAT PLAINTIFF-APPELLANT CAN ONLY RECOVER FOR THE
DAMAGE TO ITS TWO SWIMMING POOLS UNDER ITS FIRE POLICY NO. 31944, CONSIDERING ITS
PROVISIONS, THE CIRCUMSTANCES SURROUNDING THE ISSUANCE OF SAID POLICY AND THE
ACTUATIONS OF THE PARTIES SUBSEQUENT TO THE EARTHQUAKE OF JULY 16, 1990.
B. THE TRIAL COURT ERRED IN DETERMINING PLAINTIFF-APPELLANTS RIGHT TO RECOVER UNDER
DEFENDANT-APPELLEES POLICY (NO. 31944; EXH I) BY LIMITING ITSELF TO A CONSIDERATION OF THE
SAID POLICY ISOLATED FROM THE CIRCUMSTANCES SURROUNDING ITS ISSUANCE AND THE
ACTUATIONS OF THE PARTIES AFTER THE EARTHQUAKE OF JULY 16, 1990.
C. THE TRIAL COURT ERRED IN NOT HOLDING THAT PLAINTIFF-APPELLANT IS ENTITLED TO THE
DAMAGES CLAIMED, WITH INTEREST COMPUTED AT 24% PER ANNUM ON CLAIMS ON PROCEEDS OF
POLICY.
On the other hand, respondent filed a partial appeal, assailing the lower courts failure to award it
attorneys fees and damages on its compulsory counterclaim.
After review, the appellate court affirmed the decision of the trial court and ruled, thus:
However, after carefully perusing the documentary evidence of both parties, We are not convinced that
the last two (2) insurance contracts (Exhs. G and H), which the plaintiff-appellant had with AHAC (AIU)
and upon which the subject insurance contract with Philippine Charter Insurance Corporation is said to
have been based and copied (Exh. I), covered an extended earthquake shock insurance on all the
insured properties.
xxx
We also find that the Court a quo was correct in not granting the plaintiff-appellants prayer for the
imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting
to P4,280,000.00. Since the defendant-appellant has expressed its willingness to pay the damage
caused on the two (2) swimming pools, as the Court a quo and this Court correctly found it to be liable
only, it then cannot be said that it was in default and therefore liable for interest.
Coming to the defendant-appellants prayer for an attorneys fees, long-standing is the rule that the
award thereof is subject to the sound discretion of the court. Thus, if such discretion is well-exercised,
it will not be disturbed on appeal (Castro et al. v. CA, et al., G.R. No. 115838, July 18, 2002). Moreover,
being the award thereof an exception rather than a rule, it is necessary for the court to make findings
of facts and law that would bring the case within the exception and justify the grant of such award
(Country Bankers Insurance Corp. v. Lianga Bay and Community Multi-Purpose Coop., Inc., G.R. No.

136914, January 25, 2002). Therefore, holding that the plaintiff-appellants action is not baseless and
highly speculative, We find that the Court a quo did not err in granting the same.
WHEREFORE, in view of all the foregoing, both appeals are hereby DISMISSED and judgment of the Trial
Court hereby AFFIRMED in toto. No costs.[15]
Petitioner filed the present petition raising the following issues: [16]
A. WHETHER THE COURT OF APPEALS CORRECTLY HELD THAT UNDER RESPONDENTS INSURANCE
POLICY NO. 31944, ONLY THE TWO (2) SWIMMING POOLS, RATHER THAN ALL THE PROPERTIES
COVERED THEREUNDER, ARE INSURED AGAINST THE RISK OF EARTHQUAKE SHOCK.
B. WHETHER THE COURT OF APPEALS CORRECTLY DENIED PETITIONERS PRAYER FOR DAMAGES WITH
INTEREST THEREON AT THE RATE CLAIMED, ATTORNEYS FEES AND EXPENSES OF LITIGATION.
Petitioner contends:
First, that the policys earthquake shock endorsement clearly covers all of the properties insured and
not only the swimming pools. It used the words any property insured by this policy, and it should be
interpreted as all inclusive.
Second, the unqualified and unrestricted nature of the earthquake shock endorsement is confirmed in
the body of the insurance policy itself, which states that it is [s]ubject to: Other Insurance Clause,
Typhoon Endorsement, Earthquake Shock Endt., Extended Coverage Endt., FEA Warranty & Annual
Payment Agreement On Long Term Policies.[17]
Third, that the qualification referring to the two swimming pools had already been deleted in the
earthquake shock endorsement.
Fourth, it is unbelievable for respondent to claim that it only made an inadvertent omission when it
deleted the said qualification.
Fifth, that the earthquake shock endorsement rider should be given precedence over the wording of
the insurance policy, because the rider is the more deliberate expression of the agreement of the
contracting parties.
Sixth, that in their previous insurance policies, limits were placed on the endorsements/warranties
enumerated at the time of issue.
Seventh, any ambiguity in the earthquake shock endorsement should be resolved in favor of
petitioner and against respondent. It was respondent which caused the ambiguity when it made the
policy in issue.
Eighth, the qualification of the endorsement limiting the earthquake shock endorsement should be
interpreted as a caveat on the standard fire insurance policy, such as to remove the two swimming
pools from the coverage for the risk of fire. It should not be used to limit the respondents liability for
earthquake shock to the two swimming pools only.
Ninth, there is no basis for the appellate court to hold that the additional premium was not paid under
the extended coverage. The premium for the earthquake shock coverage was already included in the
premium paid for the policy.
Tenth, the parties contemporaneous and subsequent acts show that they intended to extend
earthquake shock coverage to all insured properties. When it secured an insurance policy from
respondent, petitioner told respondent that it wanted an exact replica of its latest insurance policy
from American Home Assurance Company (AHAC-AIU), which covered all the resorts properties for

earthquake shock damage and respondent agreed. After the July 16, 1990 earthquake, respondent
assured petitioner that it was covered for earthquake shock. Respondents insurance adjuster, Bayne
Adjusters and Surveyors, Inc., likewise requested petitioner to submit the necessary documents for its
building claims and other repair costs. Thus, under the doctrine of equitable estoppel, it cannot deny
that the insurance policy it issued to petitioner covered all of the properties within the resort.
Eleventh, that it is proper for it to avail of a petition for review by certiorari under Rule 45 of the
Revised Rules of Court as its remedy, and there is no need for calibration of the evidence in order to
establish the facts upon which this petition is based.
On the other hand, respondent made the following counter arguments: [18]
First, none of the previous policies issued by AHAC-AIU from 1983 to 1990 explicitly extended
coverage against earthquake shock to petitioners insured properties other than on the two swimming
pools. Petitioner admitted that from 1984 to 1988, only the two swimming pools were insured against
earthquake shock. From 1988 until 1990, the provisions in its policy were practically identical to its
earlier policies, and there was no increase in the premium paid. AHAC-AIU, in a letter [19] by its
representative Manuel C. Quijano, categorically stated that its previous policy, from which respondents
policy was copied, covered only earthquake shock for the two swimming pools.
Second, petitioners payment of additional premium in the amount of P393.00 shows that the policy
only covered earthquake shock damage on the two swimming pools. The amount was the same
amount paid by petitioner for earthquake shock coverage on the two swimming pools from 1990-1991.
No additional premium was paid to warrant coverage of the other properties in the resort.
Third, the deletion of the phrase pertaining to the limitation of the earthquake shock endorsement to
the two swimming pools in the policy schedule did not expand the earthquake shock coverage to all of
petitioners properties. As per its agreement with petitioner, respondent copied its policy from the
AHAC-AIU policy provided by petitioner. Although the first five policies contained the said qualification
in their riders title, in the last two policies, this qualification in the title was deleted. AHAC-AIU, through
Mr. J. Baranda III, stated that such deletion was a mere inadvertence. This inadvertence did not make
the policy incomplete, nor did it broaden the scope of the endorsement whose descriptive title was
merely enumerated. Any ambiguity in the policy can be easily resolved by looking at the other
provisions, specially the enumeration of the items insured, where only the two swimming pools were
noted as covered for earthquake shock damage.
Fourth, in its Complaint, petitioner alleged that in its policies from 1984 through 1988, the phrase
Item 5 P393,000.00 on the two swimming pools only (against the peril of earthquake shock only)
meant that only the swimming pools were insured for earthquake damage. The same phrase is used in
toto in the policies from 1989 to 1990, the only difference being the designation of the two swimming
pools as Item 3.
Fifth, in order for the earthquake shock endorsement to be effective, premiums must be paid for all
the properties covered. In all of its seven insurance policies, petitioner only paid P393.00 as premium
for coverage of the swimming pools against earthquake shock. No other premium was paid for
earthquake shock coverage on the other properties. In addition, the use of the qualifier ANY instead of
ALL to describe the property covered was done deliberately to enable the parties to specify the
properties included for earthquake coverage.
Sixth, petitioner did not inform respondent of its requirement that all of its properties must be
included in the earthquake shock coverage. Petitioners own evidence shows that it only required
respondent to follow the exact provisions of its previous policy from AHAC-AIU. Respondent complied
with this requirement. Respondents only deviation from the agreement was when it modified the
provisions regarding the replacement cost endorsement. With regard to the issue under litigation, the
riders of the old policy and the policy in issue are identical.

Seventh, respondent did not do any act or give any assurance to petitioner as would estop it from
maintaining that only the two swimming pools were covered for earthquake shock. The adjusters letter
notifying petitioner to present certain documents for its building claims and repair costs was given to
petitioner before the adjuster knew the full coverage of its policy.
Petitioner anchors its claims on AHAC-AIUs inadvertent deletion of the phrase Item 5 Only after the
descriptive name or title of the Earthquake Shock Endorsement. However, the words of the policy
reflect the parties clear intention to limit earthquake shock coverage to the two swimming pools.
Before petitioner accepted the policy, it had the opportunity to read its conditions. It did not object to
any deficiency nor did it institute any action to reform the policy. The policy binds the petitioner.
Eighth, there is no basis for petitioner to claim damages, attorneys fees and litigation expenses. Since
respondent was willing and able to pay for the damage caused on the two swimming pools, it cannot
be considered to be in default, and therefore, it is not liable for interest.
We hold that the petition is devoid of merit.
In Insurance Policy No. 31944, four key items are important in the resolution of the case at bar.
First, in the designation of location of risk, only the two swimming pools were specified as
included, viz:
ITEM 3 393,000.00 On the two (2) swimming pools only (against the peril of earthquake shock only) [20]
Second, under the breakdown for premium payments,[21] it was stated that:
PREMIUM RECAPITULATION
ITEM NOS. AMOUNT RATES PREMIUM
xxx
3 393,000.00 0.100%-E/S 393.00[22]
Third, Policy Condition No. 6 stated:
6. This insurance does not cover any loss or damage occasioned by or through or in consequence,
directly or indirectly of any of the following occurrences, namely:-(a) Earthquake, volcanic eruption or other convulsion of nature. [23]
Fourth, the rider attached to the policy, titled Extended Coverage Endorsement (To Include the Perils
of Explosion, Aircraft, Vehicle and Smoke), stated, viz:
ANNUAL PAYMENT AGREEMENT ON
LONG TERM POLICIES
THE INSURED UNDER THIS POLICY HAVING ESTABLISHED AGGREGATE SUMS INSURED IN EXCESS OF
FIVE MILLION PESOS, IN CONSIDERATION OF A DISCOUNT OF 5% OR 7 % OF THE NET PREMIUM x x x
POLICY HEREBY UNDERTAKES TO CONTINUE THE INSURANCE UNDER THE ABOVE NAMED x x x AND TO
PAY THE PREMIUM.
Earthquake Endorsement

In consideration of the payment by the Insured to the Company of the sum of P. . . . . . . . . . . . . . . . .

