FIRST DIVISION

FIRST LEPANTO-TAISHO INSURANCE CORPORATION (now known as FLT PRIME INSURANCE CORPORATION), Petitioner, G.R. No. 177839 Present: CORONA, C.J., Chairperson, LEONARDO-DE CASTRO, BERSAMIN, DEL CASTILLO, and VILLARAMA, JR., JJ.

- versus -

CHEVRON PHILIPPINES, INC. (formerly Promulgated: known as CALTEX [PHILIPPINES], INC.), Respondent. January 18, 2012 x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
VILLARAMA, JR., J.: Before this Court is a Rule 45 Petition assailing the Decision[1] dated November 20, 2006 and Resolution[2] dated May 8, 2007 of the Court of Appeals (CA) in CA-G.R. CV No. 86623, which reversed the Decision[3] dated August 5, 2005 of the Regional Trial Court (RTC) of Makati City, Branch 59 in Civil Case No 02-857. Respondent Chevron Philippines, Inc., formerly Caltex Philippines, Inc., sued petitioner First Lepanto-Taisho Insurance Corporation (now known as FLT Prime Insurance Corporation) for the payment of unpaid oil and petroleum purchases made by its distributor Fumitechniks Corporation (Fumitechniks).

Fumitechniks, represented by Ma. Lourdes Apostol, had applied for and was issued Surety Bond FLTICG (16) No. 01012 by petitioner for the amount ofP15,700,000.00. As stated in the attached rider, the bond was in compliance with the requirement for the grant of a credit line with the respondent to guarantee payment/remittance of the cost of fuel products withdrawn within the stipulated time in accordance with the terms and conditions of the agreement. The surety bond was executed on October 15, 2001 and will expire on October 15, 2002.[4] Fumitechniks defaulted on its obligation. The check dated December 14, 2001 it issued to respondent in the amount of P11,461,773.10, when presented for payment, was dishonored for reason of Account Closed. In a letter dated February 6, 2002, respondent notified petitioner of Fumitechniks unpaid purchases in the total amount of P15,084,030.30. In its letter-reply dated February 13, 2002, petitioner through its counsel, requested that it be furnished copies of the documents such as delivery receipts.[5] Respondent complied by sending copies of invoices showing deliveries of fuel and petroleum products between November 11, 2001 andDecember 1, 2001. Simultaneously, a letter[6] was sent to Fumitechniks demanding that the latter submit to petitioner the following: (1) its comment on respondents February 6, 2002 letter; (2) copy of the agreement secured by the Bond, together with copies of documents such as delivery receipts; and (3) information on the particulars, including the terms and conditions, of any arrangement that [Fumitechniks] might have made or any ongoing negotiation with Caltex in connection with the settlement of the obligations subject of the Caltex letter. In its letter dated March 1, 2002, Fumitechniks through its counsel wrote petitioners counsel informing that it cannot submit the requested agreement since no such agreement was executed between Fumitechniks and respondent. Fumitechniks also enclosed a copy of another surety bond issued by CICI General Insurance Corporation in favor of respondent to secure the obligation of Fumitechniks and/or Prime Asia Sales and Services, Inc. in the amount of P15,000,000.00.[7]Consequently, petitioner advised respondent of the non-existence of the principal agreement as confirmed by Fumitechniks. Petitioner explained that being an accessory contract, the bond cannot exist without a principal agreement as it is essential that the

copy of the basic contract be submitted to the proposed surety for the appreciation of the extent of the obligation to be covered by the bond applied for.[8] On April 9, 2002, respondent formally demanded from petitioner the payment of its claim under the surety bond. However, petitioner reiterated its position that without the basic contract subject of the bond, it cannot act on respondents claim; petitioner also contested the amount of Fumitechniks supposed obligation.[9] Alleging that petitioner unjustifiably refused to heed its demand for payment, respondent prayed for judgment ordering petitioner to pay the sum ofP15,080,030.30, plus interest, costs and attorneys fees equivalent to ten percent of the total obligation.[10] Petitioner, in its Answer with Counterclaim, [11] asserted that the Surety Bond was issued for the purpose of securing the performance of the obligations embodied in the Principal Agreement stated therein, which contract should have been attached and made part thereof. After trial, the RTC rendered judgment dismissing the complaint as well as petitioners counterclaim. Said court found that the terms and conditions of the oral credit line agreement between respondent and Fumitechniks have not been relayed to petitioner and neither were the same conveyed even during trial. Since the surety bond is a mere accessory contract, the RTC concluded that the bond cannot stand in the absence of the written agreement secured thereby. In holding that petitioner cannot be held liable under the bond it issued to Fumitechniks, the RTC noted the practice of petitioner, as testified on by its witnesses, to attach a copy of the written agreement (principal contract) whenever it issues a surety bond, or to be submitted later if not yet in the possession of the assured, and in case of failure to submit the said written agreement, the surety contract will not be binding despite payment of the premium. Respondent filed a motion for reconsideration while petitioner filed a motion for partial reconsideration as to the dismissal of its counterclaim. With the denial of their motions, both parties filed their respective notice of appeal.

The CA ruled in favor of respondent, the dispositive portion of its decision reads:
WHEREFORE, the appealed Decision is REVERSED and SET ASIDE. A new judgment is hereby entered ORDERING defendantappellant First Lepanto-Taisho Insurance Corporation to pay plaintiffappellant Caltex (Philippines) Inc. now Chevron Philippines, Inc. the sum of P15,084,030.00. SO ORDERED.[12]

According to the appellate court, petitioner cannot insist on the submission of a written agreement to be attached to the surety bond considering that respondent was not aware of such requirement and unwritten company policy. It also declared that petitioner is estopped from assailing the oral credit line agreement, having consented to the same upon presentation by Fumitechniks of the surety bond it issued. Considering that such oral contract between Fumitechniks and respondent has been partially executed, the CA ruled that the provisions of the Statute of Frauds do not apply. With the denial of its motion for reconsideration, petitioner appealed to this Court raising the following issues:
I. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE PROVISIONS OF THE SURETY BOND WHEN IT HELD THAT THE SURETY BOND SECURED AN ORAL CREDIT LINE AGREEMENT NOTWITHSTANDING THE STIPULATIONS THEREIN CLEARLY SHOWING BEYOND DOUBT THAT WHAT WAS BEING SECURED WAS A WRITTEN AGREEMENT, PARTICULARLY, THE WRITTEN AGREEMENT A COPY OF WHICH WAS EVEN REQUIRED TO BE ATTACHED TO THE SURETY BOND AND MADE A PART THEREOF. II. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING OUT THE QUESTIONED RESPONDENTS EVIDENCE FOR BEING CONTRARY TO THE PAROL EVIDENCE RULE, IMMATERIAL AND IRRELEVANT AND CONTRARY TO THE STATUTE OF FRAUDS. III. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN NOT STRIKING OUT THE RESPONDENTS

MOTION FOR RECONSIDERATION OF THE RTC DECISION FOR BEING A MERE SCRAP OF PAPER AND PRO FORMA AND, CONSEQUENTLY, IN NOT DECLARING THE RTC DECISION AS FINAL AND EXECUTORY IN SO FAR AS IT DISMISSED THE COMPLAINT. IV. WHETHER OR NOT THE HONORABLE COURT OF APPEALS ERRED IN REVERSING THE RTC DECISION AND IN NOT GRANTING PETITIONERS COUNTERCLAIM.[13]

The main issue to be resolved is one of first impression: whether a surety is liable to the creditor in the absence of a written contract with the principal. Section 175 of the Insurance Code defines a suretyship as a contract or agreement whereby a party, called the surety, guarantees the performance by another party, called the principal or obligor, of an obligation or undertaking in favor of a third party, called the obligee. It includes official recognizances, stipulations, bonds or undertakings issued under Act 536, [14] as amended. Suretyship arises upon the solidary binding of a person deemed the surety with the principal debtor, for the purpose of fulfilling an obligation.[15] Such undertaking makes a surety agreement an ancillary contract as it presupposes the existence of a principal contract. Although the contract of a surety is in essence secondary only to a valid principal obligation, the surety becomes liable for the debt or duty of another although it possesses no direct or personal interest over the obligations nor does it receive any benefit therefrom. And notwithstanding the fact that the surety contract is secondary to the principal obligation, the surety assumes liability as a regular party to the undertaking.[16] The extent of a suretys liability is determined by the language of the suretyship contract or bond itself. It cannot be extended by implication, beyond the terms of the contract.[17] Thus, to determine whether petitioner is liable to respondent under the surety bond, it becomes necessary to examine the terms of the contract itself. Surety Bond FLTICG (16) No. 01012 is a standard form used by petitioner, which states:

That we, FUMITECHNIKS CORP. OF THE PHILS. of #154 Anahaw St., Project 7, Quezon City as principal and First Lepanto-Taisho Insurance Corporation a corporation duly organized and existing under and by virtue of the laws of the Philippines as Surety, are held firmly bound unto CALTEX PHILIPPINES, INC. of ______ in the sum of FIFTEEN MILLION SEVEN HUNDRED THOUSAND ONLY PESOS (P15,700,000.00), Philippine Currency, for the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors, administrators, successors, and assigns, jointly and severally, firmly by these presents: The conditions of this obligation are as follows: WHEREAS, the above-bounden principal, on 15th day of October, 2001 entered into [an] agreement with CALTEX PHILIPPINES, INC. of ________________ to fully and faithfully a copy of which is attached hereto and made a part hereof: WHEREAS, said Obligee__ requires said principal to give a good and sufficient bond in the above stated sum to secure the full and faithful performance on his part of said agreement__. NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms, conditions, and agreements stipulated in said agreement__ then this obligation shall be null and void; otherwise it shall remain in full force and effect. The liability of First Lepanto-Taisho Insurance Corporation under this bond will expire on October 15, 2002__. x x x x[18] (Emphasis supplied.)

The rider attached to the bond sets forth the following:

WHEREAS, the Principal has applied for a Credit Line in the amount of PESOS: Fifteen Million Seven Hundred thousand only (P15,700,000.00), Philippine Currency with the Obligee for the purchase of Fuel Products; WHEREAS, the obligee requires the Principal to post a bond to guarantee payment/remittance of the cost of fuel products withdrawn within the stipulated time in accordance with terms and conditions of the agreement;

IN NO CASE, however, shall the liability of the Surety hereunder exceed the sum of PESOS: Fifteen million seven hundred thousand only (P15,700,000.00), Philippine Currency. NOW THEREFORE, if the principal shall well and truly perform and fulfill all the undertakings, covenants, terms and conditions and agreements stipulated in said undertakings, then this obligation shall be null and void; otherwise, it shall remain in full force and effect. The liability of FIRST LEPANTO-TAISHO INSURANCE CORPORATION, under this Bond will expire on 10.15.01_. Furthermore, it is hereby understood that FIRST LEPANTO-TAISHO INSURANCE CORPORATION will not be liable for any claim not presented to it in writing within fifteen (15) days from the expiration of this bond, and that the Obligee hereby waives its right to claim or file any court action against the Surety after the termination of fifteen (15) days from the time its cause of action accrues.[19]

Petitioner posits that non-compliance with the submission of the written agreement, which by the express terms of the surety bond, should be attached and made part thereof, rendered the bond ineffective. Since all stipulations and provisions of the surety contract should be taken and interpreted together, in this case, the unmistakable intention of the parties was to secure only those terms and conditions of the written agreement. Thus, by deleting the required submission and attachment of the written agreement to the surety bond and replacing it with the oral credit agreement, the obligations of the surety have been extended beyond the limits of the surety contract. On the other hand, respondent contends that the surety bond had been delivered by petitioner to Fumitechniks which paid the premiums and delivered the bond to respondent, who in turn, opened the credit line which Fumitechniks availed of to purchase its merchandise from respondent on credit. Respondent points out that a careful reading of the surety contract shows that there is no such requirement of submission of the written credit agreement for the bonds effectivity. Moreover, respondents witnesses had already explained that distributorship accounts are not covered by written distribution agreements. Supplying the details of these agreements is allowed as an exception to the parol evidence rule even if it is proof of an oral agreement. Respondent argues that by introducing documents that petitioner sought to exclude, it never intended to change or modify the

contents of the surety bond but merely to establish the actual terms of the distribution agreement between Fumitechniks and respondent, a separate agreement that was executed shortly after the issuance of the surety bond. Because petitioner still issued the bond and allowed it to be delivered to respondent despite the fact that a copy of the written distribution agreement was never attached thereto, respondent avers that clearly, such attaching of the copy of the principal agreement, was for evidentiary purposes only. The real intention of the bond was to secure the payment of all the purchases of Fumitechniks from respondent up to the maximum amount allowed under the bond. A reading of Surety Bond FLTICG (16) No. 01012 shows that it secures the payment of purchases on credit by Fumitechniks in accordance with the terms and conditions of the agreement it entered into with respondent. The word agreement has reference to the distributorship agreement, the principal contract and by implication included the credit agreement mentioned in the rider. However, it turned out that respondent has executed written agreements only with its direct customers but not distributors like Fumitechniks and it also never relayed the terms and conditions of its distributorship agreement to the petitioner after the delivery of the bond. This was clearly admitted by respondents Marketing Coordinator, Alden Casas Fajardo, who testified as follows:
Atty. Selim: Q : Mr. Fajardo[,] you mentioned during your cross-examination that the surety bond as part of the requirements of [Fumitechniks] before the Distributorship Agreement was approved? A : Yes Sir. xxxx Q : Is it the practice or procedure at Caltex to reduce distributorship account into writing? xxxx A : No, its not a practice to make an agreement. xxxx Atty. Quiroz:

Q : A :

What was the reason why you are not reducing your agreement with your client into writing? Well, of course as I said, there is no fix pricing in terms of distributorship agreement, its usually with regards to direct service to the customers which have direct fixed price. xxxx

Q : A :

These supposed terms and conditions that you agreed with [Fumitechniks], did you relay to the defendant Yes Sir. xxxx

Q : A : Q : A : Q : A : Q : A :

How did you relay that, how did you relay the terms and conditions to the defendant? I dont know, it was during the time for collection because I collected them and explain the terms and conditions. You testified awhile ago that you did not talk to the defendant First Lepanto-Taisho Insurance Corporation? I was confused with the question. Im talking about Malou Apostol. So, in your answer, you have not relayed those terms and conditions to the defendant First Lepanto, you have not? Yes Sir. And as of this present, you have not yet relayed the terms and conditions? Yes Sir. x x x x [20]

Respondent, however, maintains that the delivery of the bond and acceptance of premium payment by petitioner binds the latter as surety, notwithstanding the non-submission of the oral distributorship and credit agreement which understandably cannot be attached to the bond. The contention has no merit.

The law is clear that a surety contract should be read and interpreted together with the contract entered into between the creditor and the principal. Section 176 of the Insurance Code states:
Sec. 176. The liability of the surety or sureties shall be joint and several with the obligor and shall be limited to the amount of the bond. It is determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee. (Emphasis supplied.)

A surety contract is merely a collateral one, its basis is the principal contract or undertaking which it secures.[21] Necessarily, the stipulations in such principal agreement must at least be communicated or made known to the surety particularly in this case where the bond expressly guarantees the payment of respondents fuel products withdrawn by Fumitechniks in accordance with the terms and conditions of their agreement. The bond specifically makes reference to a written agreement. It is basic that if the terms of a contract are clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its stipulations shall control. [22] Moreover, being an onerous undertaking, a surety agreement is strictly construed against the creditor, and every doubt is resolved in favor of the solidary debtor.[23] Having accepted the bond, respondent as creditor must be held bound by the recital in the surety bond that the terms and conditions of its distributorship contract be reduced in writing or at the very least communicated in writing to the surety. Such non-compliance by the creditor (respondent) impacts not on the validity or legality of the surety contract but on the creditors right to demand performance. It bears stressing that the contract of suretyship imports entire good faith and confidence between the parties in regard to the whole transaction, although it has been said that the creditor does not stand as a fiduciary in his relation to the surety. The creditor is generally held bound to a faithful observance of the rights of the surety and to the performance of every duty necessary for the protection of those rights.[24] Moreover, in this jurisdiction, obligations arising from contracts have the force of law between the parties and should be complied with in good faith. [25] Respondent is charged with notice of the specified form of the agreement or at least the disclosure of basic terms and conditions of its distributorship and credit agreements with its client Fumitechniks after its acceptance of the bond delivered by the

latter. However, it never made any effort to relay those terms and conditions of its contract with Fumitechniks upon the commencement of its transactions with said client, which obligations are covered by the surety bond issued by petitioner. Contrary to respondents assertion, there is no indication in the records that petitioner had actual knowledge of its alleged business practice of not having written contracts with distributors; and even assuming petitioner was aware of such practice, the bond issued to Fumitechniks and accepted by respondent specifically referred to a written agreement. As to the contention of petitioner that respondents motion for reconsideration filed before the trial court should have been deemed not filed for being pro forma,the Court finds it to be without merit. The mere fact that a motion for reconsideration reiterates issues already passed upon by the court does not, by itself, make it apro forma motion. Among the ends to which a motion for reconsideration is addressed is precisely to convince the court that its ruling is erroneous and improper, contrary to the law or evidence; the movant has to dwell of necessity on issues already passed upon.[26] Finally, we hold that the trial court correctly dismissed petitioners counterclaim for moral damages and attorneys fees. The filing alone of a civil action should not be a ground for an award of moral damages in the same way that a clearly unfounded civil action is not among the grounds for moral damages.[27] Besides, a juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. [28] Although in some recent cases we have held that the Court may allow the grant of moral damages to corporations, it is not automatically granted; there must still be proof of the existence of the factual basis of the damage and its causal relation to the defendants acts.This is so because moral damages, though incapable of pecuniary estimation, are in the category of an award designed to compensate the claimant for actual injurysuffered and not to impose a penalty on the wrongdoer.[29] There is no evidence presented to establish the factual basis of petitioners claim for moral damages. Petitioner is likewise not entitled to attorneys fees. The settled rule is that no premium should be placed on the right to litigate and that not every winning party is entitled to an automatic grant of attorneys fees. [30] In

pursuing its claim on the surety bond, respondent was acting on the belief that it can collect on the obligation of Fumitechniks notwithstanding the non-submission of the written principal contract. WHEREFORE, the petition for review on certiorari is PARTLY GRANTED. The Decision dated November 20, 2006 and Resolution dated May 8, 2007 of the Court of Appeals in CA-G.R. CV No. 86623, are REVERSED and SET ASIDE. The Decision dated August 5, 2005 of the Regional Trial Court of Makati City, Branch 59 in Civil Case No. 02857 dismissing respondents complaint as well as petitioners counterclaim, is hereby REINSTATED and UPHELD. No pronouncement as to costs. SO ORDERED.

MARTIN S. VILLARAMA, JR. Associate Justice WE CONCUR:

RENATO C. CORONA Chief Justice Chairperson

TERESITA J. LEONARDO-DE CASTRO Associate Justice

LUCAS P. BERSAMINAssociate Justice

MARIANO C. DEL CASTILLO Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the 1987 Constitution, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA Chief Justice

Supreme Court of the Philippines

Third Division
G.R. No. 180784, February 15, 2012

INSURANCE COMPANY OF NORTH AMERICA, PETITIONER, VS. ASIAN TERMINALS, INC., RESPONDENT.
DECISION

PERALTA, J.:
This is a petition for review on certiorari[1] of the Decision of the Regional Trial Court (RTC) of Makati City, Branch 138 (trial court) in Civil Case No. 05809 and its Order dated December 4, 2007 on the ground that the trial court committed reversible error of law. The trial court dismissed petitioners complaint for actual damages on the ground of prescription under the Carriage of Goods by Sea Act (COGSA). The facts are as follows: On November 9, 2002, Macro-Lite Korea Corporation shipped to San Miguel Corporation, through M/V DIMI P vessel, one hundred eighty-five (185) packages (231,000 sheets) of electrolytic tin free steel, complete and in good order condition and covered by Bill of Lading No. POBUPOHMAN20638.[2] The shipment had a declared value of US$169,850.35[3] and was insured with petitioner Insurance Company of North America against all risks under Marine Policy No. MOPA-06310.[4] The carrying vessel arrived at the port of Manila on November 19, 2002, and when the shipment was discharged therefrom, it was noted that seven (7) packages thereof were damaged and in bad order.[5] The shipment was then turned over to the custody of respondent Asian Terminals, Inc. (ATI) on November 21, 2002 for storage and safekeeping pending its withdrawal by the consignees authorized customs broker, R.V. Marzan Brokerage Corp. (Marzan). On November 22, 23 and 29, 2002, the subject shipment was withdrawn by Marzan from the custody of respondent. On November 29, 2002, prior to the last withdrawal of the shipment, a joint inspection of the said cargo was conducted per the Request for Bad Order Survey[6] dated November 29, 2002, and the examination report, which was written on the same request, showed that an additional five (5) packages were found to be damaged and in bad order. On January 6, 2003, the consignee, San Miguel Corporation, filed separate claims[7] against respondent and petitioner for the damage to 11,200 sheets of electrolytic tin free steel. Petitioner engaged the services of an independent adjuster/surveyor, BA McLarens Phils., Inc., to conduct an investigation and evaluation on the claim and to prepare the necessary report.[8] BA McLarens Phils., Inc. submitted to

petitioner an Survey Report[9] dated January 22, 2003 and another report[10] dated May 5, 2003 regarding the damaged shipment. It noted that out of the reported twelve (12) damaged skids, nine (9) of them were rejected and three (3) skids were accepted by the consignees representative as good order. BA McLarens Phils., Inc. evaluated the total cost of damage to the nine (9) rejected skids (11,200 sheets of electrolytic tin free steel) to be P431,592.14. The petitioner, as insurer of the said cargo, paid the consignee the amount of P431,592.14 for the damage caused to the shipment, as evidenced by the Subrogation Receipt dated January 8, 2004. Thereafter, petitioner, formally demanded reparation against respondent. As respondent failed to satisfy its demand, petitioner filed an action for damages with the RTC of Makati City. The trial court found, thus: The Court finds that the subject shipment indeed suffered additional damages. The Request for Bad Order Survey No. 56422 shows that prior to the turn over of the shipment from the custody of ATI to the consignee, aside from the seven (7) packages which were already damaged upon arrival at the port of Manila, five (5) more packages were found with dent, cut and crumple while in the custody of ATI. This document was issued by ATI and was jointly executed by the representatives of ATI, consignee and customs, and the Shed Supervisor. Thus, ATI is now estopped from claiming that there was no additional damage suffered by the shipment. It is, therefore, only logical to conclude that the damage was caused solely by the negligence of defendant ATI. This evidence of the plaintiff was refuted by the defendant by merely alleging that the damage to the 5 Tin Plates is only in its external packaging. However, the fact remains that the consignee has rejected the same as total loss for not being suitable for their intended purpose. In addition, the photographs presented by the plaintiff show that the shipment also suffered severe dents and some packages were even critically crumpled.[11] As to the extent of liability, ATI invoked the Contract for Cargo Handling Services executed between the Philippine Ports Authority and Marina Ports Services, Inc. (now Asian Terminals, Inc.). Under the said contract, ATIs liability for damage to cargoes in its custody is limited to P5,000.00 for each package, unless the value of the cargo shipment is otherwise specified or manifested or

communicated in writing, together with the declared Bill of Lading value and supported by a certified packing list to the contractor by the interested party or parties before the discharge or lading unto vessel of the goods. The trial court found that there was compliance by the shipper and consignee with the above requirement. The Bill of Lading, together with the corresponding invoice and packing list, was shown to ATI prior to the discharge of the goods from the vessel. Since the shipment was released from the custody of ATI, the trial court found that the same was declared for tax purposes as well as for the assessment of arrastre charges and other fees. For the purpose, the presentation of the invoice, packing list and other shipping documents to ATI for the proper assessment of the arrastre charges and other fees satisfied the condition of declaration of the actual invoices of the value of the goods to overcome the limitation of liability of the arrastre operator.[12] Further, the trial court found that there was a valid subrogation between the petitioner and the assured/consignee San Miguel Corporation. The respondent admitted the existence of Global Marine Policy No. MOPA-06310 with San Miguel Corporation and Marine Risk Note No. 3445,[13] which showed that the cargo was indeed insured with petitioner. The trial court held that petitioners claim is compensable because the Subrogation Receipt,16 which was admitted as to its existence by respondent, was sufficient to establish not only the relationship of the insurer and the assured, but also the amount paid to settle the insurance claim.[14] However, the trial court dismissed the complaint on the ground that the petitioners claim was already barred by the statute of limitations. It held that COGSA, embodied in Commonwealth Act (CA) No. 65, applies to this case, since the goods were shipped from a foreign port to the Philippines. The trial court stated that under the said law, particularly paragraph 4, Section 3 (6)[15] thereof, the shipper has the right to bring a suit within one year after the delivery of the goods or the date when the goods should have been delivered, in respect of loss or damage thereto. The trial court held: In the case at bar, the records show that the shipment was delivered to the consignee on 22, 23 and 29 of November 2002. The plaintiff took almost a year to

approve and pay the claim of its assured, San Miguel, despite the fact that it had initially received the latters claim as well as the inspection report and survey report of McLarens as early as January 2003. The assured/consignee had only until November of 2003 within which to file a suit against the defendant. However, the instant case was filed only on September 7, 2005 or almost three (3) years from the date the subject shipment was delivered to the consignee. The plaintiff, as insurer of the shipment which has paid the claim of the insured, is subrogated to all the rights of the said insured in relation to the reimbursement of such claim. As such, the plaintiff cannot acquire better rights than that of the insured. Thus, the plaintiff has no one but itself to blame for having acted lackadaisically on San Miguels claim. WHEREFORE, the complaint and counterclaim are hereby DISMISSED. [16] Petitioners motion for reconsideration was denied by the trial court in the Order[17] dated December 4, 2007. Petitioner filed this petition under Rule 45 of the Rules of Court directly before this Court, alleging that it is raising a pure question of law: THE TRIAL COURT COMMITTED A PURE AND SERIOUS ERROR OF LAW IN APPLYING THE ONE-YEAR PRESCRIPTIVE PERIOD FOR FILING A SUIT UNDER THE CARRIAGE OF GOODS BY SEA ACT (COGSA) TO AN ARRASTRE OPERATOR.[18] Petitioner states that while it is in full accord with the trial court in finding respondent liable for the damaged shipment, it submits that the trial courts dismissal of the complaint on the ground of prescription under the COGSA is legally erroneous. It contends that the one-year limitation period for bringing a suit in court under the COGSA is not applicable to this case, because the prescriptive period applies only to the carrier and the ship. It argues that respondent, which is engaged in warehousing, arrastre and stevedoring business, is not a carrier as defined by the COGSA, because it is not engaged in the business of transportation of goods by sea in international trade as a common carrier. Petitioner asserts that since the complaint was filed against respondent arrastre operator only, without impleading the carrier, the prescriptive period under the COGSA is not applicable to this case.