additional premium the Company agrees, notwithstanding what is stated in the printed conditions of
this Policy to the contrary, that this insurance covers loss or damage (including loss or damage by fire)
to any of the property insured by this Policy occasioned by or through or in consequence of
Earthquake.
Provided always that all the conditions of this Policy shall apply (except in so far as they may be hereby
expressly varied) and that any reference therein to loss or damage by fire should be deemed to apply
also to loss or damage occasioned by or through or in consequence of Earthquake. [24]
Petitioner contends that pursuant to this rider, no qualifications were placed on the scope of the
earthquake shock coverage. Thus, the policy extended earthquake shock coverage to all of the insured
properties.
It is basic that all the provisions of the insurance policy should be examined and interpreted in
consonance with each other.[25] All its parts are reflective of the true intent of the parties. The policy
cannot be construed piecemeal. Certain stipulations cannot be segregated and then made to control;
neither do particular words or phrases necessarily determine its character. Petitioner cannot focus on
the earthquake shock endorsement to the exclusion of the other provisions. All the provisions and
riders, taken and interpreted together, indubitably show the intention of the parties to extend
earthquake shock coverage to the two swimming pools only.
A careful examination of the premium recapitulation will show that it is the clear intent of the parties to
extend earthquake shock coverage only to the two swimming pools. Section 2(1) of the Insurance Code
defines a contract of insurance as an agreement whereby one undertakes for a consideration to
indemnify another against loss, damage or liability arising from an unknown or contingent event. Thus,
an insurance contract exists where the following elements concur:
1. The insured has an insurable interest;
2. The insured is subject to a risk of loss by the happening of the designated peril;
3. The insurer assumes the risk;
4. Such assumption of risk is part of a general scheme to distribute actual losses among a large group
of persons bearing a similar risk; and
5. In consideration of the insurer's promise, the insured pays a premium.[26] (Emphasis ours)
An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured
against a specified peril.[27] In fire, casualty, and marine insurance, the premium payable becomes a
debt as soon as the risk attaches.[28] In the subject policy, no premium payments were made with
regard to earthquake shock coverage, except on the two swimming pools. There is no mention of any
premium payable for the other resort properties with regard to earthquake shock. This is consistent
with the history of petitioners previous insurance policies from AHAC-AIU. As borne out by petitioners
witnesses:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 12-13
Q. Now Mr. Mantohac, will it be correct to state also that insofar as your insurance policy during the
period from March 4, 1984 to March 4, 1985 the coverage on earthquake shock was limited to the two
swimming pools only?

A. Yes, sir. It is limited to the two swimming pools, specifically shown in the warranty, there is a
provision here that it was only for item 5.
Q. More specifically Item 5 states the amount of P393,000.00 corresponding to the two swimming
pools only?
A. Yes, sir.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC TSN, November 25, 1991
pp. 23-26
Q. For the period from March 14, 1988 up to March 14, 1989, did you personally arrange for the
procurement of this policy?
A. Yes, sir.
Q. Did you also do this through your insurance agency?
A. If you are referring to Forte Insurance Agency, yes.
Q. Is Forte Insurance Agency a department or division of your company?
A. No, sir. They are our insurance agency.
Q. And they are independent of your company insofar as operations are concerned?
A. Yes, sir, they are separate entity.
Q. But insofar as the procurement of the insurance policy is concerned they are of course subject to
your instruction, is that not correct?
A. Yes, sir. The final action is still with us although they can recommend what insurance to take.
Q. In the procurement of the insurance police (sic) from March 14, 1988 to March 14, 1989, did you
give written instruction to Forte Insurance Agency advising it that the earthquake shock coverage must
extend to all properties of Agoo Playa Resort in La Union?
A. No, sir. We did not make any written instruction, although we made an oral instruction to that effect
of extending the coverage on (sic) the other properties of the company.
Q. And that instruction, according to you, was very important because in April 1987 there was an
earthquake tremor in La Union?
A. Yes, sir.
Q. And you wanted to protect all your properties against similar tremors in the [future], is that correct?
A. Yes, sir.
Q. Now, after this policy was delivered to you did you bother to check the provisions with respect to
your instructions that all properties must be covered again by earthquake shock endorsement?
A. Are you referring to the insurance policy issued by American Home Assurance Company marked
Exhibit G?
Atty. Mejia: Yes.

Witness:
A. I examined the policy and seeing that the warranty on the earthquake shock endorsement has no
more limitation referring to the two swimming pools only, I was contented already that the previous
limitation pertaining to the two swimming pools was already removed.
Petitioner also cited and relies on the attachment of the phrase Subject to: Other Insurance
Clause, Typhoon Endorsement, Earthquake Shock Endorsement, Extended Coverage
Endorsement, FEA Warranty & Annual Payment Agreement on Long Term Policies [29] to the
insurance policy as proof of the intent of the parties to extend the coverage for earthquake shock.
However, this phrase is merely an enumeration of the descriptive titles of the riders, clauses,
warranties or endorsements to which the policy is subject, as required under Section 50, paragraph 2
of the Insurance Code.
We also hold that no significance can be placed on the deletion of the qualification limiting the
coverage to the two swimming pools. The earthquake shock endorsement cannot stand alone. As
explained by the testimony of Juan Baranda III, underwriter for AHAC-AIU:
DIRECT EXAMINATION OF JUAN BARANDA III[30]
TSN, August 11, 1992
pp. 9-12
Atty. Mejia:
We respectfully manifest that the same exhibits C to H inclusive have been previously marked by
counsel for defendant as Exhibit[s] 1-6 inclusive. Did you have occasion to review of (sic) these six (6)
policies issued by your company [in favor] of Agoo Playa Resort?
WITNESS:
Yes[,] I remember having gone over these policies at one point of time, sir.
Q. Now, wach (sic) of these six (6) policies marked in evidence as Exhibits C to H respectively carries
an earthquake shock endorsement[?] My question to you is, on the basis on (sic) the wordings
indicated in Exhibits C to H respectively what was the extent of the coverage [against] the peril of
earthquake shock as provided for in each of the six (6) policies?
xxx
WITNESS:
The extent of the coverage is only up to the two (2) swimming pools, sir.
Q. Is that for each of the six (6) policies namely: Exhibits C, D, E, F, G and H?
A. Yes, sir.
ATTY. MEJIA:
What is your basis for stating that the coverage against earthquake shock as provided for in each of
the six (6) policies extend to the two (2) swimming pools only?
WITNESS:

Because it says here in the policies, in the enumeration Earthquake Shock Endorsement, in the Clauses
and Warranties: Item 5 only (Earthquake Shock Endorsement), sir.
ATTY. MEJIA:
Witness referring to Exhibit C-1, your Honor.
WITNESS:
We do not normally cover earthquake shock endorsement on stand alone basis. For swimming pools
we do cover earthquake shock. For building we covered it for full earthquake coverage which includes
earthquake shock
COURT:
As far as earthquake shock endorsement you do not have a specific coverage for other things other
than swimming pool? You are covering building? They are covered by a general insurance?
WITNESS:
Earthquake shock coverage could not stand alone. If we are covering building or another we can issue
earthquake shock solely but that the moment I see this, the thing that comes to my mind is either
insuring a swimming pool, foundations, they are normally affected by earthquake but not by fire, sir.
DIRECT EXAMINATION OF JUAN BARANDA III
TSN, August 11, 1992
pp. 23-25
Q. Plaintiffs witness, Mr. Mantohac testified and he alleged that only Exhibits C, D, E and F inclusive
[remained] its coverage against earthquake shock to two (2) swimming pools only but that Exhibits G
and H respectively entend the coverage against earthquake shock to all the properties indicated in the
respective schedules attached to said policies, what can you say about that testimony of plaintiffs
witness?
WITNESS:
As I have mentioned earlier, earthquake shock cannot stand alone without the other half of it. I assure
you that this one covers the two swimming pools with respect to earthquake shock endorsement.
Based on it, if we are going to look at the premium there has been no change with respect to the rates.
Everytime (sic) there is a renewal if the intention of the insurer was to include the earthquake shock, I
think there is a substantial increase in the premium. We are not only going to consider the two (2)
swimming pools of the other as stated in the policy. As I see, there is no increase in the amount of the
premium. I must say that the coverage was not broaden (sic) to include the other items.
COURT:
They are the same, the premium rates?
WITNESS:
They are the same in the sence (sic), in the amount of the coverage. If you are going to do some
computation based on the rates you will arrive at the same premiums, your Honor.
CROSS-EXAMINATION OF JUAN BARANDA III

TSN, September 7, 1992

pp. 4-6
ATTY. ANDRES:
Would you as a matter of practice [insure] swimming pools for fire insurance?
WITNESS:
No, we dont, sir.
Q. That is why the phrase earthquake shock to the two (2) swimming pools only was placed, is it not?
A. Yes, sir.
ATTY. ANDRES:
Will you not also agree with me that these exhibits, Exhibits G and H which you have pointed to during
your direct-examination, the phrase Item no. 5 only meaning to (sic) the two (2) swimming pools was
deleted from the policies issued by AIU, is it not?
xxx
ATTY. ANDRES:
As an insurance executive will you not attach any significance to the deletion of the qualifying phrase
for the policies?
WITNESS:
My answer to that would be, the deletion of that particular phrase is inadvertent. Being a company
underwriter, we do not cover. . it was inadvertent because of the previous policies that we have issued
with no specific attachments, premium rates and so on. It was inadvertent, sir.
The Court also rejects petitioners contention that respondents contemporaneous and subsequent acts
to the issuance of the insurance policy falsely gave the petitioner assurance that the coverage of the
earthquake shock endorsement included all its properties in the resort. Respondent only insured the
properties as intended by the petitioner. Petitioners own witness testified to this agreement, viz:
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 4-5
Q. Just to be clear about this particular answer of yours Mr. Witness, what exactly did you tell Atty.
Omlas (sic) to copy from Exhibit H for purposes of procuring the policy from Philippine Charter
Insurance Corporation?
A. I told him that the insurance that they will have to get will have the same provisions as this
American Home Insurance Policy No. 206-4568061-9.
Q. You are referring to Exhibit H of course?
A. Yes, sir, to Exhibit H.

Q. So, all the provisions here will be the same except that of the premium rates?
A. Yes, sir. He assured me that with regards to the insurance premium rates that they will be charging
will be limited to this one. I (sic) can even be lesser.
CROSS EXAMINATION OF LEOPOLDO MANTOHAC
TSN, January 14, 1992
pp. 12-14
Atty. Mejia:
Q. Will it be correct to state[,] Mr. Witness, that you made a comparison of the provisions and scope of
coverage of Exhibits I and H sometime in the third week of March, 1990 or thereabout?
A. Yes, sir, about that time.
Q. And at that time did you notice any discrepancy or difference between the policy wordings as well
as scope of coverage of Exhibits I and H respectively?
A. No, sir, I did not discover any difference inasmuch (sic) as I was assured already that the policy
wordings and rates were copied from the insurance policy I sent them but it was only when this case
erupted that we discovered some discrepancies.
Q. With respect to the items declared for insurance coverage did you notice any discrepancy at any
time between those indicated in Exhibit I and those indicated in Exhibit H respectively?
A. With regard to the wordings I did not notice any difference because it was exactly the
same P393,000.00 on the two (2) swimming pools only against the peril of earthquake shock which I
understood before that this provision will have to be placed here because this particular provision
under the peril of earthquake shock only is requested because this is an insurance policy and therefore
cannot be insured against fire, so this has to be placed.
The verbal assurances allegedly given by respondents representative Atty. Umlas were not proved.
Atty. Umlas categorically denied having given such assurances.
Finally, petitioner puts much stress on the letter of respondents independent claims adjuster, Bayne
Adjusters and Surveyors, Inc. But as testified to by the representative of Bayne Adjusters and
Surveyors, Inc., respondent never meant to lead petitioner to believe that the endorsement for
earthquake shock covered properties other than the two swimming pools, viz:
DIRECT EXAMINATION OF ALBERTO DE LEON (Bayne
Adjusters and Surveyors, Inc.)
TSN, January 26, 1993
pp. 22-26
Q. Do you recall the circumstances that led to your discussion regarding the extent of coverage of the
policy issued by Philippine Charter Insurance Corporation?
A. I remember that when I returned to the office after the inspection, I got a photocopy of the
insurance coverage policy and it was indicated under Item 3 specifically that the coverage is only for
earthquake shock. Then, I remember I had a talk with Atty. Umlas (sic), and I relayed to him what I had