Moreover, petitioner contends that the term carriage of goods in the COGSA covers the period from the time the goods are loaded to the vessel to the time they are discharged therefrom. It points out that it sued respondent only for the additional five (5) packages of the subject shipment that were found damaged while in respondents custody, long after the shipment was discharged from the vessel. The said damage was confirmed by the trial court and proved by the Request for Bad Order Survey No. 56422.[19] Petitioner prays that the decision of the trial court be reversed and set aside and a new judgment be promulgated granting its prayer for actual damages. The main issues are: (1) whether or not the one-year prescriptive period for filing a suit under the COGSA applies to this action for damages against respondent arrastre operator; and (2) whether or not petitioner is entitled to recover actual damages in the amount of P431,592.14 from respondent. To reiterate, petitioner came straight to this Court to appeal from the decision of the trial court under Rule 45 of the Rules of Court on the ground that it is raising only a question of law. Microsoft Corporation v. Maxicorp, Inc.[20] explains the difference between questions of law and questions of fact, thus: The distinction between questions of law and questions of fact is settled. A question of law exists when the doubt or difference centers on what the law is on a certain state of facts. A question of fact exists if the doubt centers on the truth or falsity of the alleged facts. Though this delineation seems simple, determining the true nature and extent of the distinction is sometimes problematic. For example, it is incorrect to presume that all cases where the facts are not in dispute automatically involve purely questions of law. There is a question of law if the issue raised is capable of being resolved without need of reviewing the probative value of the evidence. The resolution of the issue must rest solely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact. If the query requires a re-evaluation of the credibility of witnesses, or the existence or relevance of surrounding circumstances and their relation to each other, the issue in that query is factual. x x x[21]

In this case, although petitioner alleged that it is merely raising a question of law, that is, whether or not the prescriptive period under the COGSA applies to an action for damages against respondent arrastre operator, yet petitioner prays for the reversal of the decision of the trial court and that it be granted the relief sought, which is the award of actual damages in the amount of P431,592.14. For a question to be one of law, it must not involve an examination of the probative value of the evidence presented by the litigants or any of them.[22] However, to resolve the issue of whether or not petitioner is entitled to recover actual damages from respondent requires the Court to evaluate the evidence on record; hence, petitioner is also raising a question of fact. Under Section 1, Rule 45, providing for appeals by certiorari before the Supreme Court, it is clearly enunciated that only questions of law may be set forth.[23] The Court may resolve questions of fact only when the case falls under the following exceptions: (1) when the findings are grounded entirely on speculation, surmises, or conjectures; (2) when the inference made is manifestly mistaken, absurd, or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; (5) when the findings of fact are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to those of the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondent; and (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record.[24] In this case, the fourth exception cited above applies, as the trial court rendered judgment based on a misapprehension of facts. We first resolve the issue on whether or not the one-year prescriptive period for filing a suit under the COGSA applies to respondent arrastre operator. The Carriage of Goods by Sea Act (COGSA), Public Act No. 521 of the 74th US Congress, was accepted to be made applicable to all contracts for the carriage

of goods by sea to and from Philippine ports in foreign trade by virtue of CA No. 65. Section 1 of CA No. 65 states: Section 1. That the provisions of Public Act Numbered Five hundred and twenty-one of the Seventy-fourth Congress of the United States, approved on April sixteenth, nineteen hundred and thirty-six, be accepted, as it is hereby accepted to be made applicable to all contracts for the carriage of goods by sea to and from Philippine ports in foreign trade: Provided, That nothing in the Act shall be construed as repealing any existing provision of the Code of Commerce which is now in force, or as limiting its application. Section 1, Title I of CA No. 65 defines the relevant terms in Carriage of Goods by Sea, thus: Section 1. When used in this Act (a) The term carrier includes the owner or the charterer who enters into a contract of carriage with a shipper. (b) The term contract of carriage applies only to contracts of carriage covered by a bill of lading or any similar document of title, insofar as such document relates to the carriage of goods by sea, including any bill of lading or any similar document as aforesaid issued under or pursuant to a charter party from the moment at which such bill of lading or similar document of title regulates the relations between a carrier and a holder of the same. (c) The term goods includes goods, wares, merchandise, and articles of every kind whatsoever, except live animals and cargo which by the contract of carriage is stated as being carried on deck and is so carried. (d) The term ship means any vessel used for the carriage of goods by sea. (e) The term carriage of goods covers the period from the time when the goods are loaded to the time when they are discharged from the ship.[25] It is noted that the term carriage of goods covers the period from the time when the goods are loaded to the time when they are discharged from the ship; thus, it can be inferred that the period of time when the goods have been discharged from the ship and given to the custody of the arrastre operator is not covered by the COGSA.

The prescriptive period for filing an action for the loss or damage of the goods under the COGSA is found in paragraph (6), Section 3, thus: 6) Unless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, such removal shall be prima facie evidence of the delivery by the carrier of the goods as described in the bill of lading. If the loss or damage is not apparent, the notice must be given within three days of the delivery. Said notice of loss or damage maybe endorsed upon the receipt for the goods given by the person taking delivery thereof. The notice in writing need not be given if the state of the goods has at the time of their receipt been the subject of joint survey or inspection. In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered: Provided, That if a notice of loss or damage, either apparent or concealed, is not given as provided for in this section, that fact shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered.[26] From the provision above, the carrier and the ship may put up the defense of prescription if the action for damages is not brought within one year after the delivery of the goods or the date when the goods should have been delivered. It has been held that not only the shipper, but also the consignee or legal holder of the bill may invoke the prescriptive period.[27] However, the COGSA does not mention that an arrastre operator may invoke the prescriptive period of one year; hence, it does not cover the arrastre operator. Respondent arrastre operators responsibility and liability for losses and damages are set forth in Section 7.01 of the Contract for Cargo Handling Services executed between the Philippine Ports Authority and Marina Ports Services, Inc. (now Asian Terminals, Inc.), thus: Section 7.01 Responsibility and Liability for Losses and Damages; Exceptions The CONTRACTOR shall, at its own expense, handle all

merchandise in all work undertaken by it hereunder, diligently and in a skillful, workman-like and efficient manner. The CONTRACTOR shall be solely responsible as an independent contractor, and hereby agrees to accept liability and to pay to the shipping company, consignees, consignors or other interested party or parties for the loss, damage or non-delivery of cargoes in its custody and control to the extent of the actual invoice value of each package which in no case shall be more than FIVE THOUSAND PESOS (P5,000.00) each, unless the value of the cargo shipment is otherwise specified or manifested or communicated in writing together with the declared Bill of Lading value and supported by a certified packing list to the CONTRACTOR by the interested party or parties before the discharge or loading unto vessel of the goods. This amount of Five Thousand Pesos (P5,000.00) per package may be reviewed and adjusted by the AUTHORITY from time to time. The CONTRACTOR shall not be responsible for the condition or the contents of any package received, nor for the weight nor for any loss, injury or damage to the said cargo before or while the goods are being received or remains in the piers, sheds, warehouses or facility, if the loss, injury or damage is caused by force majeure or other causes beyond the CONTRACTORs control or capacity to prevent or remedy; PROVIDED, that a formal claim together with the necessary copies of Bill of Lading, Invoice, Certified Packing List and Computation arrived at covering the loss, injury or damage or non-delivery of such goods shall have been filed with the CONTRACTOR within fifteen (15) days from day of issuance by the CONTRACTOR of a certificate of non-delivery; PROVIDED, however, that if said CONTRACTOR fails to issue such certification within fifteen (15) days from receipt of a written request by the shipper/consignee or his duly authorized representative or any interested party, said certification shall be deemed to have been issued, and thereafter, the fifteen (15) day period within which to file the claim commences; PROVIDED, finally, that the request for certification of loss shall be made within thirty (30) days from the date of delivery of the package to the consignee.[28] Based on the Contract above, the consignee has a period of thirty (30) days from the date of delivery of the package to the consignee within which to request a certificate of loss from the arrastre operator. From the date of the

request for a certificate of loss, the arrastre operator has a period of fifteen (15) days within which to issue a certificate of non-delivery/loss either actually or constructively. Moreover, from the date of issuance of a certificate of nondelivery/loss, the consignee has fifteen (15) days within which to file a formal claim covering the loss, injury, damage or non-delivery of such goods with all accompanying documentation against the arrastre operator. Petitioner clarified that it sued respondent only for the additional five (5) packages of the subject shipment that were found damaged while in respondents custody, which fact of damage was sustained by the trial court and proved by the Request for Bad Order Survey No. 56422.[29] Petitioner pointed out the importance of the Request for Bad Order Survey by citing New Zealand Insurance Company Limited v. Navarro.[30] In the said case, the Court ruled that the request for, and the result of, the bad order examination, which were filed and done within fifteen days from the haulage of the goods from the vessel, served the purpose of a claim, which is to afford the carrier or depositary reasonable opportunity and facilities to check the validity of the claims while facts are still fresh in the minds of the persons who took part in the transaction and documents are still available. Hence, even if the consignee therein filed a formal claim beyond the stipulated period of 15 days, the arrastre operator was not relieved of liability as the purpose of a formal claim had already been satisfied by the consignees timely request for the bad order examination of the goods shipped and the result of the said bad order examination. To elaborate, New Zealand Insurance Company, Ltd. v. Navarro held: We took special note of the above pronouncement six (6) years later in Firemans Fund Insurance Co. v. Manila Port Service Co., et al. There, fifteen (15) cases of nylon merchandise had been discharged from the carrying vessel and received by defendant Manila Port Service Co., the arrastre operator, on 7 July 1961. Out of those fifteen (15) cases, however, only twelve (12) had been delivered to the consignee in good condition. Consequently, on 20 July 1961, the consignees broker requested a bad order examination of the shipment, which was later certified by defendants own inspector to be short of three (3) cases. On 15 August 1961, a formal claim for indemnity was then filed by the consignee, who was later replaced in the action by plaintiff Firemans Fund Insurance Co., the

insurer of the goods. Defendant, however, refused to honor the claim, arguing that the same had not been filed within fifteen (15) days from the date of discharge of the shipment from the carrying vessel, as required under the arrastre Management Contract then in force between itself and the Bureau of Customs. The trial court upheld this argument and hence dismissed the complaint. On appeal by the consignee, this Court, speaking through Mr. Justice J.B.L. Reyes, reversed the trial court and found the defendant arrastre operator liable for the value of the lost cargo, explaining as follows: However, the trial court has overlooked the significance of the request for, and the result of, the bad order examination, which were filed and done within fifteen days from the haulage of the goods from the vessel. Said request and result, in effect, served the purpose of a claim, which is to afford the carrier or depositary reasonable opportunity and facilities to check the validity of the claims while facts are still fresh in the minds of the persons who took part in the transaction and documents are still available. (Consunji vs. Manila Port Service, L-15551, 29 November 1960) Indeed, the examination undertaken by the defendants own inspector not only gave the defendant an opportunity to check the goods but is itself a verification of its own liability x x x. In other words, what the Court considered as the crucial factor in declaring the defendant arrastre operator liable for the loss occasioned, in the Firemans Fund case, was the fact that defendant, by virtue of the consignees request for a bad order examination, had been able formally to verify the existence and extent of its liability within fifteen (15) days from the date of discharge of the shipment from the carrying vessel i.e., within the same period stipulated under the Management Contract for the consignee to file a formal claim. That a formal claim had been filed by the consignee beyond the stipulated period of fifteen (15) days neither relieved defendant of liability nor excused payment thereof, the purpose of a formal claim, as contemplated in Consunji, having already been fully served and satisfied by the consignees timely request for, and the eventual result of, the bad order examination of the nylon merchandise shipped.

Relating the doctrine of Firemans Fund to the case at bar, the record shows that delivery to the warehouse of consignee Monterey Farms Corporation of the 5,974 bags of soybean meal, had been completed by respondent Razon (arrastre operator) on 9 July 1974. On that same day, a bad order examination of the goods delivered was requested by the consignee and was, in fact, conducted by respondent Razons own inspector, in the presence of representatives of both the Bureau of Customs and the consignee. The ensuing bad order examination report what the trial court considered a certificate of loss confirmed that out of the 5,974 bags of soybean meal loaded on board the M/S Zamboanga and shipped to Manila, 173 bags had been damaged in transitu while an additional 111 bags had been damaged after the entire shipment had been discharged from the vessel and placed in the custody of respondent Razon. Hence, as early as 9 July 1974 (the date of last delivery to the consignees warehouse), respondent Razon had been able to verify and ascertain for itself not only the existence of its liability to the consignee but, more significantly, the exact amount thereof i.e., P5,746.61, representing the value of 111 bags of soybean meal. We note further that such verification and ascertainment of liability on the part of respondent Razon, had been accomplished within thirty (30) days from the date of delivery of last package to the consignee, broker or importer as well as within fifteen (15) days from the date of issuance by the Contractor [respondent Razon] of a certificate of loss, damage or injury or certificate of non-delivery the periods prescribed under Article VI, Section 1 of the Management Contract here involved, within which a request for certificate of loss and a formal claim, respectively, must be filed by the consignee or his agent. Evidently, therefore, the rule laid down by the Court in Firemans Fund finds appropriate application in the case at bar.[31] In this case, the records show that the goods were deposited with the arrastre operator on November 21, 2002. The goods were withdrawn from the arrastre operator on November 22, 23 and 29, 2002. Prior to the withdrawal on November 29, 2002, the broker of the importer, Marzan, requested for a bad order survey in the presence of a Customs representative and other parties concerned. The joint inspection of cargo was conducted and it was found that an additional five (5) packages were found in bad order as evidenced by the

document entitled Request for Bad Order Survey[32] dated November 29, 2002, which document also contained the examination report, signed by the Customs representative, Supervisor/Superintendent, consignees representative, and the ATI Inspector. Thus, as early as November 29, 2002, the date of the last withdrawal of the goods from the arrastre operator, respondent ATI was able to verify that five (5) packages of the shipment were in bad order while in its custody. The certificate of non-delivery referred to in the Contract is similar to or identical with the examination report on the request for bad order survey.[33] Like in the case of New Zealand Insurance Company Ltd. v. Navarro, the verification and ascertainment of liability by respondent ATI had been accomplished within thirty (30) days from the date of delivery of the package to the consignee and within fifteen (15) days from the date of issuance by the Contractor (respondent ATI) of the examination report on the request for bad order survey. Although the formal claim was filed beyond the 15-day period from the issuance of the examination report on the request for bad order survey, the purpose of the time limitations for the filing of claims had already been fully satisfied by the request of the consignees broker for a bad order survey and by the examination report of the arrastre operator on the result thereof, as the arrastre operator had become aware of and had verified the facts giving rise to its liability.[34] Hence, the arrastre operator suffered no prejudice by the lack of strict compliance with the 15-day limitation to file the formal complaint.[35] The next factual issue is whether or not petitioner is entitled to actual damages in the amount of P431,592.14. The payment of the said amount by petitioner to the assured/consignee was based on the Evaluation Report[36] of BA McLarens Phils., Inc., thus: xxxx CIRCUMSTANCES OF LOSS As reported, the shipment consisting of 185 packages (344.982 MT) Electrolytic Tin Free Steel, JISG 3315SPTFS, MRT-4CA, Matte Finish arrived Manila via Ocean Vessel, M/V DIMI P V-075 on November 9, 2002 and subsequently docked alongside Pier No. 9, South Harbor, Manila. The cargo of Electrolyic Tin Free Steel was discharged ex-vessel complete with seven (7) skids

noted in bad order condition by the vessel[s] representative. These skids were identified as nos. 2HD804211, 2HD804460, SHD804251, SHD803784, 2HD803763, 2HD803765 and 2HD803783 and covered with Bad Order Tally Receipts No. 3709, 3707, 3703 and 3704. Thereafter, the same were stored inside the warehouse of Pier No. 9, South Harbor, Manila, pending delivery to the consignees warehouse. On November 22, 23 and 29, 2002, the subject cargo was withdrawn from the Pier by the consignee authorized broker, R. V. Marzan Brokerage Corp. and the same was delivered to the consignees final warehouse located at Silangan, Canlubang, Laguna complete with twelve (12) skids in bad order condition. VISUAL INSPECTION We conducted an ocular inspection on the reported damaged Electrolytic Tin Free Steel, Matte Finish at the consignees warehouse located at Brgy. Silangan, Canlubang, Laguna and noted that out of the reported twelve (12) damaged skids, nine (9) of them were rejected and three (3) skids were accepted by the consignees representative as complete and without exceptions. xxxx EVALUATION OF INDEMNITY We evaluated the loss/damage sustained by the subject shipments and arrived as follows: PRODUCT NOS. NET WT. PER PACKING LIST 2HD803763 Steel JISG3315 2HD803783 2HD803784 2HD804460 2HD803765 2HD804522 2HD804461 2HD804540 2HD804549 -do-do-do-do-do-do-do-do1,200 1,200 1,400 1,200 1,200 1,400 1,200 1,200 1,908 1,908 1,698 1,908 1,987 1,698 1,987 1,987 Electrolytic Tin Free 1,200 1,908 PRODUCTS NAMED NO. OF SHEETS

9 SKIDS P9,878,547.58 P478,959.88

TOTAL

11,200

16,989 kgs.

= 42.7643 x 11,200 231,000 Less: Deductible 0.50% based on sum insured Total Add: Surveyors Fee Sub-Total the damaged stocks has yet to be determined. RECOVERY ASPECT Prospect of recovery would be feasible against the shipping company and the Arrastre operator considering the copies of Bad Order Tally Receipts and Bad Order Certificate issued by the subject parties.[37] To clarify, based on the Evaluation Report, seven (7) skids were damaged upon arrival of the vessel per the Bad Order Cargo Receipts[38] issued by the shipping company, and an additional five (5) skids were damaged in the custody of the arrastre operator per the Bad Order Certificate/Examination Report[39] issued by the arrastre contractor. The Evaluation Report states that out of the reported twelve damaged skids, only nine were rejected, and three were accepted as good order by the consignees representative. Out of the nine skids that were rejected, five skids were damaged upon arrival of the vessel as shown by the product numbers in the Evaluation Report, which product numbers matched those in the Bad Order Cargo Receipts[40] issued by the shipping company. It can then be safely inferred that the four remaining rejected skids were damaged in the custody of the arrastre operator, as the Bad Order Certificate/Examination Report did not indicate the product numbers thereof. Hence, it should be pointed out that the Evaluation Report shows that the claim for actual damages in the amount of P431,592.14 covers five (5)[41] out of the seven (7) skids that were found to be damaged upon arrival of the vessel and covered by Bad Order Cargo Receipt Nos. 3704, 3706, 3707 and 3709,[42] which 49,392.74 P429,567.14 2,025.00 P431,592.14

Note: Above evaluation is Assureds tentative liability as the salvage proceeds on

claim should have been filed with the shipping company. Petitioner must have realized that the claim for the said five (5) skids was already barred under COGSA; hence, petitioner filed the claim for actual damages only against respondent arrastre operator. As regards the four (4) skids that were damaged in the custody of the arrastre operator, petitioner is still entitled to recover from respondent. The Court has ruled that the Request for Bad Order Survey and the examination report on the said request satisfied the purpose of a formal claim, as respondent was made aware of and was able to verify that five (5) skids were damaged or in bad order while in its custody before the last withdrawal of the shipment on November 29, 2002. Hence, even if the formal claim was filed beyond the 15-day period stipulated in the Contract, respondent was not prejudiced thereby, since it already knew of the number of skids damaged in its possession per the examination report on the request for bad order survey. Remand of the case to the trial court for the determination of the liability of respondent to petitioner is not necessary as the Court can resolve the same based on the records before it.[43] The Court notes that petitioner, who filed this action for damages for the five (5) skids that were damaged while in the custody of respondent, was not forthright in its claim, as it knew that the damages it sought in the amount of P431,592.14, which was based on the Evaluation Report of its adjuster/surveyor, BA McLarens Phils., Inc., covered nine (9) skids. Based on the same Evaluation Report, only four of the nine skids were damaged in the custody of respondent. Petitioner should have been straightforward about its exact claim, which is borne out by the evidence on record, as petitioner can be granted only the amount of damages that is due to it. Based on the Evaluation Report[44] of BA McLarens Phils., Inc., dated May 5, 2003, the four (4) skids damaged while in the custody of the arrastre operator and the amount of actual damages therefore are as follows: PRODUCT NOS. NET WT. PER PACKING LIST 2HD804522 Steel JISG3315 Electrolytic Tin Free 1,200 1,987 PRODUCTS NAMED NO. OF SHEETS

2HD804461 1,698 2HD804540 1,987 2HD804549 1,987

-do-do-do-

1,400 1,200 1,200

4 SKIDS P213,821.50 = 42.7643 x 5,000 231,000 (Total number of sheets) Less: Deductible 0.50% based on sum insured[46] 49,392.74 Total P164,428.76 In view of the foregoing, petitioner is entitled to actual damages in the amount of P164,428.76 for the four (4) skids damaged while in the custody of respondent. WHEREFORE, the petition is GRANTED. The Decision of the Regional Trial Court of Makati City, Branch 138, dated October 17, 2006, in Civil Case No. 05-809, and its Order dated December 4, 2007, are hereby REVERSED and SET ASIDE. Respondent Asian Terminals, Inc. is ORDERED to pay petitioner Insurance Company of North America actual damages in the amount of One Hundred Sixty-Four Thousand Four Hundred Twenty-Eight Pesos and SeventySix Centavos (P164,428.76). Twelve percent (12%) interest per annum shall be imposed on the amount of actual damages from the date the award becomes final and executory until its full satisfaction. Costs against petitioner. SO ORDERED. TOTAL 5,000 P9,878,547.58 (Insured value)[45]

DIOSDADO M. PERALTA Associate Justice

WE CONCUR:

ANTONIO T. CARPIO * Associate Justice ROBERTO A. ABAD Associate Justice JOSE PORTUGAL PEREZ ** Associate Justice JOSE CATRAL MENDOZA Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

DIOSDADO M. PERALTA Associate Justice Third Division, Acting Chairperson

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Acting Chairpersons Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

RENATO C. CORONA Chief Justice

SECOND DIVISION

COUNTRY BANKERS INSURANCE CORPORATION, Petiti oner,

G.R. No. 165487

Present:

CARPIO,J., Chairperson, LEONARDO DE CASTRO, * -versusVILLARAMA, JR.,** PEREZ, and SERENO, JJ.

Promulgated: ANTONIO LAGMAN, Respond ent. x ---------------------------------------------------------------------------------------x DECISION July 13, 2011

PEREZ, J.:

This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, assailing the Decision[1] and Resolution[2] of the Court of Appeals dated 21 June 2004 and 24 September 2004, respectively.

These are the undisputed facts. Nelson Santos (Santos) applied for a license with the National Food Authority (NFA) to engage in the business of storing not more than 30,000 sacks of palayvalued at P5,250,000.00 in his warehouse at Barangay Malacampa, Camiling, Tarlac. Under Act No. 3893 or the General Bonded Warehouse Act, as amended, [3] the approval for said license was conditioned upon posting of a cash bond, a bond secured by real estate, or a bond signed by a duly authorized bonding company, the amount of which shall be fixed by the NFA Administrator at not less than thirty-three and one third percent (33 1/3%) of the market value of the maximum quantity of rice to be received.

Accordingly, Country Bankers Insurance Corporation (Country Bankers) issued Warehouse Bond No. [4] 03304 for P1,749,825.00 on 5 November 1989 and Warehouse Bond No. 02355 [5] for P749,925.00 on 13 December 1989 (1989 Bonds) through its agent, Antonio Lagman (Lagman). Santos was the bond principal, Lagman was the surety and the Republic of the Philippines, through the NFA was the obligee. In consideration of these issuances, corresponding Indemnity Agreements[6] were executed by Santos, as bond principal, together with Ban Lee Lim Santos (Ban Lee Lim), Rhosemelita Reguine (Reguine) and Lagman, as co-signors. The latter bound themselves jointly and severally liable to Country Bankers for any damages, prejudice, losses, costs, payments, advances and expenses of whatever kind and nature,

including attorneys fees and legal costs, which it may sustain as a consequence of the said bond; to reimburse Country Bankers of whatever amount it may pay or cause to be paid or become liable to pay thereunder; and to pay interest at the rate of 12% per annum computed and compounded monthly, as well as to pay attorneys fees of 20% of the amount due it.[7]

Santos then secured a loan using his warehouse receipts as collateral.[8] When the loan matured, Santos defaulted in his payment. The sacks of palay covered by the warehouse receipts were no longer found in the bonded warehouse.[9] By virtue of the surety bonds, Country Bankers was compelled to payP1,166,750.37. [10]

Consequently, Country Bankers filed a complaint for a sum of money docketed as Civil Case No. 95-73048 before the Regional Trial Court (RTC) of Manila. In his Answer, Lagman alleged that the 1989 Bonds were valid only for 1 year from the date of their issuance, as evidenced by receipts; that the bonds were never renewed and revived by payment of premiums; that on 5 November 1990, Country Bankers issued Warehouse Bond No. 03515 (1990 Bond) which was also valid for one year and that no Indemnity Agreement was executed for the purpose; and that the 1990 Bond supersedes, cancels, and renders no force and effect the 1989 Bonds.[11]

The bond principals, Santos and Ban Lee Lim, were not served with summons because they could no longer be found.[12] The case was eventually dismissed against them without prejudice.[13] The other co-signor, Reguine, was declared in default for failure to file her answer.[14]

On 21 September 1998, the trial court rendered judgment declaring Reguine and Lagman jointly and severally liable to pay Country Bankers the amount ofP2,400,499.87. [15] The dispositive portion of the RTC Decision[16] reads:

WHEREFORE, premises considered, judgment is hereby rendered, ordering defendants Rhomesita [sic] Reguine and Antonio Lagman, jointly and severally liable to pay plaintiff, Country Bankers Assurance Corporation, the amount of P2,400,499.87, with 12% interest from the date the complaint was filed until fully satisfied plus 20% of the amount due plaintiff as and for attorneys fees and to pay the costs.

As the Court did not acquire jurisdiction over the persons of defendants Nelson Santos and Ban Lee Lim Santos, let the case against them be DISMISSED. Defendant Antonio Lagmans counterclaim is likewise DISMISSED, for lack of merit.[17]

In holding Lagman and Reguine solidarily liable to Country Bankers, the trial court relied on the express terms of the Indemnity Agreement that they jointly and severally bound themselves to indemnify and make good to Country Bankers any liability which the latter may incur on account of or arising from the execution of the bonds.[18]

The trial court rationalized that the bonds remain in force unless cancelled by the Administrator of the NFA and cannot be unilaterally cancelled by Lagman. The trial court emphasized that for the failure of Lagman to comply with his obligation under the Indemnity Agreements, he is likewise liable for damages as a consequence of the breach.

Lagman filed an appeal to the Court of Appeals, docketed as CA G.R. CV No. 61797. He insisted that the lifetime of the 1989 Bonds, as well as the corresponding Indemnity Agreements was only 12 months. According to Lagman, the 1990 Bond was not pleaded in the complaint because it was not covered by an Indemnity Agreement and it superseded the two prior bonds.[19]

On 21 June 2004, the Court of Appeals rendered the assailed Decision reversing and setting aside the Decision of the RTC and ordering the dismissal of the complaint filed against Lagman. [20]

The appellate court held that the 1990 Bond superseded the 1989 Bonds. The appellate court observed that the 1990 Bond covers 33.3% of the market value of the palay, thereby manifesting the intention of the parties to make the latter bond more comprehensive. Lagman was also exonerated by the appellate court from liability because he was not a signatory to the alleged Indemnity Agreement of 5 November 1990 covering the 1990 Bond. The appellate court rejected the argument of Country Bankers that the 1989 bonds were continuing, finding, as reason therefor, that the receipts issued for the bonds indicate that they were effective for only one-year.

Country Bankers sought reconsideration which was denied in a Resolution dated 24 September 2004.[21] Expectedly, Country Bankers filed the instant petition attributing two (2) errors to the Court of Appeals, to wit:

A.

THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN DISREGARDING THE EXPRESS PROVISIONS OF SECTION 177 OF THE INSURANCE CODE WHEN IT HELD THAT THE SUBJECT SURETY BONDS WERE SUPERSEDED BY A SUBSEQUENT BOND NOTWITHSTANDING THE NON-CANCELLATION THEREOF BY THE BOND OBLIGEE. B. THE HONORABLE COURT OF APPEALS SERIOUSLY ERRED IN HOLDING THAT RECEIPTS FOR THE PAYMENT OF PREMIUMS PREVAIL OVER THE EXPRESS PROVISION OF THE SURETY BOND THAT FIXES THE TERM THEREOF.[22]

Country Bankers maintains that by the express terms of the 1989 Bonds, they shall remain in full force until cancelled by the Administrator of the NFA. As continuing bonds, Country Bankers avers that Section 177 of the Insurance Code applies, in that the bond may only be cancelled by the obligee, by the Insurance Commissioner or by a competent court.

Country Bankers questions the existence of a third bond, the 1990 Bond, which allegedly cancelled the 1989 Bonds on the following grounds: First, Lagman failed to produce the original of the 1990 Bond and no basis has been laid for the presentation of secondary evidence; Second, the issuance of the 1990 Bond was not approved and processed by Country Bankers; Third, the NFA as bond obligee was not in possession of the 1990 Bond. Country Bankers stresses that the cancellation of the 1989 Bonds requires the participation of the bond obligee. Ergo, the bonds remain subsisting until cancelled by the bond obligee. Country Bankers further assert that Lagman also failed to prove that the NFA accepted the 1990 Bond in replacement of the 1989 Bonds.