found out in the policy and he confirmed to me indeed only Item 3 which were the two swimming pools
have coverage for earthquake shock.
xxx
Q. Now, may we know from you Engr. de Leon your basis, if any, for stating that except for the
swimming pools all affected items have no coverage for earthquake shock?
xxx
A. I based my statement on my findings, because upon my examination of the policy I found out that
under Item 3 it was specific on the wordings that on the two swimming pools only, then enclosed in
parenthesis (against the peril[s] of earthquake shock only), and secondly, when I examined the
summary of premium payment only Item 3 which refers to the swimming pools have a computation for
premium payment for earthquake shock and all the other items have no computation for payment of
premiums.
In sum, there is no ambiguity in the terms of the contract and its riders. Petitioner cannot rely on the
general rule that insurance contracts are contracts of adhesion which should be liberally construed in
favor of the insured and strictly against the insurer company which usually prepares it. [31] A contract of
adhesion is one wherein a party, usually a corporation, prepares the stipulations in the contract, while
the other party merely affixes his signature or his "adhesion" thereto. Through the years, the courts
have held that in these type of contracts, the parties do not bargain on equal footing, the weaker
party's participation being reduced to the alternative to take it or leave it. Thus, these contracts are
viewed as traps for the weaker party whom the courts of justice must protect. [32] Consequently, any
ambiguity therein is resolved against the insurer, or construed liberally in favor of the insured. [33]
The case law will show that this Court will only rule out blind adherence to terms where facts and
circumstances will show that they are basically one-sided. [34] Thus, we have called on lower courts to
remain careful in scrutinizing the factual circumstances behind each case to determine the efficacy of
the claims of contending parties. In Development Bank of the Philippines v. National
Merchandising Corporation, et al.,[35] the parties, who were acute businessmen of experience, were
presumed to have assented to the assailed documents with full knowledge.
We cannot apply the general rule on contracts of adhesion to the case at bar. Petitioner cannot claim it
did not know the provisions of the policy. From the inception of the policy, petitioner had required the
respondent to copy verbatim the provisions and terms of its latest insurance policy from AHAC-AIU. The
testimony of Mr. Leopoldo Mantohac, a direct participant in securing the insurance policy of petitioner,
is reflective of petitioners knowledge, viz:
DIRECT EXAMINATION OF LEOPOLDO MANTOHAC[36]
TSN, September 23, 1991
pp. 20-21
Q. Did you indicate to Atty. Omlas (sic) what kind of policy you would want for those facilities in Agoo
Playa?
A. Yes, sir. I told him that I will agree to that renewal of this policy under Philippine Charter Insurance
Corporation as long as it will follow the same or exact provisions of the previous insurance policy we
had with American Home Assurance Corporation.
Q. Did you take any step Mr. Witness to ensure that the provisions which you wanted in the American
Home Insurance policy are to be incorporated in the PCIC policy?

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

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-31845 April 30, 1979
GREAT PACIFIC LIFE ASSURANCE COMPANY, petitioner,
vs.
HONORABLE COURT OF APPEALS, respondents.
G.R. No. L-31878 April 30, 1979
LAPULAPU D. MONDRAGON, petitioner,
vs.
HON. COURT OF APPEALS and NGO HING, respondents.
Siguion Reyna, Montecillo & Ongsiako and Sycip, Salazar, Luna & Manalo for petitioner Company.
Voltaire Garcia for petitioner Mondragon.
Pelaez, Pelaez & Pelaez for respondent Ngo Hing.

DE CASTRO, J.:
The two above-entitled cases were ordered consolidated by the Resolution of this Court dated April 29, 1970, (Rollo,
No. L-31878, p. 58), because the petitioners in both cases seek similar relief, through these petitions for certiorari by
way of appeal, from the amended decision of respondent Court of Appeals which affirmed in toto the decision of the
Court of First Instance of Cebu, ordering "the defendants (herein petitioners Great Pacific Ligfe Assurance Company
and Mondragon) jointly and severally to pay plaintiff (herein private respondent Ngo Hing) the amount of P50,000.00
with interest at 6% from the date of the filing of the complaint, and the sum of P1,077.75, without interest.
It appears that on March 14, 1957, private respondent Ngo Hing filed an application with the Great Pacific Life
Assurance Company (hereinafter referred to as Pacific Life) for a twenty-year endownment policy in the amount of
P50,000.00 on the life of his one-year old daughter Helen Go. Said respondent supplied the essential data which
petitioner Lapulapu D. Mondragon, Branch Manager of the Pacific Life in Cebu City wrote on the corresponding form
in his own handwriting (Exhibit I-M). Mondragon finally type-wrote the data on the application form which was signed
by private respondent Ngo Hing. The latter paid the annual premuim the sum of P1,077.75 going over to the
Company, but he reatined the amount of P1,317.00 as his commission for being a duly authorized agebt of Pacific
Life. Upon the payment of the insurance premuim, the binding deposit receipt (Exhibit E) was issued to private
respondent Ngo Hing. Likewise, petitioner Mondragon handwrote at the bottom of the back page of the application
form his strong recommendation for the approval of the insurance application. Then on April 30, 1957, Mondragon
received a letter from Pacific Life disapproving the insurance application (Exhibit 3-M). The letter stated that the said
life insurance application for 20-year endowment plan is not available for minors below seven years old, but Pacific
Life can consider the same under the Juvenile Triple Action Plan, and advised that if the offer is acceptable, the
Juvenile Non-Medical Declaration be sent to the company.
The non-acceptance of the insurance plan by Pacific Life was allegedly not communicated by petitioner Mondragon
to private respondent Ngo Hing. Instead, on May 6, 1957, Mondragon wrote back Pacific Life again strongly

recommending the approval of the 20-year endowment insurance plan to children, pointing out that since 1954 the
customers, especially the Chinese, were asking for such coverage (Exhibit 4-M).
It was when things were in such state that on May 28, 1957 Helen Go died of influenza with complication of
bronchopneumonia. Thereupon, private respondent sought the payment of the proceeds of the insurance, but having
failed in his effort, he filed the action for the recovery of the same before the Court of First Instance of Cebu, which
rendered the adverse decision as earlier refered to against both petitioners.
The decisive issues in these cases are: (1) whether the binding deposit receipt (Exhibit E) constituted a temporary
contract of the life insurance in question; and (2) whether private respondent Ngo Hing concealed the state of health
and physical condition of Helen Go, which rendered void the aforesaid Exhibit E.
1. At the back of Exhibit E are condition precedents required before a deposit is considered a BINDING RECEIPT.
These conditions state that:
A. If the Company or its agent, shan have received the premium deposit ... and the insurance
application, ON or PRIOR to the date of medical examination ... said insurance shan be in force
and in effect from the date of such medical examination, for such period as is covered by the
deposit ...,PROVIDED the company shall be satisfied that on said date the applicant was insurable
on standard rates under its rule for the amount of insurance and the kind of policy requested in the
application.
D. If the Company does not accept the application on standard rate for the amount of insurance
and/or the kind of policy requested in the application but issue, or offers to issue a policy for a
different plan and/or amount ..., the insurance shall not be in force and in effect until the applicant
shall have accepted the policy as issued or offered by the Company and shall have paid the full
premium thereof. If the applicant does not accept the policy, the deposit shall be refunded.
E. If the applicant shall not have been insurable under Condition A above, and the Company
declines to approve the application the insurance applied for shall not have been in force at any
time and the sum paid be returned to the applicant upon the surrender of this receipt. (Emphasis
Ours).
The aforequoted provisions printed on Exhibit E show that the binding deposit receipt is intended to be merely a
provisional or temporary insurance contract and only upon compliance of the following conditions: (1) that the
company shall be satisfied that the applicant was insurable on standard rates; (2) that if the company does not accept
the application and offers to issue a policy for a different plan, the insurance contract shall not be binding until the
applicant accepts the policy offered; otherwise, the deposit shall be reftmded; and (3) that if the applicant is not ble
according to the standard rates, and the company disapproves the application, the insurance applied for shall not be
in force at any time, and the premium paid shall be returned to the applicant.
Clearly implied from the aforesaid conditions is that the binding deposit receipt in question is merely an
acknowledgment, on behalf of the company, that the latter's branch office had received from the applicant the
insurance premium and had accepted the application subject for processing by the insurance company; and that the
latter will either approve or reject the same on the basis of whether or not the applicant is "insurable on standard
rates." Since petitioner Pacific Life disapproved the insurance application of respondent Ngo Hing, the binding
deposit receipt in question had never become in force at any time.
Upon this premise, the binding deposit receipt (Exhibit E) is, manifestly, merely conditional and does not insure
outright. As held by this Court, where an agreement is made between the applicant and the agent, no liability shall
attach until the principal approves the risk and a receipt is given by the agent. The acceptance is merely conditional
and is subordinated to the act of the company in approving or rejecting the application. Thus, in life insurance, a

"binding slip" or "binding receipt" does not insure by itself (De Lim vs. Sun Life Assurance Company of Canada, 41
Phil. 264).
It bears repeating that through the intra-company communication of April 30, 1957 (Exhibit 3-M), Pacific Life
disapproved the insurance application in question on the ground that it is not offering the twenty-year endowment
insurance policy to children less than seven years of age. What it offered instead is another plan known as the
Juvenile Triple Action, which private respondent failed to accept. In the absence of a meeting of the minds between
petitioner Pacific Life and private respondent Ngo Hing over the 20-year endowment life insurance in the amount of
P50,000.00 in favor of the latter's one-year old daughter, and with the non-compliance of the abovequoted conditions
stated in the disputed binding deposit receipt, there could have been no insurance contract duly perfected between
thenl Accordingly, the deposit paid by private respondent shall have to be refunded by Pacific Life.
As held in De Lim vs. Sun Life Assurance Company of Canada, supra, "a contract of insurance, like other contracts,
must be assented to by both parties either in person or by their agents ... The contract, to be binding from the date of
the application, must have been a completed contract, one that leaves nothing to be dione, nothing to be completed,
nothing to be passed upon, or determined, before it shall take effect. There can be no contract of insurance unless
the minds of the parties have met in agreement."
We are not impressed with private respondent's contention that failure of petitioner Mondragon to communicate to
him the rejection of the insurance application would not have any adverse effect on the allegedly perfected temporary
contract (Respondent's Brief, pp. 13-14). In this first place, there was no contract perfected between the parties who
had no meeting of their minds. Private respondet, being an authorized insurance agent of Pacific Life at Cebu branch
office, is indubitably aware that said company does not offer the life insurance applied for. When he filed the
insurance application in dispute, private respondent was, therefore, only taking the chance that Pacific Life will
approve the recommendation of Mondragon for the acceptance and approval of the application in question along with
his proposal that the insurance company starts to offer the 20-year endowment insurance plan for children less than
seven years. Nonetheless, the record discloses that Pacific Life had rejected the proposal and recommendation.
Secondly, having an insurable interest on the life of his one-year old daughter, aside from being an insurance agent
and an offense associate of petitioner Mondragon, private respondent Ngo Hing must have known and followed the
progress on the processing of such application and could not pretend ignorance of the Company's rejection of the 20year endowment life insurance application.
At this juncture, We find it fit to quote with approval, the very apt observation of then Appellate Associate Justice
Ruperto G. Martin who later came up to this Court, from his dissenting opinion to the amended decision of the
respondent court which completely reversed the original decision, the following:
Of course, there is the insinuation that neither the memorandum of rejection (Exhibit 3-M) nor the
reply thereto of appellant Mondragon reiterating the desire for applicant's father to have the
application considered as one for a 20-year endowment plan was ever duly communicated to Ngo;
Hing, father of the minor applicant. I am not quite conninced that this was so. Ngo Hing, as father of
the applicant herself, was precisely the "underwriter who wrote this case" (Exhibit H-1). The
unchallenged statement of appellant Mondragon in his letter of May 6, 1957) (Exhibit 4-M),
specifically admits that said Ngo Hing was "our associate" and that it was the latter who "insisted
that the plan be placed on the 20-year endowment plan." Under these circumstances, it is
inconceivable that the progress in the processing of the application was not brought home to his
knowledge. He must have been duly apprised of the rejection of the application for a 20-year
endowment plan otherwise Mondragon would not have asserted that it was Ngo Hing himself who
insisted on the application as originally filed, thereby implictly declining the offer to consider the
application under the Juvenile Triple Action Plan. Besides, the associate of Mondragon that he was,
Ngo Hing should only be presumed to know what kind of policies are available in the company for
minors below 7 years old. What he and Mondragon were apparently trying to do in the premises
was merely to prod the company into going into the business of issuing endowment policies for
minors just as other insurance companies allegedly do. Until such a definite policy is however,

adopted by the company, it can hardly be said that it could have been bound at all under the
binding slip for a plan of insurance that it could not have, by then issued at all. (Amended Decision,
Rollo, pp- 52-53).
2. Relative to the second issue of alleged concealment. this Court is of the firm belief that private respondent had
deliberately concealed the state of health and piysical condition of his daughter Helen Go. Wher private regpondeit
supplied the required essential data for the insurance application form, he was fully aware that his one-year old
daughter is typically a mongoloid child. Such a congenital physical defect could never be ensconced nor disguished.
Nonetheless, private respondent, in apparent bad faith, withheld the fact materal to the risk to be assumed by the
insurance compary. As an insurance agent of Pacific Life, he ought to know, as he surely must have known. his duty
and responsibility to such a material fact. Had he diamond said significant fact in the insurance application fom Pacific
Life would have verified the same and would have had no choice but to disapprove the application outright.
The contract of insurance is one of perfect good faith uberrima fides meaning good faith, absolute and perfect candor
or openness and honesty; the absence of any concealment or demotion, however slight [Black's Law Dictionary, 2nd
Edition], not for the alone but equally so for the insurer (Field man's Insurance Co., Inc. vs. Vda de Songco, 25 SCRA
70). Concealment is a neglect to communicate that which a partY knows aDd Ought to communicate (Section 25, Act
No. 2427). Whether intentional or unintentional the concealment entitles the insurer to rescind the contract of
insurance (Section 26, Id.: Yu Pang Cheng vs. Court of Appeals, et al, 105 Phil 930; Satumino vs. Philippine
American Life Insurance Company, 7 SCRA 316). Private respondent appears guilty thereof.
We are thus constrained to hold that no insurance contract was perfected between the parties with the
noncompliance of the conditions provided in the binding receipt, and concealment, as legally defined, having been
comraitted by herein private respondent.
WHEREFORE, the decision appealed from is hereby set aside, and in lieu thereof, one is hereby entered absolving
petitioners Lapulapu D. Mondragon and Great Pacific Life Assurance Company from their civil liabilities as found by
respondent Court and ordering the aforesaid insurance company to reimburse the amount of P1,077.75, without
interest, to private respondent, Ngo Hing. Costs against private respondent.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-15895

November 29, 1920

RAFAEL ENRIQUEZ, as administrator of the estate of the late Joaquin Ma. Herrer, plaintiff-appellant,
vs.
SUN LIFE ASSURANCE COMPANY OF CANADA, defendant-appellee.
Jose A. Espiritu for appellant.
Cohn, Fisher and DeWitt for appellee.

MALCOLM, J.:
This is an action brought by the plaintiff ad administrator of the estate of the late Joaquin Ma. Herrer to recover from
the defendant life insurance company the sum of pesos 6,000 paid by the deceased for a life annuity. The trial court
gave judgment for the defendant. Plaintiff appeals.
The undisputed facts are these: On September 24, 1917, Joaquin Herrer made application to the Sun Life Assurance
Company of Canada through its office in Manila for a life annuity. Two days later he paid the sum of P6,000 to the
manager of the company's Manila office and was given a receipt reading as follows:
MANILA, I. F., 26 de septiembre, 1917.
PROVISIONAL RECEIPT Pesos 6,000
Recibi la suma de seis mil pesos de Don Joaquin Herrer de Manila como prima dela Renta Vitalicia solicitada por
dicho Don Joaquin Herrer hoy, sujeta al examen medico y aprobacion de la Oficina Central de la Compaia.

The application was immediately forwarded to the head office of the company at Montreal, Canada. On November
26, 1917, the head office gave notice of acceptance by cable to Manila. (Whether on the same day the cable was
received notice was sent by the Manila office of Herrer that the application had been accepted, is a disputed point,
which will be discussed later.) On December 4, 1917, the policy was issued at Montreal. On December 18, 1917,
attorney Aurelio A. Torres wrote to the Manila office of the company stating that Herrer desired to withdraw his
application. The following day the local office replied to Mr. Torres, stating that the policy had been issued, and called
attention to the notification of November 26, 1917. This letter was received by Mr. Torres on the morning of December
21, 1917. Mr. Herrer died on December 20, 1917.
As above suggested, the issue of fact raised by the evidence is whether Herrer received notice of acceptance of his
application. To resolve this question, we propose to go directly to the evidence of record.
The chief clerk of the Manila office of the Sun Life Assurance Company of Canada at the time of the trial testified that
he prepared the letter introduced in evidence as Exhibit 3, of date November 26, 1917, and handed it to the local
manager, Mr. E. E. White, for signature. The witness admitted on cross-examination that after preparing the letter and
giving it to he manager, he new nothing of what became of it. The local manager, Mr. White, testified to having
received the cablegram accepting the application of Mr. Herrer from the home office on November 26, 1917. He said
that on the same day he signed a letter notifying Mr. Herrer of this acceptance. The witness further said that letters,
after being signed, were sent to the chief clerk and placed on the mailing desk for transmission. The witness could
not tell if the letter had every actually been placed in the mails. Mr. Tuason, who was the chief clerk, on November 26,
1917, was not called as a witness. For the defense, attorney Manuel Torres testified to having prepared the will of
Joaquin Ma. Herrer, that on this occasion, Mr. Herrer mentioned his application for a life annuity, and that he said that
the only document relating to the transaction in his possession was the provisional receipt. Rafael Enriquez, the
administrator of the estate, testified that he had gone through the effects of the deceased and had found no letter of
notification from the insurance company to Mr. Herrer.
Our deduction from the evidence on this issue must be that the letter of November 26, 1917, notifying Mr. Herrer that
his application had been accepted, was prepared and signed in the local office of the insurance company, was placed
in the ordinary channels for transmission, but as far as we know, was never actually mailed and thus was never
received by the applicant.
Not forgetting our conclusion of fact, it next becomes necessary to determine the law which should be applied to the
facts. In order to reach our legal goal, the obvious signposts along the way must be noticed.
Until quite recently, all of the provisions concerning life insurance in the Philippines were found in the Code of
Commerce and the Civil Code. In the Code of the Commerce, there formerly existed Title VIII of Book III and Section
III of Title III of Book III, which dealt with insurance contracts. In the Civil Code there formerly existed and presumably
still exist, Chapters II and IV, entitled insurance contracts and life annuities, respectively, of Title XII of Book IV. On the
after July 1, 1915, there was, however, in force the Insurance Act. No. 2427. Chapter IV of this Act concerns life and
health insurance. The Act expressly repealed Title VIII of Book II and Section III of Title III of Book III of the code of
Commerce. The law of insurance is consequently now found in the Insurance Act and the Civil Code.
While, as just noticed, the Insurance Act deals with life insurance, it is silent as to the methods to be followed in order
that there may be a contract of insurance. On the other hand, the Civil Code, in article 1802, not only describes a
contact of life annuity markedly similar to the one we are considering, but in two other articles, gives strong clues as
to the proper disposition of the case. For instance, article 16 of the Civil Code provides that "In matters which are
governed by special laws, any deficiency of the latter shall be supplied by the provisions of this Code." On the
supposition, therefore, which is incontestable, that the special law on the subject of insurance is deficient in
enunciating the principles governing acceptance, the subject-matter of the Civil code, if there be any, would be
controlling. In the Civil Code is found article 1262 providing that "Consent is shown by the concurrence of offer and
acceptance with respect to the thing and the consideration which are to constitute the contract. An acceptance made
by letter shall not bind the person making the offer except from the time it came to his knowledge. The contract, in

such case, is presumed to have been entered into at the place where the offer was made." This latter article is in
opposition to the provisions of article 54 of the Code of Commerce.
If no mistake has been made in announcing the successive steps by which we reach a conclusion, then the only duty
remaining is for the court to apply the law as it is found. The legislature in its wisdom having enacted a new law on
insurance, and expressly repealed the provisions in the Code of Commerce on the same subject, and having thus left
a void in the commercial law, it would seem logical to make use of the only pertinent provision of law found in the Civil
code, closely related to the chapter concerning life annuities.
The Civil Code rule, that an acceptance made by letter shall bind the person making the offer only from the date it
came to his knowledge, may not be the best expression of modern commercial usage. Still it must be admitted that its
enforcement avoids uncertainty and tends to security. Not only this, but in order that the principle may not be taken
too lightly, let it be noticed that it is identical with the principles announced by a considerable number of respectable
courts in the United States. The courts who take this view have expressly held that an acceptance of an offer of
insurance not actually or constructively communicated to the proposer does not make a contract. Only the mailing of
acceptance, it has been said, completes the contract of insurance, as the locus poenitentiae is ended when the
acceptance has passed beyond the control of the party. (I Joyce, The Law of Insurance, pp. 235, 244.)
In resume, therefore, the law applicable to the case is found to be the second paragraph of article 1262 of the Civil
Code providing that an acceptance made by letter shall not bind the person making the offer except from the time it
came to his knowledge. The pertinent fact is, that according to the provisional receipt, three things had to be
accomplished by the insurance company before there was a contract: (1) There had to be a medical examination of
the applicant; (2) there had to be approval of the application by the head office of the company; and (3) this approval
had in some way to be communicated by the company to the applicant. The further admitted facts are that the head
office in Montreal did accept the application, did cable the Manila office to that effect, did actually issue the policy and
did, through its agent in Manila, actually write the letter of notification and place it in the usual channels for
transmission to the addressee. The fact as to the letter of notification thus fails to concur with the essential elements
of the general rule pertaining to the mailing and delivery of mail matter as announced by the American courts, namely,
when a letter or other mail matter is addressed and mailed with postage prepaid there is a rebuttable presumption of
fact that it was received by the addressee as soon as it could have been transmitted to him in the ordinary course of
the mails. But if any one of these elemental facts fails to appear, it is fatal to the presumption. For instance, a letter
will not be presumed to have been received by the addressee unless it is shown that it was deposited in the postoffice, properly addressed and stamped. (See 22 C.J., 96, and 49 L. R. A. [N. S.], pp. 458, et seq., notes.)
We hold that the contract for a life annuity in the case at bar was not perfected because it has not been proved
satisfactorily that the acceptance of the application ever came to the knowledge of the applicant.
lawph!l.net

Judgment is reversed, and the plaintiff shall have and recover from the defendant the sum of P6,000 with legal
interest from November 20, 1918, until paid, without special finding as to costs in either instance. So ordered.
Mapa, C.J., Araullo, Avancea and Villamor, JJ., concur.
Johnson, J., dissents.