Country Bankers notes that the receipts issued for the 1989 Bonds are mere evidence of premium payments and should not be relied on to determine the period of effectivity of the bonds. Country Bankers explains that the receipts only represent the transactions between the bond principal and the surety, and does not involve the NFA as bond obligee.

Country Bankers calls this Courts attention to the incontestability clause contained in the Indemnity Agreements which prohibits Lagman from questioning his liability therein.

In his Comment, Lagman raises the issue of novation by asserting that the 1989 Bonds were superseded by the 1990 Bond, which did not include Lagman as party. Therefore, Lagman argues, Country Bankers has no cause of action against him. Lagman also reiterates that because of novation, the 1989 bonds are neither perpetual nor continuing.

Lagman anchors his defense on two (2) arguments: 1) the 1989 Bonds have expired and 2) the 1990 Bond novates the 1989 Bonds.

The Court of Appeals held that the 1989 bonds were effective only for one (1) year, as evidenced by the receipts on the payment of premiums.

We do not agree.

The official receipts in question serve as proof of payment of the premium for one year on each surety bond. It does not, however, automatically mean that the surety bond is effective for only one (1) year. In fact, the effectivity of the bond is not wholly dependent on the payment of premium. Section 177 of the Insurance Code expresses:

Sec. 177. The surety is entitled to payment of the premium as soon as the contract of suretyship or bond is perfected and delivered to the obligor. No contract of suretyship or bonding shall be valid and binding unless and until the premium therefor has been paid, except where the obligee has accepted the bond, in which case the bond becomes valid and enforceable irrespective of whether or not the premium has been paid by the obligor to the surety: Provided, That if the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect only reasonable amount, not exceeding fifty per centum of the premium due thereon as service fee plus the cost of stamps or other taxes imposed for the issuance of the contract or bond: Provided, however, That if the non-acceptance of the bond be due to the fault or negligence of the surety, no such service fee, stamps or taxes shall be collected. (Emphasis supplied)

The 1989 Bonds have identical provisions and they state in very clear terms the effectivity of these bonds, viz:

NOW, THEREFORE, if the above-bounded Principal shall well and truly deliver to the depositors PALAY received by him for STORAGE at any time that demand therefore is made, or shall pay the market value therefore in case he is unable to return the same, then this obligation shall be null and void; otherwise it shall remain in full force and effect and may be enforced in the manner provided by said Act No. 3893 as amended by Republic Act No. 247 and P.D. No. 4. This bond shall remain in force until cancelled by the Administrator of National Food Authority.
[23]

This provision in the bonds is but in compliance with the second paragraph of Section 177 of the Insurance Code, which specifies that a continuing bond, as in this case where there is no fixed expiration date, may be cancelled only by the obligee, which is the NFA, by the Insurance Commissioner, and by the court. Thus:

In case of a continuing bond, the obligor shall pay the subsequent annual premium as it falls due until the contract of suretyship is cancelled by the obligee or by the Commissioner or by a court of competent jurisdiction, as the case may be.

By law and by the specific contract involved in this case, the effectivity of the bond required for the obtention of a license to engage in the business of receiving rice for storage is determined not alone by the payment of premiums but principally by the Administrator of the NFA. From beginning to end, the Administrators brief is the enabling or disabling document.

The clear import of these provisions is that the surety bonds in question cannot be unilaterally cancelled by Lagman. The same conclusion was reached by the trial court and we quote:

As there appears no record of cancellation of the Warehouse Bonds No. 03304 and No. 02355 either by the administrator of the NFA or by the Insurance Commissioner or by the Court, the Warehouse Bonds are valid and binding and cannot be unilaterally cancelled by defendant Lagman as general agent of the plaintiff.[24]

While the trial court did not directly rule on the existence and validity of the 1990 Bond, it upheld the 1989 Bonds as valid and binding, which could not be unilaterally cancelled by Lagman. The Court of Appeals, on the other hand, acknowledged the 1990 Bond as having cancelled the two previous bonds by novation. Both courts however failed to discuss their basis for rejecting or admitting the 1990 Bond, which, as we indicated, is bone to pick in this case.

Lagmans insistence on novation depends on the validity, nay, existence of the allegedly novating 1990 Bond. Country Bankers understandably impugns both. We see the point. Lagman presented a mere photocopy of the 1990 Bond. We rule as inadmissible such copy.

Under the best evidence rule, the original document must be produced whenever its contents are the subject of inquiry.[25] The rule is encapsulated in Section 3, Rule 130 of the Rules of Court, as follow:

Sec. 3. Original document must be produced; exceptions. When the subject of inquiry is the contents of a documents, no evidence shall be admissible other than the original document itself, except in the following cases:

(a) When the original has been lost or destroyed, or cannot be produced in court, without bad faith on the part of the offeror; (b) When the original is in the custody or under the control of the party against whom the evidence is offered, and the latter fails to produce it after reasonable notice; (c) When the original consists of numerous accounts or other documents which cannot be examined in court without

great loss of time and the fact sought to be established from them is only the general result of the whole; and (d) When the original is a public record in the custody of a public officer or is recorded in a public office.[26]

A photocopy, being a mere secondary evidence, is not admissible unless it is shown that the original is unavailable. [27] Section 5, Rule 130 of the Rules of Court states:

SEC.5 When original document is unavailable. When the original document has been lost or destroyed, or cannot be produced in court, the offeror, upon proof of its execution or existence and the cause of its unavailability without bad faith on his part, may prove its contents by a copy, or by a recital of its contents in some authentic document, or by the testimony of witnesses in the order stated.

Before a party is allowed to adduce secondary evidence to prove the contents of the original, the offeror must prove the following: (1) the existence or due execution of the original; (2) the loss and destruction of the original or the reason for its non-production in court; and (3) on the part of the offeror, the absence of bad faith to which the unavailability of the original can be attributed. The correct order of proof is as follows: existence, execution, loss, and contents.[28]

In the case at bar, Lagman mentioned during the direct examination that there are actually four (4) duplicate originals of the 1990 Bond: the first is kept by the NFA, the second is with the Loan Officer of the NFA in Tarlac, the third is with Country Bankers and the fourth was in his possession. [29] A party must first present to the court proof of loss or other satisfactory explanation for the non-production of the

original instrument.[30] When more than one original copy exists, it must appear that all of them have been lost, destroyed, or cannot be produced in court before secondary evidence can be given of any one. A photocopy may not be used without accounting for the other originals.[31]

Despite knowledge of the existence and whereabouts of these duplicate originals, Lagman merely presented a photocopy. He admitted that he kept a copy of the 1990 Bond but he could no longer produce it because he had already severed his ties with Country Bankers. However, he did not explain why severance of ties is by itself reason enough for the non-availability of his copy of the bond considering that, as it appears from the 1989 Bonds, Lagman himself is a bondsman. Neither did Lagman explain why he failed to secure the original from any of the three other custodians he mentioned in his testimony. While he apparently was able to find the original with the NFA Loan Officer, he was merely contented with producing its photocopy. Clearly, Lagman failed to exert diligent efforts to produce the original.

Fueling further suspicion regarding the existence of the 1990 Bond is the absence of an Indemnity Agreement. While Lagman argued that a 1990 Bond novates the 1989 Bonds, he raises the defense of non-existence of an indemnity agreement which would conveniently exempt him from liability. The trial court deemed this defense as indicia of bad faith, thus:

To the observation of the Court, defendant Lagman contended that being a general agent (which requires a much higher qualification than an ordinary agent), he is expected to have attended seminars and workshops on general insurance wherein he is supposed to have acquired sufficient knowledge of the general principles of insurance which he had fully practised or

implemented from experience. It somehow appears to the Courts assessment of his reneging liability of the bonds in question, that he is still short of having really understood the principle of suretyship with reference to the transaction of indemnity in which he is a signatory. If, as he alleged, that he is well-versed in insurance, the Court finds no excuse for him to stand firm in denying his liability over the claim against the bonds with indemnity provision. If he insists in not recognizing that liability, the more that this Court is convinced that his knowledge that insurance operates under the principle of good faith is inadequate. He missed the exception provided by Section 177 of the Insurance Code, as amended, wherein non-payment of premium would not have the same essence in his mind that the agreements entered into would not have full force or effect. It could be glimpsed, therefore, that the mere fact of cancelling bonds with indemnity agreements and replacing them (absence of the same) to escape liability clearly manifests bad faith on his part.[32] (Emphasis supplied.)

Having discounted the existence and/or validity of the 1990 Bond, there can be no novation to speak of. Novation is the extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or modifies the first, either by changing the object or principal conditions, or by substituting another in place of the debtor, or by subrogating a third person in the rights of the creditor. For novation to take place, the following requisites must concur: 1) There must be a previous valid obligation; 2) The parties concerned must agree to a new contract; 3) The old contract must be extinguished; and 4) There must be a valid new contract.[33]

In this case, only the first element of novation exists. Indeed, there is a previous valid obligation, i.e., the 1989 Bonds. There is however neither a valid new contract nor a clear agreement between the parties to a new contract since the very existence of the 1990 Bond has been

rendered dubious. Without contract is not extinguished.

the

new

contract,

the

old

Implied novation necessitates a new obligation with which the old is in total incompatibility such that the old obligation is completely superseded by the new one.[34] Quite obviously, neither can there be implied novation. In this case, there is no new obligation.

The liability of Lagman is expressed in Indemnity Agreements executed in consideration of the 1989 Bonds which we have considered as continuing contracts. Under both Indemnity Agreements, Lagman, as co-signor, together with Santos, Ban Lee Lim and Reguine, bound themselves jointly and severally to Country Bankers to indemnify it for any damage or loss sustained on the account of the execution of the bond, among others. The pertinent identical stipulations of the Indemnity Agreements state:

INDEMNITY: To indemnify and make good to the COMPANY jointly and severally, any damages, prejudice, loss, costs, payments advances and expenses of whatever kind and nature, including attorneys fees and legal costs, which the COMPANY may, at any time, sustain or incur, as well as to reimburse to said COMPANY all sums and amounts of money which the COMPANY or its representatives shall or may pay or cause to be paid or become liable to pay, on account of or arising from the execution of the above-mentioned BOND or any extension, renewal, alteration or substitution thereof made at the instance of the undersigned or anyone of them.[35]

Moreover, the Indemnity Agreements also contained identical Incontestability Clauses which provide:
INCONTESTABILITY OF PAYMENTS MADE BY THE COMPANY: Any payment or disbursement made by the COMPANY on account of the above-mentioned Bond, its renewals, extensions, alterations

or substitutions either in the belief that the COMPANY was obligated to make such payment or in the belief that said payment was necessary or expedient in order to avoid greater losses or obligations for which the COMPANY might be liable by virtue of the terms of the above-mentioned Bond, its renewals, extensions, alterations, or substitutions, shall be final and shall not be disputed by the undersigned, who hereby jointly and severally bind themselves to indemnify [Country Bankers] of any and all such payments, as stated in the preceding clauses. In case the COMPANY shall have paid[,] settled or compromised any liability, loss, costs, damages, attorneys fees, expenses, claims[,] demands, suits, or judgments as above-stated, arising out of or in connection with said bond, an itemized statement thereof, signed by an officer of the COMPANY and other evidence to show said payment, settlement or compromise, shall be prima facie evidence of said payment, settlement or compromise, as well as the liability of the undersigned in any and all suits and claims against the undersigned arising out of said bond or this bond application.[36]

Lagman is bound by these Indemnity Agreements. Payments made by Country Bankers by virtue of the 1989 Bonds gave rise to Lagmans obligation to reimburse it under the Indemnity Agreements. Lagman, being a solidary debtor, is liable for the entire obligation.

WHEREFORE, the petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 61797 are SET ASIDE and the Decision dated 21 September 1998 of the RTC is hereby REINSTATED.

SO ORDERED.

JOSE PORTUGAL PEREZ

Associate Justice

WE CONCUR:

ANTONIO T. CARPIO Associate Justice Chairperson

TERESITA J. LEONARDO DE CASTRO VILLARAMA, JR. Associate Justice Justice

MARTIN S. Associate

MARIA LOURDES P. A. SERENO Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

ANTONIO CARPIO Associate Justice

T.

Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairpersons Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

RENAT O C. CORONA Chief Justice

THIRD DIVISION [G.R. No. 171468, August 24, 2011] NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., PETITIONER, VS. NYKFILJAPAN SHIPPING CORP., LEP PROFIT INTERNATIONAL, INC. (ORD), LEP INTERNATIONAL PHILIPPINES, INC., DMT CORP., ADVATECH INDUSTRIES, INC., MARINA PORT SERVICES, INC., SERBROS CARRIER CORPORATION, AND SEABOARDEASTERN INSURANCE CO., INC., RESPONDENTS. [G.R. NO. 174241] NEW WORLD INTERNATIONAL DEVELOPMENT (PHILS.), INC., PETITIONER, VS. SEABOARD-EASTERN INSURANCE CO., INC., RESPONDENT. DECISION
ABAD, J.: These consolidated petitions involve a cargo owner's right to recover damages from the loss of insured goods under the Carriage of Goods by Sea Act and the Insurance Code. The Facts and the Case Petitioner New World International Development (Phils.), Inc. (New World) bought from DMT Corporation (DMT) through its agent, Advatech Industries, Inc. (Advatech) three emergency generator sets worth US$721,500.00. DMT shipped the generator sets by truck from Wisconsin, United States, to LEP Profit International, Inc. (LEP Profit) in Chicago, Illinois. From there, the shipment went by train to Oakland, California, where it was loaded on S/S California Luna V59, owned and operated by NYK Fil-Japan Shipping Corporation (NYK) for delivery to petitioner New World in Manila. NYK issued a bill of lading,

declaring that it received the goods in good condition. NYK unloaded the shipment in Hong Kong and transshipped it to S/S ACX Ruby V/72 that it also owned and operated. On its journey to Manila, however, ACX Ruby encountered typhoon Kadiang whose captain filed a sea protest on arrival at the Manila South Harbor on October 5, 1993 respecting the loss and damage that the goods on board his vessel suffered. Marina Port Services, Inc. (Marina), the Manila South Harbor arrastre or cargo-handling operator, received the shipment on October 7, 1993. Upon inspection of the three container vans separately carrying the generator sets, two vans bore signs of external damage while the third van appeared unscathed. The shipment remained at Pier 3's Container Yard under Marina's care pending clearance from the Bureau of Customs. Eventually, on October 20, 1993 customs authorities allowed petitioner's customs broker, Serbros Carrier Corporation (Serbros), to withdraw the shipment and deliver the same to petitioner New World's job site in Makati City. An examination of the three generator sets in the presence of petitioner New World's representatives, Federal Builders (the project contractor) and surveyors of petitioner New World's insurer, Seaboard-Eastern Insurance Company (Seaboard), revealed that all three sets suffered extensive damage and could no longer be repaired. For these reasons, New World demanded recompense for its loss from respondents NYK, DMT, Advatech, LEP Profit, LEP International Philippines, Inc. (LEP), Marina, and Serbros. While LEP and NYK acknowledged receipt of the demand, both denied liability for the loss. Since Seaboard covered the goods with a marine insurance policy, petitioner New World sent it a formal claim dated November 16, 1993. Replying on February 14, 1994, Seaboard required petitioner New World to submit to it an itemized list of the damaged units, parts, and accessories, with corresponding values, for the processing of the claim. But petitioner New World did not submit what was required of it, insisting that the insurance policy did not include the submission of such a list in connection with an insurance claim. Reacting to this, Seaboard refused to process the claim. On October 11, 1994 petitioner New World filed an action for specific performance and damages against all the respondents before the Regional Trial Court (RTC) of Makati City, Branch 62, in Civil Case 94-2770. On August 16, 2001 the RTC rendered a decision absolving the various respondents from liability with the exception of NYK. The RTC found that the generator sets were damaged during transit while in the care of NYK's vessel, ACX Ruby. The latter failed, according to the RTC, to exercise the degree of diligence required of it in the face of a foretold raging typhoon in its path. The RTC ruled, however, that petitioner New World filed its claim against the vessel owner NYK beyond the one year provided under the Carriage of Goods by Sea Act (COGSA). New World filed its complaint on October 11, 1994 when the deadline for filing the action (on or before October 7, 1994) had already lapsed. The RTC held that the one-year period should be counted from the date the goods were delivered to thearrastre operator and not from the date they were delivered to petitioner's job site.[1] As regards petitioner New World's claim against Seaboard, its insurer, the RTC held that the latter cannot be faulted for denying the claim against it since New World refused to submit the itemized list that Seaboard needed for assessing the damage to the shipment. Likewise, the belated filing of the complaint prejudiced Seaboard's right to pursue a claim against NYK in the event of subrogation. On appeal, the Court of Appeals (CA) rendered judgment on January 31, 2006,[2]affirming the RTC's rulings except with respect to Seaboard's liability. The CA held that petitioner New World can still

recoup its loss from Seaboard's marine insurance policy, considering a) that the submission of the itemized listing is an unreasonable imposition and b) that the one-year prescriptive period under the COGSA did not affect New World's right under the insurance policy since it was the Insurance Code that governed the relation between the insurer and the insured. Although petitioner New World promptly filed a petition for review of the CA decision before the Court in G.R. 171468, Seaboard chose to file a motion for reconsideration of that decision. On August 17, 2006 the CA rendered an amended decision, reversing itself as regards the claim against Seaboard. The CA held that the submission of the itemized listing was a reasonable requirement that Seaboard asked of New World. Further, the CA held that the one-year prescriptive period for maritime claims applied to Seaboard, as insurer and subrogee of New World's right against the vessel owner. New World's failure to comply promptly with what was required of it prejudiced such right. Instead of filing a motion for reconsideration, petitioner instituted a second petition for review before the Court in G.R. 174241, assailing the CA's amended decision. The Issues Presented The issues presented in this case are as follows: a) In G.R. 171468, whether or not the CA erred in affirming the RTC's release from liability of respondents DMT, Advatech, LEP, LEP Profit, Marina, and Serbros who were at one time or another involved in handling the shipment; and b) In G.R. 174241, 1) whether or not the CA erred in ruling that Seaboard's request from petitioner New World for an itemized list is a reasonable imposition and did not violate the insurance contract between them; and 2) whether or not the CA erred in failing to rule that the one-year COGSA prescriptive period for marine claims does not apply to petitioner New World's prosecution of its claim against Seaboard, its insurer. The Court's Rulings In G.R. 171468 -Petitioner New World asserts that the roles of respondents DMT, Advatech, LEP, LEP Profit, Marina and Serbros in handling and transporting its shipment from Wisconsin to Manila collectively resulted in the damage to the same, rendering such respondents solidarily liable with NYK, the vessel owner. But the issue regarding which of the parties to a dispute incurred negligence is factual and is not a proper subject of a petition for review on certiorari. And petitioner New World has been unable to make out an exception to this rule.[3] Consequently, the Court will not disturb the finding of the RTC, affirmed by the CA, that the generator sets were totally damaged during the typhoon which beset the vessel's voyage from Hong Kong to Manila and that it was her negligence in continuing with that journey despite the adverse condition which caused petitioner New World's loss. That the loss was occasioned by a typhoon, an exempting cause under Article 1734 of the Civil Code, does not automatically relieve the common carrier of liability. The latter had the burden of proving that the typhoon was the proximate and only cause of loss and that it exercised due diligence to prevent or minimize such loss before, during, and after the disastrous typhoon.[4] As found by the RTC and the CA, NYK failed to discharge this burden. In G.R. 174241 --

One. The Court does not regard as substantial the question of reasonableness of Seaboard's additional requirement of an itemized listing of the damage that the generator sets suffered. The record shows that petitioner New World complied with the documentary requirements evidencing damage to its generator sets. The marine open policy that Seaboard issued to New World was an all-risk policy. Such a policy insured against all causes of conceivable loss or damage except when otherwise excluded or when the loss or damage was due to fraud or intentional misconduct committed by the insured. The policy covered all losses during the voyage whether or not arising from a marine peril.[5] Here, the policy enumerated certain exceptions like unsuitable packaging, inherent vice, delay in voyage, or vessels unseaworthiness, among others.[6] But Seaboard had been unable to show that petitioner New World's loss or damage fell within some or one of the enumerated exceptions. What is more, Seaboard had been unable to explain how it could not verify the damage that New World's goods suffered going by the documents that it already submitted, namely, (1) copy of the Supplier's Invoice KL2504; (2) copy of the Packing List; (3) copy of the Bill of Lading 01130E93004458; (4) the Delivery of Waybill Receipts 1135, 1222, and 1224; (5) original copy of Marine Insurance Policy MA-HO-000266; (6) copies of Damage Report from Supplier and Insurance Adjusters; (7) Consumption Report from the Customs Examiner; and (8) Copies of Received Formal Claim from the following: a) LEP International Philippines, Inc.; b) Marina Port Services, Inc.; and c) Serbros Carrier Corporation.[7] Notably, Seaboard's own marine surveyor attended the inspection of the generator sets. Seaboard cannot pretend that the above documents are inadequate since they were precisely the documents listed in its insurance policy.[8] Being a contract of adhesion, an insurance policy is construed strongly against the insurer who prepared it. The Court cannot read a requirement in the policy that was not there. Further, it appears from the exchanges of communications between Seaboard and Advatech that submission of the requested itemized listing was incumbent on the latter as the seller DMT's local agent. Petitioner New World should not be made to suffer for Advatech's shortcomings. Two. Regarding prescription of claims, Section 3(6) of the COGSA provides that the carrier and the ship shall be discharged from all liability in case of loss or damage unless the suit is brought within one year after delivery of the goods or the date when the goods should have been delivered. But whose fault was it that the suit against NYK, the common carrier, was not brought to court on time? The last day for filing such a suit fell on October 7, 1994. The record shows that petitioner New World filed its formal claim for its loss with Seaboard, its insurer, a remedy it had the right to take, as early as November 16, 1993 or about 11 months before the suit against NYK would have fallen due. In the ordinary course, if Seaboard had processed that claim and paid the same, Seaboard would have been subrogated to petitioner New World's right to recover from NYK. And it could have then filed the suit as a subrogee. But, as discussed above, Seaboard made an unreasonable demand on February 14, 1994 for an itemized list of the damaged units, parts, and accessories, with corresponding values when it appeared settled that New World's loss was total and when the insurance policy did not require the production of such a list in the event of a claim. Besides, when petitioner New World declined to comply with the demand for the list, Seaboard against whom a formal claim was pending should not have remained obstinate in refusing to process that claim. It should have examined the same, found it unsubstantiated by documents if that were the case, and formally rejected it. That would have at least given petitioner New World a

clear signal that it needed to promptly file its suit directly against NYK and the others. Ultimately, the fault for the delayed court suit could be brought to Seaboard's doorstep. Section 241 of the Insurance Code provides that no insurance company doing business in the Philippines shall refuse without just cause to pay or settle claims arising under coverages provided by its policies. And, under Section 243, the insurer has 30 days after proof of loss is received and ascertainment of the loss or damage within which to pay the claim. If such ascertainment is not had within 60 days from receipt of evidence of loss, the insurer has 90 days to pay or settle the claim. And, in case the insurer refuses or fails to pay within the prescribed time, the insured shall be entitled to interest on the proceeds of the policy for the duration of delay at the rate of twice the ceiling prescribed by the Monetary Board. Notably, Seaboard already incurred delay when it failed to settle petitioner New World's claim as Section 243 required. Under Section 244, a prima facie evidence of unreasonable delay in payment of the claim is created by the failure of the insurer to pay the claim within the time fixed in Section 243. Consequently, Seaboard should pay interest on the proceeds of the policy for the duration of the delay until the claim is fully satisfied at the rate of twice the ceiling prescribed by the Monetary Board. The term "ceiling prescribed by the Monetary Board" means the legal rate of interest of 12% per annum provided in Central Bank Circular 416, pursuant to Presidential Decree 116.[9] Section 244 of the Insurance Code also provides for an award of attorney's fees and other expenses incurred by the assured due to the unreasonable withholding of payment of his claim. In Prudential Guarantee and Assurance, Inc. v. Trans-Asia Shipping Lines, Inc.,[10]the Court regarded as proper an award of 10% of the insurance proceeds as attorney's fees. Such amount is fair considering the length of time that has passed in prosecuting the claim.[11] Pursuant to the Court's ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[12] a 12% interest per annum from the finality of judgment until full satisfaction of the claim should likewise be imposed, the interim period equivalent to a forbearance of credit. Petitioner New World is entitled to the value stated in the policy which is commensurate to the value of the three emergency generator sets or US$721,500.00 with double interest plus attorney's fees as discussed above. WHEREFORE, the Court DENIES the petition in G.R. 171468 and AFFIRMS the Court of Appeals decision of January 31, 2006 insofar as petitioner New World International Development (Phils.), Inc. is not allowed to recover against respondents DMT Corporation, Advatech Industries, Inc., LEP International Philippines, Inc., LEP Profit International, Inc., Marina Port Services, Inc. and Serbros Carrier Corporation. With respect to G.R. 174241, the Court GRANTS the petition and REVERSES and SETS ASIDE the Court of Appeals Amended Decision of August 17, 2006. The CourtDIRECTS Seaboard-Eastern Insurance Company, Inc. to pay petitioner New World International Development (Phils.), Inc. US$721,500.00 under Policy MA-HO-000266, with 24% interest per annum for the duration of delay in accordance with Sections 243 and 244 of the Insurance Code and attorney's fees equivalent to 10% of the insurance proceeds. Seaboard shall also pay, from finality of judgment, a 12% interest per annum on the total amount due to petitioner until its full satisfaction. SO ORDERED. Velasco, Jr., (Chairperson), Leonardo-De Castro,* Peralta, and Mendoza, JJ., concur.

THIRD DIVISION KEPPEL CEBU SHIPYARD, INC., Petitioner, - versus PIONEER INSURANCE AND SURETY CORPORATION, Respondent. X----------------------------X PIONEER INSURANCE AND SURETY G.R. Nos. 180896-97 CORPORATION, Petitioner, Present: YNARES-SANTIAGO, J.,* Chairperson, CHICO-NAZARIO, VELASCO, JR., NACHURA, and PERALTA, JJ. Promulgated: KEPPEL CEBU SHIPYARD, INC., Respondent. September 25, 2009 G.R. Nos. 180880-81

- versus -

x------------------------------------------------------------------------------------x DECISION NACHURA, J.:

Before us are the consolidated petitions filed by the partiesPioneer Insurance and Surety Corporation[1] (Pioneer) and Keppel Cebu Shipyard, Inc.[2] (KCSI)to review on certiorari the Decision[3] dated December 17,

2004 and the Amended Decision[4] dated December 20, 2007 of the Court of Appeals (CA) in CA-G.R. SP Nos. 74018 and 73934. On January 26, 2000, KCSI and WG&A Jebsens Shipmanagement, Inc. (WG&A) executed a Shiprepair Agreement [5] wherein KCSI would renovate and reconstruct WG&As M/V Superferry 3 using its dry docking facilities pursuant to its restrictive safety and security rules and regulations. Prior to the execution of the Shiprepair Agreement, Superferry 3 was already insured by WG&A with Pioneer for US$8,472,581.78. The Shiprepair Agreement reads
SHIPREPAIR AGREEMENT[6] Company: Address: WG & A JEBSENS SHIPMANAGEMENT INC. Harbour Center II, Railroad & Chicago Sts. Port Area, City of Manila

We, WG & A JEBSENS SHIPMGMT. Owner/Operator of M/V SUPERFERRY 3 and KEPPEL CEBU SHIPYARD, INC. (KCSI) enter into an agreement that the Drydocking and Repair of the above-named vessel ordered by the Owners Authorized Representative shall be carried out under the Keppel Cebu Shipyard Standard Conditions of Contract for Shiprepair, guidelines and regulations on safety and security issued by Keppel Cebu Shipyard. In addition, the following are mutually agreed upon by the parties: 1. The Owner shall inform its insurer of Clause 20[7] and 22 (a)[8] (refer at the back hereof) and shall include Keppel Cebu Shipyard as a coassured in its insurance policy. The Owner shall waive its right to claim for any loss of profit or loss of use or damages consequential on such loss of use resulting from the delay in the redelivery of the above vessel.

2.

3.

Owners sub-contractors or workers are not permitted to work in the yard without the written approval of the Vice President Operations. In consideration of Keppel Cebu Shipyard allowing Owner to carry out own repairs onboard the vessel, the Owner shall indemnify and hold Keppel Cebu Shipyard harmless from any or all claims, damages, or liabilities arising from death or bodily injuries to Owners workers, or damages to the vessel or other property however caused. On arrival, the Owner Representative, Captain, Chief Officer and Chief Engineer will be invited to attend a conference with our Production, Safety and Security personnel whereby they will be briefed on, and given copies of Shipyard safety regulations. An adequate number of officers and crew must remain on board at all times to ensure the safety of the vessel and compliance of safety regulations by crew and owner employed workmen. The ships officers/crew or owner appointed security personnel shall maintain watch against pilferage and acts of sabotage. The yard must be informed and instructed to provide the necessary security arrangement coverage should there be inadequate or no crew on board to provide the expressed safety and security enforcement. The Owner shall be liable to Keppel Cebu Shipyard for any death and/or bodily injuries for the [K]eppel Cebu Shipyards employees and/or contract workers; theft and/or damages to Keppel

4.

5.

6.

7.

8.

9.

Cebu Shipyards properties and other liabilities which are caused by the workers of the Owner. 10. The invoice shall be based on quotation reference 99-KCSI-211 dated December 20, 1999 tariff dated March 15, 1998. 11. Payment term shall be as follows: 12. The Owner and Keppel Cebu Shipyard shall endeavor to settle amicably any dispute that may arise under this Agreement. Should all efforts for an amicable settlement fail, the disputes shall be submitted for arbitration in Metro Manila in accordance with provisions of Executive Order No. 1008 under the auspices of the Philippine Arbitration Commission. (Signed) BARRY HOCK CHIA _________(Signed)__________ Operations SOO

(Printed Name/Signature Above Name)

(Printed Name/Signature Above Name)

Vice President Representative Keppel Cebu Shipyard, Inc. Shipmgmt. JAN. 26, 2000 _____ Date .

Authorized for and in behalf of: WG & A Jebsens ___________________ Date

On February 8, 2000, in the course of its repair, M/V Superferry 3 was gutted by fire. Claiming that the extent of the damage was pervasive, WG&A declared the vessels damage as a total constructive loss and, hence, filed an insurance claim with Pioneer.

On June 16, 2000, Pioneer paid the insurance claim of WG&A in the amount of US$8,472,581.78. WG&A, in turn, executed a Loss and Subrogation Receipt[9] in favor of Pioneer, to wit:
LOSS AND SUBROGATION RECEIPT 16 June 2000 Our Claim Ref: MH-NIL-H0-99-00018 US$8,472,581.78 -----------------------------------------------RECEIVED from PIONEER INSURANCE & SURETY CORPORATION the sum of U.S. DOLLARS EIGHT MILLION FOUR HUNDRED SEVENTY-TWO THOUSAND FIVE HUNDRED EIGHTY-ONE & 78/100 (US$ 8,472,581.78) equivalent to PESOS THREE HUNDRED SIXTY MILLION & 00/100 (Php 360,000,000.00), in full satisfaction, compromise and discharge of all claims for loss and expenses sustained to the vessel SUPERFERRY 3 insured under Policy Nos. MH-H0-99-0000168-00-D (H&M) and MHH0-99-0000169 (I.V.) by reason as follows: Fire on board at Keppel Cebu Shipyard on 08 February 2000 and in consideration of which the undersigned hereby assigns and transfers to the said company each and all claims and demands against any person, persons, corporation or property arising from or connected with such loss or damage and the said company is subrogated in the place of and to the claims and demands of the undersigned against said person, persons, corporation or property in the premises to the extent of the amount above-mentioned. WILLIAM, GOTHONG & ABOITIZ, INC. &/OR ABOITIZ SHIPPING CORP. By: (Signed) ___________________________________ ___

Witnesses: (Signed) ___________________________________ ___ (Signed) ___________________________________ ___

Armed with the subrogation receipt, Pioneer tried to collect from KCSI, but the latter denied any responsibility for the loss of the subject vessel. As KCSI continuously refused to pay despite repeated demands, Pioneer, on August 7, 2000, filed a Request for Arbitration before the Construction Industry Arbitration Commission (CIAC) docketed as CIAC Case No. 21-2000, seeking the following reliefs:
1. To pay to the claimant Pioneer Insurance and Surety Corporation the sum of U.S.$8,472,581.78 or its equivalent amount in Philippine Currency, plus interest thereon computed from the date of the Loss and Subrogation Receipt on 16 June 2000 or from the date of filing of [the] Request for Arbitration, as may be found proper; 2. To pay to claimant WG&A, INC. and/or Aboitiz Shipping Corporation and WG&A Jebsens Shipmanagement, Inc. the sum of P500,000,000.00 plus interest thereon from the date of filing [of the] Request for Arbitration or date of the arbitral award, as may be found proper; 3. To pay to the claimants herein the sum of P3,000,000.00 for and as attorneys fees; plus other damages as may be established during the proceedings, including arbitration fees and other litigation expenses, and the costs of suit. It is likewise further prayed that Clauses 1 and 2 on the unsigned page 1 of the Shiprepair Agreement (Annex A) as well as the hardly legible Clauses 20 and 22 (a) and other similar clauses printed in very fine print on the unsigned dorsal page thereof, be all declared illegal and void ab initio and without any legal effect whatsoever.[10]

KCSI and WG&A reached an amicable settlement, leading the latter to file a Notice of Withdrawal of Claim on April 17, 2001 with the CIAC. The CIAC granted the withdrawal on October 22, 2001, thereby dismissing the claim of WG&A against KCSI. Hence, the arbitration proceeded with Pioneer as the remaining claimant. In the course of the proceedings, Pioneer and KCSI stipulated, among others, that: (1) on January 26, 2000, M/V Superferry 3 arrived at KCSI in Lapu-Lapu City, Cebu, for dry docking and repairs; (2) on the same date, WG&A signed a ship repair agreement with KCSI; and (3) a fire broke out on board M/V Superferry 3 on February 8, 2000, while still dry docked in KCSIs shipyard.[11] As regards the disputed facts, below are the respective positions of the parties, viz.: Pioneers Theory of the Case:
First, Pioneer (as Claimant) is the real party in interest in this case and that Pioneer has been subrogated to the claim of its assured. The Claimant claims that it has the preponderance of evidence over that of the Respondent. Claimant cited documentary references on the Statutory Source of the Principle of Subrogation. Claimant then proceeded to explain that the Right of Subrogation: Is by Operation of Law exists in Property Insurance is not Dependent Upon Privity of Contract. Claimant then argued that Payment Operates as Equitable Assignment of Rights to Insurer and that the Right of Subrogation Entitles Insurer to Recover from the Liable Party. Second, Respondent Keppel had custody of and control over the M/V Superferry 3 while said vessel was in Respondent Keppels premises. In its Draft Decision, Claimant stated:

A.

B. C.

D.

The evidence presented during the hearings indubitably proves that respondent not only took custody but assumed responsibility and control over M/V Superferry 3 in carrying out the dry-docking and repair of the vessel. The presence on board the M/V Superferry 3 of its officers and crew does not relieve the respondent of its responsibility for said vessel. Respondent Keppel assumed responsibility over M/V Superferry 3 when it brought the vessel inside its graving dock and applied its own safety rules to the dry-docking and repairs of the vessel. The practice of allowing a shipowner and its sub-contractors to perform maintenance works while the vessel was within respondents premises does not detract from the fact that control and custody over M/V Superferry 3 was transferred to the yard.

From the preceding statements, Claimant claims that Keppel is clearly liable for the loss of M/V Superferry 3. Third, the Vessels Safety Manual cannot be relied upon as proof of the Masters continuing control over the vessel. Fourth, the Respondent Yard is liable under the Doctrine of Res Ipsa Loquitur. According to Claimant, the Yard is liable under the ruling laid down by the Supreme Court in the Manila City case. Claimant asserts that said ruling is applicable hereto as The Law of the Case. Fifth, the liability of Respondent does not arise merely from the application of the Doctrine of Res Ipsa Loquitur, but from its negligence in this case. Sixth, the Respondent Yard was the employer responsible for the negligent acts of the welder. According to Claimant; In contemplation of law, Sevillejo was not a loaned servant/employee. The yard, being his employer, is solely

and exclusively liable for his negligent acts. Claimant proceeded to enumerate its reasons: A. The Control Test The yard exercised control over Sevillejo. The power of control is not diminished by the failure to exercise control. There was no independent work contract between Joniga and Sevillejo Joniga was not the employer of Sevillejo, as Sevillejo remained an employee of the yard at the time the loss occurred. The mere fact that Dr. Joniga requested Sevillejo to perform some of the Owners hot works under the 26 January 2000 work order did not make Dr. Joniga the employer of Sevillejo.

B.

C.

Claimant proffers that Dr. Joniga was not a Contractor of the Hot Work Done on Deck A. Claimant argued that: A. B. The yard, not Dr. Joniga, gave the welders their marching orders, and Dr. Jonigas authority to request the execution of owners hot works in the passenger areas was expressly recognized by the Yard Project Superintendent Orcullo.

Seventh, the shipowner had no legal duty to apply for a hotworks permit since it was not required by the yard, and the owners hotworks were conducted by welders who remained employees of the yard. Claimant contends that the need, if any, for an owners application for a hot work permit was canceled out by the yards actual knowledge of Sevillejos whereabouts and the fact that he was in deck A doing owners hotworks.

Eight[h], in supplying welders and equipment as per The Work Order Dated 26 January 2000, the Yard did so at its own risk, and acted as a Less Than Prudent Ship Repairer. The Claimant then disputed the statements of Manuel Amagsila by claiming that Amagsila was a disgruntled employee. Nevertheless, Claimant claims that Amagsila affirmed that the five yard welders never became employees of the owner so as to obligate the latter to be responsible for their conduct and performance. Claimant enumerated further badges of yard negligence. According to Claimant: A. Yards water supply was inadequate. B. Yard Fire Fighting Efforts and Equipment Were Inadequate. C. Yard Safety Practices and Procedures Were Unsafe or Inadequate. D. Yard Safety Assistants and Firewatch-Men were Overworked. Finally, Claimant disputed the theories propounded by the Respondent (The Yard). Claimant presented its case against: (i) (ii) (iii) (iv) (v) Non-removal of the life jackets theory. Hole-in-the[-]floor theory. Need for a plan theory. The unauthorized hot works theory. The Marina report theory.

The Claimant called the attention of the Tribunal (CIAC) on the non-appearance of the welder involved in the cause of the fire, Mr. Severino Sevillejo. Claimant claims that this is suppression of evidence by Respondent.

KCSIs Theory of the Case

1.

The Claimant has no standing to file the Request for Arbitration and the Tribunal has no jurisdiction over the case: (a) There is no valid arbitration agreement between the Yard and the Vessel Owner. On January 26, 2000, when the ship repair agreement (which includes the arbitration agreement) was signed by WG&A Jebsens on behalf of the Vessel, the same was still owned by Aboitiz Shipping. Consequently, when another firm, WG&A, authorized WG&A Jebsens to manage the MV Superferry 3, it had no authority to do so. There is, as a result, no binding arbitration agreement between the Vessel Owner and the Yard to which the Claimant can claim to be subrogated and which can support CIAC jurisdiction. The Claimant is not a real party in interest and has no standing because it has not been subrogated to the Vessel Owner. For the reason stated above, the insurance policies on which the Claimant bases its right of subrogation were not validly obtained. In any event, the Claimant has not been subrogated to any rights which the Vessel may have against the Yard because: i. The Claimant has not proved payment of the proceeds of the policies to any specific party. As a consequence, it has also not proved payment to the Vessel Owner. The Claimant had no legally demandable obligation to pay under the policies and did so only voluntarily. Under the policies, the Claimant and the Vessel agreed that there is no Constructive Total Loss unless the expense of recovering and repairing the vessel would exceed the Agreed Value of P360 million assigned by the parties to the Vessel, a threshold which the actual repair cost for the Vessel did not reach. Since the Claimant

(b)

ii.

opted to pay contrary to the provisions of the policies, its payment was voluntary, and there was no resulting subrogation to the Vessel. iii. There was also no subrogation under Article 1236 of the Civil Code. First, if the Claimant asserts a right of payment only by virtue of Article 1236, then there is no legal subrogation under Article 2207 and it does not succeed to the Vessels rights under the Ship [R]epair Agreement and the arbitration agreement. It does not have a right to demand arbitration and will have only a purely civil law claim for reimbursement to the extent that its payment benefited the Yard which should be filed in court. Second, since the Yard is not liable for the fire and the resulting damage to the Vessel, then it derived no benefit from the Claimants payment to the Vessel Owner. Third, in any event, the Claimant has not proved payment of the proceeds to the Vessel Owner.

2.

The Ship [R]epair Agreement was not imposed upon the Vessel. The Vessel knowingly and voluntarily accepted that agreement. Moreover, there are no signing or other formal defects that can invalidate the agreement. The proximate cause of the fire and damage to the Vessel was not any negligence committed by Angelino Sevillejo in cutting the bulkhead door or any other shortcoming by the Yard. On the contrary, the proximate cause of the fire was Dr. Jonigas and the Vessels deliberate decision to have Angelino Sevillejo undertake cutting work in inherently dangerous conditions created by them. (a) The Claimants material witnesses lied on the record and the Claimant presented no credible proof of any negligence by Angelino Sevillejo.

3.