FIRST DIVISION
[G.R. No. 112329. January 28, 2000]
VIRGINIA A. PEREZ, petitioner, vs. COURT OF APPEALS and BF LIFEMAN INSURANCE
CORPORATION, respondents.
DECISION
YNARES-SANTIAGO, J.:
A contract of insurance, like all other contracts, must be assented to by both parties, either in person
or through their agents and so long as an application for insurance has not been either accepted or
rejected, it is merely a proposal or an offer to make a contract.
Petitioner Virginia A. Perez assails the decision of respondent Court of Appeals dated July 9, 1993 in CAG.R. CV 35529 entitled, "BF Lifeman Insurance Corporations, Plaintiff-Appellant versus Virginia A.
Perez, Defendant-Appellee," which declared Insurance Policy 056300 for P50,000.00 issued by private
respondent corporation in favor of the deceased Primitivo B. Perez, null and void and rescinded,
thereby reversing the decision rendered by the Regional Trial Court of Manila, Branch XVI.
The facts of the case as summarized by respondent Court of Appeals are not in dispute.
Primitivo B. Perez had been insured with the BF Lifeman Insurance Corporation since 1980
for P20,000.00. Sometime in October 1987, an agent of the insurance corporation, Rodolfo Lalog,

visited Perez in Guinayangan, Quezon and convinced him to apply for additional insurance coverage
of P50,000.00, to avail of the ongoing promotional discount of P400.00 if the premium were paid
annually.
On October 20, 1987, Primitivo B. Perez accomplished an application form for the additional insurance
coverage of P50,000.00. On the same day, petitioner Virginia A. Perez, Primitivos wife, paid P2,075.00
to Lalog. The receipt issued by Lalog indicated the amount received was a "deposit." [1] Unfortunately,
Lalog lost the application form accomplished by Perez and so on October 28, 1987, he asked the latter
to fill up another application form.[2] On November 1, 1987, Perez was made to undergo the required
medical examination, which he passed.[3]
Pursuant to the established procedure of the company, Lalog forwarded the application for additional
insurance of Perez, together with all its supporting papers, to the office of BF Lifeman Insurance
Corporation at Gumaca, Quezon which office was supposed to forward the papers to the Manila office.
On November 25, 1987, Perez died in an accident. He was riding in a banca which capsized during a
storm. At the time of his death, his application papers for the additional insurance of P50,000.00 were
still with the Gumaca office. Lalog testified that when he went to follow up the papers, he found them
still in the Gumaca office and so he personally brought the papers to the Manila office of BF Lifeman
Insurance Corporation. It was only on November 27, 1987 that said papers were received in Manila.
Without knowing that Perez died on November 25, 1987, BF Lifeman Insurance Corporation approved
the application and issued the corresponding policy for the P50,000.00 on December 2, 1987. [4] Ncm
Petitioner Virginia Perez went to Manila to claim the benefits under the insurance policies of the
deceased. She was paid P40,000.00 under the first insurance policy for P20,000.00 (double indemnity
in case of accident) but the insurance company refused to pay the claim under the additional policy
coverage of P50,000.00, the proceeds of which amount to P150,000.00 in view of a triple indemnity
rider on the insurance policy. In its letter of January 29, 1988 to Virginia A. Perez, the insurance
company maintained that the insurance for P50,000.00 had not been perfected at the time of the
death of Primitivo Perez. Consequently, the insurance company refunded the amount of P2,075.00
which Virginia Perez had paid.
On September 21, 1990, private respondent BF Lifeman Insurance Corporation filed a complaint
against Virginia A. Perez seeking the rescission and declaration of nullity of the insurance contract in
question.
Petitioner Virginia A. Perez, on the other hand, averred that the deceased had fulfilled all his
prestations under the contract and all the elements of a valid contract are present. She then filed a
counterclaim against private respondent for the collection of P150,000.00 as actual
damages,P100,000.00 as exemplary damages, P30,000.00 as attorneys fees and P10,000.00 as
expenses for litigation.
On October 25, 1991, the trial court rendered a decision in favor of petitioner, the dispositive portion of
which reads as follows:
WHEREFORE PREMISES CONSIDERED, judgment is hereby rendered in favor of defendant Virginia A.
Perez, ordering the plaintiff BF Lifeman Insurance Corporation to pay to her the face value of BF
Lifeman Insurance Policy No. 056300, plus double indemnity under the SARDI or in the total amount
of P150,000.00 (any refund made and/or premium deficiency to be deducted therefrom).
SO ORDERED.[5]
The trial court, in ruling for petitioner, held that the premium for the additional insurance
of P50,000.00 had been fully paid and even if the sum of P2,075.00 were to be considered merely as

partial payment, the same does not affect the validity of the policy. The trial court further stated that
the deceased had fully complied with the requirements of the insurance company. He paid, signed the
application form and passed the medical examination. He should not be made to suffer the subsequent
delay in the transmittal of his application form to private respondents head office since these were no
longer within his control.
The Court of Appeals, however, reversed the decision of the trial court saying that the insurance
contract for P50,000.00 could not have been perfected since at the time that the policy was issued,
Primitivo was already dead.[6] Citing the provision in the application form signed by Primitivo which
states that: Ncmmis
"x x x there shall be no contract of insurance unless and until a policy is issued on this application and
that the policy shall not take effect until the first premium has been paid and the policy has been
delivered to and accepted by me/us in person while I/we, am/are in good health"
the Court of Appeals held that the contract of insurance had to be assented to by both parties and so
long as the application for insurance has not been either accepted or rejected, it is merely an offer or
proposal to make a contract.
Petitioners motion for reconsideration having been denied by respondent court, the instant petition for
certiorari was filed on the ground that there was a consummated contract of insurance between the
deceased and BF Lifeman Insurance Corporation and that the condition that the policy issued by the
corporation be delivered and received by the applicant in good health, is potestative, being dependent
upon the will of the insurance company, and is therefore null and void.
The petition is bereft of merit.
Insurance is a contract whereby, for a stipulated consideration, one party undertakes to compensate
the other for loss on a specified subject by specified perils. [7] A contract, on the other hand, is a
meeting of the minds between two persons whereby one binds himself, with respect to the other to
give something or to render some service.[8] Under Article 1318 of the Civil Code, there is no contract
unless the following requisites concur:
(1).......Consent of the contracting parties;
(2).......Object certain which is the subject matter of the contract;
(3).......Cause of the obligation which is established.
Consent must be manifested by the meeting of the offer and the acceptance upon the thing and the
cause which are to constitute the contract. The offer must be certain and the acceptance absolute.
When Primitivo filed an application for insurance, paid P2,075.00 and submitted the results of his
medical examination, his application was subject to the acceptance of private respondent BF Lifeman
Insurance Corporation. The perfection of the contract of insurance between the deceased and
respondent corporation was further conditioned upon compliance with the following requisites stated in
the application form:
"there shall be no contract of insurance unless and until a policy is issued on this application and that
the said policy shall not take effect until the premium has been paid and the policy delivered to and
accepted by me/us in person while I/We, am/are in good health." [9] Scnc m
The assent of private respondent BF Lifeman Insurance Corporation therefore was not given when it
merely received the application form and all the requisite supporting papers of the applicant. Its assent
was given when it issues a corresponding policy to the applicant. Under the abovementioned provision,

it is only when the applicant pays the premium and receives and accepts the policy while he is in good
health that the contract of insurance is deemed to have been perfected.
It is not disputed, however, that when Primitivo died on November 25, 1987, his application papers for
additional insurance coverage were still with the branch office of respondent corporation in Gumaca
and it was only two days later, or on November 27, 1987, when Lalog personally delivered the
application papers to the head office in Manila. Consequently, there was absolutely no way the
acceptance of the application could have been communicated to the applicant for the latter to accept
inasmuch as the applicant at the time was already dead. In the case of Enriquez vs. Sun Life Assurance
Co. of Canada,[10] recovery on the life insurance of the deceased was disallowed on the ground that the
contract for annuity was not perfected since it had not been proved satisfactorily that the acceptance
of the application ever reached the knowledge of the applicant.
Petitioner insists that the condition imposed by respondent corporation that a policy must have been
delivered to and accepted by the proposed insured in good health is potestative being dependent upon
the will of the corporation and is therefore null and void.
We do not agree.
A potestative condition depends upon the exclusive will of one of the parties. For this reason, it is
considered void. Article 1182 of the New Civil Code states: When the fulfillment of the condition
depends upon the sole will of the debtor, the conditional obligation shall be void.
In the case at bar, the following conditions were imposed by the respondent company for the
perfection of the contract of insurance:
(a).......a policy must have been issued;
(b).......the premiums paid; and
(c).......the policy must have been delivered to and accepted by the applicant while he is in good
health.
The condition imposed by the corporation that the policy must have been delivered to and accepted by
the applicant while he is in good health can hardly be considered as a potestative or facultative
condition. On the contrary, the health of the applicant at the time of the delivery of the policy is
beyond the control or will of the insurance company. Rather, the condition is a suspensive one whereby
the acquisition of rights depends upon the happening of an event which constitutes the condition. In
this case, the suspensive condition was the policy must have been delivered and accepted by the
applicant while he is in good health. There was non-fulfillment of the condition, however, inasmuch as
the applicant was already dead at the time the policy was issued. Hence, the non-fulfillment of the
condition resulted in the non-perfection of the contract. Sdaa miso
As stated above, a contract of insurance, like other contracts, must be assented to by both parties
either in person or by their agents. So long as an application for insurance has not been either
accepted or rejected, it is merely an offer or proposal to make a contract. The contract, to be binding
from the date of application, must have been a completed contract, one that leaves nothing to be
done, nothing to be completed, nothing to be passed upon, or determined, before it shall take effect.
There can be no contract of insurance unless the minds of the parties have met in agreement. [11]
Prescinding from the foregoing, respondent corporation cannot be held liable for gross negligence. It
should be noted that an application is a mere offer which requires the overt act of the insurer for it to
ripen into a contract. Delay in acting on the application does not constitute acceptance even though
the insured has forwarded his first premium with his application. The corporation may not be penalized
for the delay in the processing of the application papers. Moreover, while it may have taken some time

for the application papers to reach the main office, in the case at bar, the same was acted upon less
than a week after it was received. The processing of applications by respondent corporation normally
takes two to three weeks, the longest being a month.[12] In this case, however, the requisite medical
examination was undergone by the deceased on November 1, 1987; the application papers were
forwarded to the head office on November 27, 1987; and the policy was issued on December 2, 1987.
Under these circumstances, we hold that the delay could not be deemed unreasonable so as to
constitute gross negligence.
A final note. It has not escaped our notice that the Court of Appeals declared Insurance Policy 056300
for P50,000.00 null and void and rescinded. The Court of Appeals corrected this in its Resolution of the
motion for reconsideration filed by petitioner, thus:
"Anent the appearance of the word rescinded in the dispositive portion of the decision, to which
defendant-appellee attaches undue significance and makes capital of, it is clear that the use of the
words and rescinded is, as it is hereby declared, a superfluity. It is apparent from the context of the
decision that the insurance policy in question was found null and void, and did not have to be
rescinded."[13]
True, rescission presupposes the existence of a valid contract. A contract which is null and void is no
contract at all and hence could not be the subject of rescission.
WHEREFORE, the decision rendered by the Court of Appeals in CA-G.R. CV No. 35529 is AFFIRMED
insofar as it declared Insurance Policy No. 056300 for P50,000.00 issued by BF Lifeman Insurance
Corporation of no force and effect and hence null and void. No costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION
G.R. No. L-38613 February 25, 1982
PACIFIC TIMBER EXPORT CORPORATION, petitioner,
vs.
THE HONORABLE COURT OF APPEALS and WORKMEN'S INSURANCE COMPANY,
INC., respondents.

DE CASTRO, ** J.:
This petition seeks the review of the decision of the Court of Appeals reversing the decision of the
Court of First Instance of Manila in favor of petitioner and against private respondent which ordered the
latter to pay the sum of Pll,042.04 with interest at the rate of 12% interest from receipt of notice of loss
on April 15, 1963 up to the complete payment, the sum of P3,000.00 as attorney's fees and the
costs 1 thereby dismissing petitioner s complaint with costs. 2
The findings of the of fact of the Court of Appeals, which are generally binding upon this Court, Except
as shall be indicated in the discussion of the opinion of this Court the substantial correctness of still
particular finding having been disputed, thereby raising a question of law reviewable by this Court 3 are
as follows:
March 19, l963, the plaintiff secured temporary insurance from the defendant for its exportation of
1,250,000 board feet of Philippine Lauan and Apitong logs to be shipped from the Diapitan. Bay,
Quezon Province to Okinawa and Tokyo, Japan. The defendant issued on said date Cover Note No.
1010, insuring the said cargo of the plaintiff "Subject to the Terms and Conditions of the WORKMEN'S
INSURANCE COMPANY, INC. printed Marine Policy form as filed with and approved by the Office of the
Insurance Commissioner (Exhibit A).
The regular marine cargo policies were issued by the defendant in favor of the plaintiff on April 2,
1963. The two marine policies bore the numbers 53 HO 1032 and 53 HO 1033 (Exhibits B and C,
respectively). Policy No. 53 H0 1033 (Exhibit B) was for 542 pieces of logs equivalent to 499,950 board
feet. Policy No. 53 H0 1033 was for 853 pieces of logs equivalent to 695,548 board feet (Exhibit C). The
total cargo insured under the two marine policies accordingly consisted of 1,395 logs, or the equivalent
of 1,195.498 bd. ft.
After the issuance of Cover Note No. 1010 (Exhibit A), but before the issuance of the two marine
policies Nos. 53 HO 1032 and 53 HO 1033, some of the logs intended to be exported were lost during
loading operations in the Diapitan Bay. The logs were to be loaded on the 'SS Woodlock' which docked
about 500 meters from the shoreline of the Diapitan Bay. The logs were taken from the log pond of the
plaintiff and from which they were towed in rafts to the vessel. At about 10:00 o'clock a. m. on March
29, 1963, while the logs were alongside the vessel, bad weather developed resulting in 75 pieces of
logs which were rafted together co break loose from each other. 45 pieces of logs were salvaged, but
30 pieces were verified to have been lost or washed away as a result of the accident.
In a letter dated April 4, 1963, the plaintiff informed the defendant about the loss of 'appropriately 32
pieces of log's during loading of the 'SS Woodlock'. The said letter (Exhibit F) reads as follows:
April 4, 1963
Workmen's Insurance Company, Inc. Manila, Philippines
Gentlemen:

This has reference to Insurance Cover Note No. 1010 for shipment of 1,250,000 bd. ft. Philippine Lauan
and Apitong Logs. We would like to inform you that we have received advance preliminary report from
our Office in Diapitan, Quezon that we have lost approximately 32 pieces of logs during loading of the
SS Woodlock.
We will send you an accurate report all the details including values as soon as same will be reported to
us.
Thank you for your attention, we wish to remain.
Very respectfully yours,
PACIFIC TIMBER EXPORT CORPORATION
(Sgd.) EMMANUEL S. ATILANO Asst. General Manager.
Although dated April 4, 1963, the letter was received in the office of the defendant only on April 15,
1963, as shown by the stamp impression appearing on the left bottom corner of said letter. The
plaintiff subsequently submitted a 'Claim Statement demanding payment of the loss under Policies
Nos. 53 HO 1032 and 53 HO 1033, in the total amount of P19,286.79 (Exhibit G).
On July 17, 1963, the defendant requested the First Philippine Adjustment Corporation to inspect the
loss and assess the damage. The adjustment company submitted its 'Report on August 23, 1963
(Exhibit H). In said report, the adjuster found that 'the loss of 30 pieces of logs is not covered by
Policies Nos. 53 HO 1032 and 1033 inasmuch as said policies covered the actual number of logs loaded
on board the 'SS Woodlock' However, the loss of 30 pieces of logs is within the 1,250,000 bd. ft.
covered by Cover Note 1010 insured for $70,000.00.
On September 14, 1963, the adjustment company submitted a computation of the defendant's
probable liability on the loss sustained by the shipment, in the total amount of Pl1,042.04 (Exhibit 4).
On January 13, 1964, the defendant wrote the plaintiff denying the latter's claim, on the ground they
defendant's investigation revealed that the entire shipment of logs covered by the two marines policies
No. 53 110 1032 and 713 HO 1033 were received in good order at their point of destination. It was
further stated that the said loss may be considered as covered under Cover Note No. 1010 because the
said Note had become 'null and void by virtue of the issuance of Marine Policy Nos. 53 HO 1032 and
1033'(Exhibit J-1). The denial of the claim by the defendant was brought by the plaintiff to the attention
of the Insurance Commissioner by means of a letter dated March 21, 1964 (Exhibit K). In a reply letter
dated March 30, 1964, Insurance Commissioner Francisco Y. Mandanas observed that 'it is only fair and
equitable to indemnify the insured under Cover Note No. 1010', and advised early settlement of the
said marine loss and salvage claim (Exhibit L).
On June 26, 1964, the defendant informed the Insurance Commissioner that, on advice of their
attorneys, the claim of the plaintiff is being denied on the ground that the cover note is null and void
for lack of valuable consideration (Exhibit M). 4
Petitioner assigned as errors of the Court of Appeals, the following:
I
THE COURT OF APPEALS ERRED IN HOLDING THAT THE COVER NOTE WAS NULL AND VOID FOR LACK
OF VALUABLE CONSIDERATION BECAUSE THE COURT DISREGARDED THE PROVEN FACTS THAT
PREMIUMS FOR THE COMPREHENSIVE INSURANCE COVERAGE THAT INCLUDED THE COVER NOTE WAS
PAID BY PETITIONER AND THAT INCLUDED THE COVER NOTE WAS PAID BY PETITIONER AND THAT NO
SEPARATE PREMIUMS ARE COLLECTED BY PRIVATE RESPONDENT ON ALL ITS COVER NOTES.

II
THE COURT OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT WAS RELEASED FROM
LIABILITY UNDER THE COVER NOTE DUE TO UNREASONABLE DELAY IN GIVING NOTICE OF LOSS
BECAUSE THE COURT DISREGARDED THE PROVEN FACT THAT PRIVATE RESPONDENT DID NOT
PROMPTLY AND SPECIFICALLY OBJECT TO THE CLAIM ON THE GROUND OF DELAY IN GIVING NOTICE OF
LOSS AND, CONSEQUENTLY, OBJECTIONS ON THAT GROUND ARE WAIVED UNDER SECTION 84 OF THE
INSURANCE ACT. 5
1. Petitioner contends that the Cover Note was issued with a consideration when, by express
stipulation, the cover note is made subject to the terms and conditions of the marine policies, and the
payment of premiums is one of the terms of the policies. From this undisputed fact, We uphold
petitioner's submission that the Cover Note was not without consideration for which the respondent
court held the Cover Note as null and void, and denied recovery therefrom. The fact that no separate
premium was paid on the Cover Note before the loss insured against occurred, does not militate
against the validity of petitioner's contention, for no such premium could have been paid, since by the
nature of the Cover Note, it did not contain, as all Cover Notes do not contain particulars of the
shipment that would serve as basis for the computation of the premiums. As a logical consequence, no
separate premiums are intended or required to be paid on a Cover Note. This is a fact admitted by an
official of respondent company, Juan Jose Camacho, in charge of issuing cover notes of the respondent
company (p. 33, tsn, September 24, 1965).
At any rate, it is not disputed that petitioner paid in full all the premiums as called for by the statement
issued by private respondent after the issuance of the two regular marine insurance policies, thereby
leaving no account unpaid by petitioner due on the insurance coverage, which must be deemed to
include the Cover Note. If the Note is to be treated as a separate policy instead of integrating it to the
regular policies subsequently issued, the purpose and function of the Cover Note would be set at
naught or rendered meaningless, for it is in a real sense a contract, not a mere application for
insurance which is a mere offer. 6
It may be true that the marine insurance policies issued were for logs no longer including those which
had been lost during loading operations. This had to be so because the risk insured against is not for
loss during operations anymore, but for loss during transit, the logs having already been safely placed
aboard. This would make no difference, however, insofar as the liability on the cover note is concerned,
for the number or volume of logs lost can be determined independently as in fact it had been so
ascertained at the instance of private respondent itself when it sent its own adjuster to investigate and
assess the loss, after the issuance of the marine insurance policies.
The adjuster went as far as submitting his report to respondent, as well as its computation of
respondent's liability on the insurance coverage. This coverage could not have been no other than
what was stipulated in the Cover Note, for no loss or damage had to be assessed on the coverage
arising from the marine insurance policies. For obvious reasons, it was not necessary to ask petitioner
to pay premium on the Cover Note, for the loss insured against having already occurred, the more
practical procedure is simply to deduct the premium from the amount due the petitioner on the Cover
Note. The non-payment of premium on the Cover Note is, therefore, no cause for the petitioner to lose
what is due it as if there had been payment of premium, for non-payment by it was not chargeable
against its fault. Had all the logs been lost during the loading operations, but after the issuance of the
Cover Note, liability on the note would have already arisen even before payment of premium. This is
how the cover note as a "binder" should legally operate otherwise, it would serve no practical purpose
in the realm of commerce, and is supported by the doctrine that where a policy is delivered without
requiring payment of the premium, the presumption is that a credit was intended and policy is valid. 7
2. The defense of delay as raised by private respondent in resisting the claim cannot be sustained. The
law requires this ground of delay to be promptly and specifically asserted when a claim on the

insurance agreement is made. The undisputed facts show that instead of invoking the ground of delay
in objecting to petitioner's claim of recovery on the cover note, it took steps clearly indicative that this
particular ground for objection to the claim was never in its mind. The nature of this specific ground for
resisting a claim places the insurer on duty to inquire when the loss took place, so that it could
determine whether delay would be a valid ground upon which to object to a claim against it.
As already stated earlier, private respondent's reaction upon receipt of the notice of loss, which was on
April 15, 1963, was to set in motion from July 1963 what would be necessary to determine the cause
and extent of the loss, with a view to the payment thereof on the insurance agreement. Thus it sent its
adjuster to investigate and assess the loss in July, 1963. The adjuster submitted his report on August
23, 1963 and its computation of respondent's liability on September 14, 1963. From April 1963 to July,
1963, enough time was available for private respondent to determine if petitioner was guilty of delay
in communicating the loss to respondent company. In the proceedings that took place later in the
Office of the Insurance Commissioner, private respondent should then have raised this ground of delay
to avoid liability. It did not do so. It must be because it did not find any delay, as this Court fails to find
a real and substantial sign thereof. But even on the assumption that there was delay, this Court is
satisfied and convinced that as expressly provided by law, waiver can successfully be raised against
private respondent. Thus Section 84 of the Insurance Act provides:
Section 84.Delay in the presentation to an insurer of notice or proof of loss is waived if caused by any
act of his or if he omits to take objection promptly and specifically upon that ground.
From what has been said, We find duly substantiated petitioner's assignments of error.
ACCORDINGLY, the appealed decision is set aside and the decision of the Court of First Instance is
reinstated in toto with the affirmance of this Court. No special pronouncement as to costs.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 119176

March 19, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LINCOLN PHILIPPINE LIFE INSURANCE COMPANY, INC. (now JARDINE-CMA LIFE INSURANCE
COMPANY, INC.) and THE COURT OF APPEALS, respondents.
KAPUNAN, J.:
This is a petition for review on certiorari filed by the Commission on Internal Revenue of the decision of
the Court of Appeals dated November 18, 1994 in C.A. G.R. SP No. 31224 which reversed in part the
decision of the Court of Tax Appeals in C.T.A. Case No. 4583.
The facts of the case are undisputed.
Private respondent Lincoln Philippine Life Insurance Co., Inc., (now Jardine-CMA Life Insurance
Company, Inc.) is a domestic corporation registered with the Securities and Exchange Commission and
engaged in life insurance business. In the years prior to 1984, private respondent issued a special kind
of life insurance policy known as the "Junior Estate Builder Policy," the distinguishing feature of which
is a clause providing for an automatic increase in the amount of life insurance coverage upon
attainment of a certain age by the insured without the need of issuing a new policy. The clause was to
take effect in the year 1984. Documentary stamp taxes due on the policy were paid by petitioner only
on the initial sum assured.
In 1984, private respondent also issued 50,000 shares of stock dividends with a par value of P100.00
per share or a total par value of P5,000,000.00. The actual value of said shares, represented by its
book value, wasP19,307,500.00. Documentary stamp taxes were paid based only on the par value
of P5,000,000.00 and not on the book value.1wphi1.nt
Subsequently, petitioner issued deficiency documentary stamps tax assessment for the year 1984 in
the amounts of (a) P464,898.75, corresponding to the amount of automatic increase of the sum
assured on the policy issued by respondent, and (b) P78,991.25 corresponding to the book value in
excess of the par value of the stock dividends. The computation of the deficiency documentary stamp
taxes is as follows:
On Policies Issued:

Total policy issued during the year

P1,360,054,000.00

Documentary stamp tax due thereon

(P1,360,054,000.00 divided by P200.00
multiplied by P0.35)

P 2,380,094.50

Less: Payment

P 1,915,495.75

Deficiency

P 464,598.75

Add: Compromise Penalty

300.00
-----------------------

TOTAL AMOUNT DUE & COLLECTIBLE

P 464,898.75

Private respondent questioned the deficiency assessments and sought their cancellation in a petition
filed in the Court of Tax Appeals, docketed as CTA Case No. 4583.
On March 30, 1993, the Court of Tax Appeals found no valid basis for the deficiency tax assessment on
the stock dividends, as well as on the insurance policy. The dispositive portion of the CTAs decision
reads:
WHEREFORE, the deficiency documentary stamp tax assessments in the amount of P464,898.76
andP78,991.25 or a total of P543,890.01 are hereby cancelled for lack of merit. Respondent
Commissioner of Internal Revenue is ordered to desist from collecting said deficiency documentary
stamp taxes for the same are considered withdrawn.
SO ORDERED.1
Petitioner appealed the CTAs decision to the Court of Appeals. On November 18, 1994, the Court of
Appeals promulgated a decision affirming the CTAs decision insofar as it nullified the deficiency
assessment on the insurance policy, but reversing the same with regard to the deficiency assessment
on the stock dividends. The CTA ruled that the correct basis of the documentary stamp tax due on the
stock dividends is the actual value or book value represented by the shares. The dispositive portion of
the Court of Appeals decision states:
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby REVERSED with respect to the
deficiency tax assessment on the stock dividends, but AFFIRMED with regards to the assessment on
the Insurance Policies. Consequently, private respondent is ordered to pay the petitioner herein the
sum ofP78,991.25, representing documentary stamp tax on the stock dividends it issued. No costs
pronouncement.
SO ORDERED.2
A motion for reconsideration of the decision having been denied, 3 both the Commissioner of Internal
Revenue and private respondent appealed to this Court, docketed as G.R. No. 118043 and G.R. No.
119176, respectively. In G.R. No. 118043, private respondent appealed the decision of the Court of
Appeals insofar as it upheld the validity of the deficiency tax assessment on the stock dividends. The
Commissioner of Internal Revenue, on his part, filed the present petition questioning that portion of the

Court of Appeals decision which invalidated the deficiency assessment on the insurance policy,
attributing the following errors:
THE HONORABLE COURT OF APPEALS ERRED WHEN IT RULED THAT THERE IS A SINGLE AGREEMENT
EMBODIED IN THE POLICY AND THAT THE AUTOMATIC INCREASE CLAUSE IS NOT A SEPARATE
AGREEMENT, CONTRARY TO SECTION 49 OF THE INSURANCE CODE AND SECTION 183 OF THE
REVENUE CODE THAT A RIDER, A CLAUSE IS PART OF THE POLICY.
THE HONORABLE COURT OF APPEALS ERRED IN NOT COMPUTING THE AMOUNT OF TAX ON THE TOTAL
VALUE OF THE INSURANCE ASSURED IN THE POLICY INCLUDING THE ADDITIONAL INCREASE ASSURED
BY THE AUTOMATIC INCREASE CLAUSE DESPITE ITS RULING THAT THE ORIGINAL POLICY AND THE
AUTOMATIC CLAUSE CONSTITUTED ONLY A SINGULAR TRANSACTION. 4
Section 173 of the National Internal Revenue Code on documentary stamp taxes provides:
Sec. 173. Stamp taxes upon documents, instruments and papers. - Upon documents,
instruments, loan agreements, and papers, and upon acceptances, assignments, sales, and transfers
of the obligation, right or property incident thereto, there shall be levied, collected and paid for, and in
respect of the transaction so had or accomplished, the corresponding documentary stamp taxes
prescribed in the following section of this Title, by the person making, signing, issuing, accepting, or
transferring the same wherever the document is made, signed, issued, accepted, or transferred when
the obligation or right arises from Philippine sources or the property is situated in the Philippines,
and at the same time such act is done or transaction had: Provided, That whenever one party to the
taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not
exempt shall be the one directly liable for the tax. (As amended by PD No. 1994) The basis for the
value of documentary stamp taxes to be paid on the insurance policy is Section 183 of the National
Internal Revenue Code which states in part:
The basis for the value of documentary stamp taxes to be paid on the insurance policy is Section 183
of the National Internal Revenue Code which states in part:
Sec. 183. Stamp tax on life insurance policies. - On all policies of insurance or other instruments
by whatever name the same may be called, whereby any insurance shall be made or renewed upon
any life or lives, there shall be collected a documentary stamp tax of thirty (now 50c) centavos on each
Two hundred pesos per fractional part thereof, of the amount insured by any such policy.
Petitioner claims that the "automatic increase clause" in the subject insurance policy is separate and
distinct from the main agreement and involves another transaction; and that, while no new policy was
issued, the original policy was essentially re-issued when the additional obligation was assumed upon
the effectivity of this "automatic increase clause" in 1984; hence, a deficiency assessment based on
the additional insurance not covered in the main policy is in order.
The Court of Appeals sustained the CTAs ruling that there was only one transaction involved in the
issuance of the insurance policy and that the "automatic increase clause" is an integral part of that
policy.
The petition is impressed with merit.
Section 49, Title VI of the Insurance Code defines an insurance policy as the written instrument in
which a contract of insurance is set forth.5 Section 50 of the same Code provides that the policy, which
is required to be in printed form, may contain any word, phrase, clause, mark, sign, symbol, signature,
number, or word necessary to complete the contract of insurance.6 It is thus clear that any rider,
clause, warranty or endorsement pasted or attached to the policy is considered part of such policy or
contract of insurance.

The subject insurance policy at the time it was issued contained an "automatic increase clause."
Although the clause was to take effect only in 1984, it was written into the policy at the time of its
issuance. The distinctive feature of the "junior estate builder policy" called the "automatic increase
clause" already formed part and parcel of the insurance contract, hence, there was no need for an
execution of a separate agreement for the increase in the coverage that took effect in 1984 when the
assured reached a certain age.
It is clear from Section 173 that the payment of documentary stamp taxes is done at the time the act
is done or transaction had and the tax base for the computation of documentary stamp taxes on life
insurance policies under Section 183 is the amount fixed in policy, unless the interest of a person
insured is susceptible of exact pecuniary measurement. 7 What then is the amount fixed in the policy?
Logically, we believe that the amount fixed in the policy is the figure written on its face and whatever
increases will take effect in the future by reason of the "automatic increase clause" embodied in the
policy without the need of another contract.
Here, although the automatic increase in the amount of life insurance coverage was to take effect later
on, the date of its effectivity, as well as the amount of the increase, was already definite at the time of
the issuance of the policy. Thus, the amount insured by the policy at the time of its issuance
necessarily included the additional sum covered by the automatic increase clause because it was
already determinable at the time the transaction was entered into and formed part of the policy.
The "automatic increase clause" in the policy is in the nature of a conditional obligation under Article
1181,8 by which the increase of the insurance coverage shall depend upon the happening of the event
which constitutes the obligation. In the instant case, the additional insurance that took effect in 1984
was an obligation subject to a suspensive obligation, 9 but still a part of the insurance sold to which
private respondent was liable for the payment of the documentary stamp tax.
The deficiency of documentary stamp tax imposed on private respondent is definitely not on the
amount of the original insurance coverage, but on the increase of the amount insured upon the
effectivity of the "Junior Estate Builder Policy."
Finally, it should be emphasized that while tax avoidance schemes and arrangements are not
prohibited,10 tax laws cannot be circumvented in order to evade the payment of just taxes. In the case
at bar, to claim that the increase in the amount insured (by virtue of the automatic increase clause
incorporated into the policy at the time of issuance) should not be included in the computation of the
documentary stamp taxes due on the policy would be a clear evasion of the law requiring that the tax
be computed on the basis of the amount insured by the policy.
WHEREFORE, the petition is hereby given DUE COURSE. The decision of the Court of Appeals is SET
ASIDEinsofar as it affirmed the decision of the Court of Tax Appeals nullifying the deficiency stamp tax
assessment petitioner imposed on private respondent in the amount of P464,898.75 corresponding to
the increase in 1984 of the sum under the policy issued by respondent.1wphi1.nt
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-44059 October 28, 1977
THE INSULAR LIFE ASSURANCE COMPANY, LTD., plaintiff-appellee,
vs.
CARPONIA T. EBRADO and PASCUALA VDA. DE EBRADO, defendants-appellants.

MARTIN, J.:
This is a novel question in insurance law: Can a common-law wife named as beneficiary in the life
insurance policy of a legally married man claim the proceeds thereof in case of death of the latter?
On September 1, 1968, Buenaventura Cristor Ebrado was issued by The Life Assurance Co., Ltd., Policy
No. 009929 on a whole-life for P5,882.00 with a, rider for Accidental Death for the same amount
Buenaventura C. Ebrado designated T. Ebrado as the revocable beneficiary in his policy. He to her as
his wife.
On October 21, 1969, Buenaventura C. Ebrado died as a result of an t when he was hit by a failing
branch of a tree. As the policy was in force, The Insular Life Assurance Co., Ltd. liable to pay the
coverage in the total amount of P11,745.73, representing the face value of the policy in the amount of
P5,882.00 plus the additional benefits for accidental death also in the amount of P5,882.00 and the
refund of P18.00 paid for the premium due November, 1969, minus the unpaid premiums and interest
thereon due for January and February, 1969, in the sum of P36.27.

Carponia T. Ebrado filed with the insurer a claim for the proceeds of the Policy as the designated
beneficiary therein, although she admits that she and the insured Buenaventura C. Ebrado were
merely living as husband and wife without the benefit of marriage.
Pascuala Vda. de Ebrado also filed her claim as the widow of the deceased insured. She asserts that
she is the one entitled to the insurance proceeds, not the common-law wife, Carponia T. Ebrado.
In doubt as to whom the insurance proceeds shall be paid, the insurer, The Insular Life Assurance Co.,
Ltd. commenced an action for Interpleader before the Court of First Instance of Rizal on April 29, 1970.
After the issues have been joined, a pre-trial conference was held on July 8, 1972, after which, a pretrial order was entered reading as follows: +.wph!1
During the pre-trial conference, the parties manifested to the court. that there is no possibility of
amicable settlement. Hence, the Court proceeded to have the parties submit their evidence for the
purpose of the pre-trial and make admissions for the purpose of pretrial. During this conference,
parties Carponia T. Ebrado and Pascuala Ebrado agreed and stipulated: 1) that the deceased
Buenaventura Ebrado was married to Pascuala Ebrado with whom she has six (legitimate) namely;
Hernando, Cresencio, Elsa, Erlinda, Felizardo and Helen, all surnamed Ebrado; 2) that during the
lifetime of the deceased, he was insured with Insular Life Assurance Co. Under Policy No. 009929 whole
life plan, dated September 1, 1968 for the sum of P5,882.00 with the rider for accidental death benefit
as evidenced by Exhibits A for plaintiffs and Exhibit 1 for the defendant Pascuala and Exhibit 7 for
Carponia Ebrado; 3) that during the lifetime of Buenaventura Ebrado, he was living with his commonwife, Carponia Ebrado, with whom she had 2 children although he was not legally separated from his
legal wife; 4) that Buenaventura in accident on October 21, 1969 as evidenced by the death Exhibit 3
and affidavit of the police report of his death Exhibit 5; 5) that complainant Carponia Ebrado filed claim
with the Insular Life Assurance Co. which was contested by Pascuala Ebrado who also filed claim for
the proceeds of said policy 6) that in view ofthe adverse claims the insurance company filed this action
against the two herein claimants Carponia and Pascuala Ebrado; 7) that there is now due from the
Insular Life Assurance Co. as proceeds of the policy P11,745.73; 8) that the beneficiary designated by
the insured in the policy is Carponia Ebrado and the insured made reservation to change the
beneficiary but although the insured made the option to change the beneficiary, same was never
changed up to the time of his death and the wife did not have any opportunity to write the company
that there was reservation to change the designation of the parties agreed that a decision be rendered
based on and stipulation of facts as to who among the two claimants is entitled to the policy.
Upon motion of the parties, they are given ten (10) days to file their simultaneous memoranda from
the receipt of this order.
SO ORDERED.
On September 25, 1972, the trial court rendered judgment declaring among others, Carponia T. Ebrado
disqualified from becoming beneficiary of the insured Buenaventura Cristor Ebrado and directing the
payment of the insurance proceeds to the estate of the deceased insured. The trial court held: +.
wph!1
It is patent from the last paragraph of Art. 739 of the Civil Code that a criminal conviction for adultery
or concubinage is not essential in order to establish the disqualification mentioned therein. Neither is it
also necessary that a finding of such guilt or commission of those acts be made in a separate
independent action brought for the purpose. The guilt of the donee (beneficiary) may be proved by
preponderance of evidence in the same proceeding (the action brought to declare the nullity of the
donation).
It is, however, essential that such adultery or concubinage exists at the time defendant Carponia T.
Ebrado was made beneficiary in the policy in question for the disqualification and incapacity to exist

and that it is only necessary that such fact be established by preponderance of evidence in the trial.
Since it is agreed in their stipulation above-quoted that the deceased insured and defendant Carponia
T. Ebrado were living together as husband and wife without being legally married and that the
marriage of the insured with the other defendant Pascuala Vda. de Ebrado was valid and still existing
at the time the insurance in question was purchased there is no question that defendant Carponia T.
Ebrado is disqualified from becoming the beneficiary of the policy in question and as such she is not
entitled to the proceeds of the insurance upon the death of the insured.
From this judgment, Carponia T. Ebrado appealed to the Court of Appeals, but on July 11, 1976, the
Appellate Court certified the case to Us as involving only questions of law.
We affirm the judgment of the lower court.
1. It is quite unfortunate that the Insurance Act (RA 2327, as amended) or even the new Insurance
Code (PD No. 612, as amended) does not contain any specific provision grossly resolutory of the prime
question at hand. Section 50 of the Insurance Act which provides that "(t)he insurance shag be applied
exclusively to the proper interest of the person in whose name it is made" 1 cannot be validly seized
upon to hold that the mm includes the beneficiary. The word "interest" highly suggests that the
provision refers only to the "insured" and not to the beneficiary, since a contract of insurance is
personal in character. 2 Otherwise, the prohibitory laws against illicit relationships especially on
property and descent will be rendered nugatory, as the same could easily be circumvented by modes
of insurance. Rather, the general rules of civil law should be applied to resolve this void in the
Insurance Law. Article 2011 of the New Civil Code states: "The contract of insurance is governed by
special laws. Matters not expressly provided for in such special laws shall be regulated by this Code."
When not otherwise specifically provided for by the Insurance Law, the contract of life insurance is
governed by the general rules of the civil law regulating contracts. 3 And under Article 2012 of the
same Code, "any person who is forbidden from receiving any donation under Article 739 cannot be
named beneficiary of a fife insurance policy by the person who cannot make a donation to
him. 4 Common-law spouses are, definitely, barred from receiving donations from each other. Article
739 of the new Civil Code provides: +.wph!1
The following donations shall be void:
1. Those made between persons who were guilty of adultery or concubinage at the time of donation;
Those made between persons found guilty of the same criminal offense, in consideration thereof;
3. Those made to a public officer or his wife, descendants or ascendants by reason of his office.
In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of
the donor or donee; and the guilt of the donee may be proved by preponderance of evidence in the
same action.
2. In essence, a life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned. Both are founded upon the same consideration: liberality. A beneficiary is like a donee,
because from the premiums of the policy which the insured pays out of liberality, the beneficiary will
receive the proceeds or profits of said insurance. As a consequence, the proscription in Article 739 of
the new Civil Code should equally operate in life insurance contracts. The mandate of Article 2012
cannot be laid aside: any person who cannot receive a donation cannot be named as beneficiary in the
life insurance policy of the person who cannot make the donation. 5 Under American law, a policy of life
insurance is considered as a testament and in construing it, the courts will, so far as possible treat it as
a will and determine the effect of a clause designating the beneficiary by rules under which wins are
interpreted. 6

3. Policy considerations and dictates of morality rightly justify the institution of a barrier between
common law spouses in record to Property relations since such hip ultimately encroaches upon the
nuptial and filial rights of the legitimate family There is every reason to hold that the bar in donations
between legitimate spouses and those between illegitimate ones should be enforced in life insurance
policies since the same are based on similar consideration As above pointed out, a beneficiary in a fife
insurance policy is no different from a donee. Both are recipients of pure beneficence. So long as
manage remains the threshold of family laws, reason and morality dictate that the impediments
imposed upon married couple should likewise be imposed upon extra-marital relationship. If legitimate
relationship is circumscribed by these legal disabilities, with more reason should an illicit relationship
be restricted by these disabilities. Thus, in Matabuena v. Cervantes, 7 this Court, through Justice
Fernando, said: +.wph!1
If the policy of the law is, in the language of the opinion of the then Justice J.B.L. Reyes of that court
(Court of Appeals), 'to prohibit donations in favor of the other consort and his descendants because of
and undue and improper pressure and influence upon the donor, a prejudice deeply rooted in our
ancient law;" por-que no se enganen desponjandose el uno al otro por amor que han de consuno'
(According to) the Partidas (Part IV, Tit. XI, LAW IV), reiterating the rationale 'No Mutuato amore
invicem spoliarentur' the Pandects (Bk, 24, Titl. 1, De donat, inter virum et uxorem); then there is very
reason to apply the same prohibitive policy to persons living together as husband and wife without the
benefit of nuptials. For it is not to be doubted that assent to such irregular connection for thirty years
bespeaks greater influence of one party over the other, so that the danger that the law seeks to avoid
is correspondingly increased. Moreover, as already pointed out by Ulpian (in his lib. 32 ad Sabinum, fr.
1), 'it would not be just that such donations should subsist, lest the condition 6f those who incurred
guilt should turn out to be better.' So long as marriage remains the cornerstone of our family law,
reason and morality alike demand that the disabilities attached to marriage should likewise attach to
concubinage.
It is hardly necessary to add that even in the absence of the above pronouncement, any other
conclusion cannot stand the test of scrutiny. It would be to indict the frame of the Civil Code for a
failure to apply a laudable rule to a situation which in its essentials cannot be distinguished. Moreover,
if it is at all to be differentiated the policy of the law which embodies a deeply rooted notion of what is
just and what is right would be nullified if such irregular relationship instead of being visited with
disabilities would be attended with benefits. Certainly a legal norm should not be susceptible to such a
reproach. If there is every any occasion where the principle of statutory construction that what is
within the spirit of the law is as much a part of it as what is written, this is it. Otherwise the basic
purpose discernible in such codal provision would not be attained. Whatever omission may be
apparent in an interpretation purely literal of the language used must be remedied by an adherence to
its avowed objective.
4. We do not think that a conviction for adultery or concubinage is exacted before the disabilities
mentioned in Article 739 may effectuate. More specifically, with record to the disability on "persons
who were guilty of adultery or concubinage at the time of the donation," Article 739 itself
provides: +.wph!1
In the case referred to in No. 1, the action for declaration of nullity may be brought by the spouse of
the donor or donee; and the guilty of the donee may be proved by preponderance of evidence in the
same action.
The underscored clause neatly conveys that no criminal conviction for the offense is a condition
precedent. In fact, it cannot even be from the aforequoted provision that a prosecution is needed. On
the contrary, the law plainly states that the guilt of the party may be proved "in the same acting for
declaration of nullity of donation. And, it would be sufficient if evidence preponderates upon the guilt
of the consort for the offense indicated. The quantum of proof in criminal cases is not demanded.

In the caw before Us, the requisite proof of common-law relationship between the insured and the
beneficiary has been conveniently supplied by the stipulations between the parties in the pre-trial
conference of the case. It case agreed upon and stipulated therein that the deceased insured
Buenaventura C. Ebrado was married to Pascuala Ebrado with whom she has six legitimate children;
that during his lifetime, the deceased insured was living with his common-law wife, Carponia Ebrado,
with whom he has two children. These stipulations are nothing less thanjudicial admissions which, as a
consequence, no longer require proof and cannot be contradicted. 8 A fortiori, on the basis of these
admissions, a judgment may be validly rendered without going through the rigors of a trial for the sole
purpose of proving the illicit liaison between the insured and the beneficiary. In fact, in that pretrial, the
parties even agreed "that a decision be rendered based on this agreement and stipulation of facts as
to who among the two claimants is entitled to the policy."
ACCORDINGLY, the appealed judgment of the lower court is hereby affirmed. Carponia T. Ebrado is
hereby declared disqualified to be the beneficiary of the late Buenaventura C. Ebrado in his life
insurance policy. As a consequence, the proceeds of the policy are hereby held payable to the estate of
the deceased insured. Costs against Carponia T. Ebrado.
SO ORDERED.

THIRD DIVISION

HEIRS OF LORETO C. MARAMAG, represented by

surviving spouse VICENTA PANGILINAN

G.R. No. 181132

MARAMAG,
Petitioners,

- versus Present:

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,

YNARES-SANTIAGO, J.,

Respondents.

CORONA,**

Chairperson,
CARPIO,*

NACHURA, and
PERALTA, JJ.

Promulgated:

June 5, 2009

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

DECISION

NACHURA, J.:

This is a petition[1] for review on certiorari under Rule 45 of the Rules, seeking to reverse and set aside
the Resolution[2] dated January 8, 2008 of the Court of Appeals (CA), in CA-G.R. CV No. 85948,
dismissing petitioners appeal for lack of jurisdiction.

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

In support of the prayer for TRO and writ of preliminary injunction, petitioners alleged, among others,
that part of the insurance proceeds had already been released in favor of Odessa, while the rest of the
proceeds are to be released in favor of Karl Brian and Trisha Angelie, both minors, upon the
appointment of their legal guardian. Petitioners also prayed for the total amount of P320,000.00 as
actual litigation expenses and attorneys fees.

In answer,[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 Odessas share as she was of
age, but withheld the release of the shares of minors Karl Brian and Trisha Angelie pending submission
of letters of guardianship. Insular alleged that the complaint or petition failed to state a cause of action
insofar as it sought to declare as void the designation of Eva as beneficiary, because Loreto revoked
her designation as such in Policy No. A001544070 and it disqualified her in Policy No. A001693029; and
insofar as it sought to declare as inofficious the shares of Odessa, Karl Brian, and Trisha Angelie,
considering that no settlement of Loretos estate had been filed nor had the respective shares of the
heirs been determined. Insular further claimed that it was bound to honor the insurance policies
designating the children of Loreto with Eva as beneficiaries pursuant to Section 53 of the Insurance
Code.

In its own answer[7] with compulsory counterclaim, Grepalife alleged that Eva was not designated as an
insurance policy beneficiary; that the claims filed by Odessa, Karl Brian, and Trisha Angelie were
denied because Loreto was ineligible for insurance due to a misrepresentation in his application form
that he was born on December 10, 1936 and, thus, not more than 65 years old when he signed it in
September 2001; that the case was premature, there being no claim filed by the legitimate family of
Loreto; and that the law on succession does not apply where the designation of insurance beneficiaries
is clear.

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

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

In their comment, petitioners alleged that the issue raised by Insular and Grepalife was purely legal
whether the complaint itself was proper or not and that the designation of a beneficiary is an act of
liberality or a donation and, therefore, subject to the provisions of Articles 752 [8] and 772[9] 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.)

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 theseIslands by virtue of Section 428 of the Code of Commerce x x x.

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

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

Insular[12] and Grepalife[13] 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.

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

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

SO ORDERED.[14]

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

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

Hence, this petition raising the following issues:

a.
In determining the merits of a motion to dismiss for failure to state a cause of action,
may the Court consider matters which were not alleged in the Complaint, particularly the defenses put
up by the defendants in their Answer?
b.
In granting a motion for reconsideration of a motion to dismiss for failure to state a cause
of action, did not the Regional Trial Court engage in the examination and determination of what were
the facts and their probative value, or the truth thereof, when it premised the dismissal on allegations
of the defendants in their answer which had not been proven?

c.
x x x (A)re the members of the legitimate family entitled to the proceeds of the insurance
for the concubine?[15]

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

The petition should be denied.

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

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

xxxx

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

A cause of action is the act or omission by which a party violates a right of another. [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 beneficiaries in the insurance policies issued by
Insular and Grepalife. The basis of petitioners claim is that Eva, being a concubine of Loreto and a
suspect in his murder, is disqualified from being designated as beneficiary of the insurance policies,
and that Evas children with Loreto, being illegitimate children, are entitled to a lesser share of the
proceeds of the policies. They also argued that pursuant to Section 12 of the Insurance Code, [19] Evas
share in the proceeds should be forfeited in their favor, the former having brought about the death of
Loreto. Thus, they prayed that the share of Eva and portions of the shares of Loretos illegitimate
children should be awarded to them, being the legitimate heirs of Loreto entitled to their respective
legitimes.

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 Loretos 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.

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.