(b)

Uncontroverted evidence proved that Dr. Joniga neglected or decided not to obtain a hot work permit for the bulkhead cutting and also neglected or refused to have the ceiling and the flammable lifejackets removed from underneath the area where he instructed Angelino Sevillejo to cut the bulkhead door. These decisions or oversights guaranteed that the cutting would be done in extremely hazardous conditions and were the proximate cause of the fire and the resulting damage to the Vessel. The Yards expert witness, Dr. Eric Mullen gave the only credible account of the cause and the mechanics of ignition of the fire. He established that: i) the fire started when the cutting of the bulkhead door resulted in sparks or hot molten slag which fell through pre-existing holes on the deck floor and came into contact with and ignited the flammable lifejackets stored in the ceiling void directly below; and ii) the bottom level of the bulkhead door was immaterial, because the sparks and slag could have come from the cutting of any of the sides of the door. Consequently, the cutting itself of the bulkhead door under the hazardous conditions created by Dr. Joniga, rather than the positioning of the doors bottom edge, was the proximate cause of the fire. The Manila City case is irrelevant to this dispute and in any case, does not establish governing precedent to the effect that when a ship is damaged in dry dock, the shipyard is presumed at fault. Apart from the differences in the factual setting of the two cases, the Manila City pronouncements regarding the res ipsa loquitur doctrine are obiter dictawithout value as binding precedent. Furthermore, even if the principle were applied to create a presumption of negligence by the Yard, however, that presumption is conclusively rebutted by the evidence on record.

(c)

(d)

(e)

The Vessels deliberate acts and its negligence created the inherently hazardous conditions in which the cutting work that could otherwise be done safely ended up causing a fire and the damage to the Vessel. The fire was a direct and logical consequence of the Vessels decisions to: (1) take Angelino Sevillejo away from his welding work at the Promenade Deck restaurant and instead to require him to do unauthorized cutting work in Deck A; and (2) to have him do that without satisfying the requirements for and obtaining a hot work permit in violation of the Yards Safety Rules and without removing the flammable ceiling and life jackets below, contrary to the requirements not only of the Yards Safety Rules but also of the demands of standard safe practice and the Vessels own explicit safety and hot work policies. The vessel has not presented any proof to show that the Yard was remiss in its fire fighting preparations or in the actual conduct of fighting the 8 February 2000 fire. The Yard had the necessary equipment and trained personnel and employed all those resources immediately and fully to putting out the 8 February 2000 fire.

(f)

4.

Even assuming that Angelino Sevillejo cut the bulkhead door close to the deck floor, and that this circumstance rather than the extremely hazardous conditions created by Dr. Joniga and the Vessel for that activity caused the fire, the Yard may still not be held liable for the resulting damage. (a) The Yards only contractual obligation to the Vessel in respect of the 26 January 2000 Work Order was to supply welders for the Promenade Deck restaurant who would then perform welding work per owner[s] instruction. Consequently, once it had provided those welders, including Angelino Sevillejo, its obligation to the Vessel was fully discharged and no claim for contractual breach, or

for damages on account thereof, may be raised against the Yard. (b) The Yard is also not liable to the Vessel/Claimant on the basis of quasi-delict. i. The Vessel exercised supervision and control over Angelino Sevillejo when he was doing work at the Promenade Deck restaurant and especially when he was instructed by Dr. Joniga to cut the bulkhead door. Consequently, the Vessel was the party with actual control over his tasks and is deemed his true and effective employer for purposes of establishing Article 2180 employer liability. Even assuming that the Yard was Angelino Sevillejos employer, the Yard may nevertheless not be held liable under Article 2180 because Angelino Sevillejo was acting beyond the scope of his tasks assigned by the Yard (which was only to do welding for the Promenade Deck restaurant) when he cut the bulkhead door pursuant to instructions given by the Vessel. The Yard is nonetheless not liable under Article 2180 because it exercised due diligence in the selection and supervision of Angelino Sevillejo.

ii.

iii.

5.

Assuming that the Yard is liable, it cannot be compelled to pay the full amount of P360 million paid by the Claimant. (a) Under the law, the Yard may not be held liable to the Claimant, as subrogee, for an amount greater than that which the Vessel could have recovered, even if the Claimant may have paid a higher amount under its policies. In turn, the right of the Vessel to

recover is limited to actual damage to the MV Superferry 3, at the time of the fire. (b) Under the Ship [R]epair Agreement, the liability of the Yard is limited to P50 million a stipulation which, under the law and decisions of the Supreme Court, is valid, binding and enforceable. The Vessel breached its obligation under Clause 22 (a) of the Yards Standard Terms to name the Yard as co-assured under the policies a breach which makes the Vessel liable for damages. This liability should in turn be set-off against the Claimants claim for damages.

(c)

The Respondent listed what it believes the Claimant wanted to impress upon the Tribunal. Respondent enumerated and disputed these as follows: 1. 2. Claimants counsel contends that the cutting of the bulkhead door was covered by the 26 January 2000 Work Order. Claimants counsel contends that Dr. Joniga told Gerry Orcullo about his intention to have Angelino Sevillejo do cutting work at the Deck A bulkhead on the morning of 8 February 2000. Claimants counsel contends that under Article 1727 of the Civil Code, The contractor is responsible for the work done by persons employed by him. Claimants counsel contends that [t]he second reason why there was no job spec or job order for this cutting work, [is] the cutting work was known to the yard and coordinated with Mr. Gerry Orcullo, the yard project superintendent. Claimants counsel also contends, to make the Vessels unauthorized hot works activities seem less likely, that they could easily be detected because Mr. Avelino Aves, the Yard Safety Superintendent, admitted that No hot works could really be hidden from the Yard, your Honors, because the welding

3.

4.

5.

cables and the gas hoses emanating from the dock will give these hotworks away apart from the assertion and the fact that there were also safety assistants supposedly going around the vessel. Respondent disputed the above by presenting its own argument in its Final Memorandum. [12]

On October 28, 2002, the CIAC rendered its Decision[13] declaring both WG&A and KCSI guilty of negligence, with the following findings and conclusions
The Tribunal agrees that the contractual obligation of the Yard is to provide the welders and equipment to the promenade deck. [The] Tribunal agrees that the cutting of the bulkhead door was not a contractual obligation of the Yard. However, by requiring, according to its own regulations, that only Yard welders are to undertake hotworks, it follows that there are certain qualifications of Yard welders that would be requisite of yard welders against those of the vessel welders. To the Tribunal, this means that yard welders are aware of the Yard safety rules and regulations on hotworks such as applying for a hotwork permit, discussing the work in a production meeting, and complying with the conditions of the hotwork permit prior to implementation. By the requirement that all hotworks are to be done by the Yard, the Tribunal finds that Sevillejo remains a yard employee. The act of Sevillejo is however mitigated in that he was not even a foreman, and that the instructions to him was (sic) by an authorized person. The Tribunal notes that the hotworks permit require[s] a request by at least a foreman. The fact that no foreman was included in the five welders issued to the Vessel was never raised in this dispute. As discussed earlier by the Tribunal, with the fact that what was ask (sic) of Sevillejo was outside the work order, the Vessel is considered equally negligent. This Tribunal finds the concurrent negligence of the Yard through Sevillejo and the Vessel through Dr. Joniga as both contributory to the cause of the fire that damaged the vessel.[14]

Holding that the liability for damages was limited to P50,000,000.00, the CIAC ordered KCSI to pay Pioneer the amount of P25,000,000.00, with interest at 6% per annum from the time of the filing of the case up to the time the decision is promulgated, and 12% interest per annum added to the award, or any balance thereof, after it becomes final and executory. The CIAC further ordered that the arbitration costs be imposed on both parties on a pro rata basis.[15] Pioneer appealed to the CA and its petition was docketed as CA-G.R. SP No. 74018. KCSI likewise filed its own appeal and the same was docketed as CA-G.R. SP No. 73934. The cases were consolidated. On December 17, 2004, the Former Fifteenth Division of the CA rendered its Decision, disposing as follows:
WHEREFORE, premises considered, the Petition of Pioneer (CA-G.R. SP No. 74018) is DISMISSED while the Petition of the Yard (CA-G.R. SP No. 73934) is GRANTED, dismissing petitioners claims in its entirety. No costs. The Yard and The WG&A are hereby ordered to pay the arbitration costs pro-rata. SO ORDERED. [16]

Aggrieved, Pioneer sought reconsideration of the December 17, 2004 Decision, insisting that it suffered from serious errors in the appreciation of the evidence and from gross misapplication of the law and jurisprudence on negligence. KCSI, for its part, filed a motion for partial reconsideration of the same Decision. On December 20, 2007, an Amended Decision was promulgated by the Special Division of Five Former Fifteenth Division of the CA in light of the dissent of Associate Justice Lucas P. Bersamin, [17] joined by Associate Justice Japar B. Dimaampao. The fallo of the Amended Decision reads

WHEREFORE, premises considered, the Court hereby decrees that: 1. Pioneers Motion for Reconsideration is PARTIALLY GRANTED, ordering The Yard to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of thisAmended Decision, subject to the following modifications: 1.1 Pioneers Petition (CA-G.R. SP No. 74018) is PARTIALLY GRANTED as the Yard is hereby ordered to pay Pioneer P25 Million without legal interest; 2. The Yard is hereby declared as equally negligent, thus, the total GRANTING of its Petition (CA-G.R. SP No. 73934) is now reduced to PARTIALLY GRANTED, in so far as it is ordered to pay Pioneer P25 Million, without legal interest, within 15 days from the finality of this Amended Decision; and 3. The rest of the disposition in the original Decision remains the same. SO ORDERED.[18]

Hence, these petitions. Pioneer bases its petition on the following grounds:
I THE COURT OF APPEALS ERRED IN BASING ITS ORIGINAL DECISION ON NON-FACTS LEADING IT TO MAKE FALSE LEGAL CONCLUSIONS; NONFACTS REMAIN TO INVALIDATE THE AMENDED DECISION. THIS ALSO VIOLATES SECTION 14, ARTICLE VIII OF THE CONSTITUTION. II THE COURT OF APPEALS ERRED IN LIMITING THE LEGAL LIABILITY OF THE YARD TO THE SUM OF P50,000,000.00, IN THAT:

A. STARE DECISIS RENDERS INAPPLICABLE ANY INVOCATION OF LIMITED LIABILITY BY THE YARD. B. THE LIMITATION CONTRARY TO PUBLIC POLICY. CLAUSE IS

C. THE VESSEL OWNER DID NOT AGREE THAT THE YARDS LIABILITY FOR LOSS OR DAMAGE TO THE VESSEL ARISING FROM YARDS NEGLIGENCE IS LIMITED TO THE SUM OF P50,000,000.00 ONLY. D. IT IS INIQUITOUS TO ALLOW THE YARD TO LIMIT LIABILITY, IN THAT: (i) THE YARD HAD CUSTODY AND CONTROL OVER THE VESSEL (M/V SUPERFERRY 3) ON 08 FEBRUARY 2000 WHEN IT WAS GUTTED BY FIRE; (ii) THE DAMAGING FIRE INCIDENT HAPPENED IN THE COURSE OF THE REPAIRS EXCLUSIVELY PERFORMED BY YARD WORKERS. III THE COURT OF APPEALS ERRED IN ITS RULING THAT WG&A WAS CONCURRENTLY NEGLIGENT, CONSIDERING THAT: A. DR. JONIGA, THE VESSELS PASSAGE TEAM LEADER, DID NOT SUPERVISE OR CONTROL THE REPAIRS. B. IT WAS THE YARD THROUGH ITS PROJECT SUPERINTENDENT GERMINIANO ORCULLO THAT SUPERVISED AND CONTROLLED THE REPAIR WORKS.

C. SINCE ONLY YARD WELDERS COULD PERFORM HOT WORKS IT FOLLOWS THAT THEY ALONE COULD BE GUILTY OF NEGLIGENCE IN DOING THE SAME. D. THE YARD AUTHORIZED THE HOT WORK OF YARD WELDER ANGELINO SEVILLEJO. E. THE NEGLIGENCE OF ANGELINO SEVILLEJO WAS THE PROXIMATE CAUSE OF THE LOSS. F. WG&A WAS NOT GUILTY OF NEGLIGENCE, BE IT DIRECT OR CONTRIBUTORY TO THE LOSS. IV THE COURT OF APPEALS CORRECTLY RULED THAT WG&A SUFFERED A CONSTRUCTIVE TOTAL LOSS OF ITS VESSEL BUT ERRED BY NOT HOLDING THAT THE YARD WAS LIABLE FOR THE VALUE OF THE FULL CONSTRUCTIVE TOTAL LOSS. V THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD LIABLE FOR INTEREST.

VI THE COURT OF APPEALS ERRED IN NOT HOLDING THE YARD SOLELY LIABLE FOR ARBITRATION COSTS.[19]

On the other hand, KCSI cites the following grounds for the allowance of its petition, to wit:
1. ABSENCE OF YARD RESPONSIBILITY IT WAS GRIEVOUS ERROR FOR THE COURT OF APPEALS TO ADOPT, WITHOUT EXPLANATION, THE CIACS RULING THAT THE YARD WAS EQUALLY NEGLIGENT BECAUSE OF ITS FAILURE TO REQUIRE A HOT WORKS PERMIT FOR THE CUTTING WORK DONE BY ANGELINO SEVILLEJO, AFTER THE COURT OF APPEALS ITSELF HAD SHOWN THAT RULING TO BE COMPLETELY WRONG AND BASELESS. 2. NO CONSTRUCTIVE TOTAL LOSS IT WAS EQUALLY GRIEVOUS ERROR FOR THE COURT OF APPEALS TO RULE, WITHOUT EXPLANATION, THAT THE VESSEL WAS A CONSTRUCTIVE TOTAL LOSS AFTER HAVING ITSELF EXPLAINED WHY THE VESSEL COULD NOT BE A CONSTRUCTIVE TOTAL LOSS. 3. FAILURE OR REFUSAL TO ADDRESS KEPPELS MOTION FOR RECONSIDERATION FINALLY, IT WAS ALSO GRIEVOUS ERROR FOR THE COURT OF APPEALS TO HAVE EFFECTIVELY DENIED, WITHOUT ADDRESSING IT AND ALSO WITHOUT EXPLANATION, KEPPELS PARTIAL MOTION FOR RECONSIDERATION OF THE ORIGINAL DECISION WHICH SHOWED: 1) WHY PIONEER WAS NOT SUBROGATED TO THE RIGHTS OF THE VESSEL OWNER AND SO HAD NO STANDING TO SUE THE YARD; 2) WHY KEPPEL MAY NOT BE REQUIRED TO REIMBURSE PIONEERS PAYMENTS TO THE VESSEL OWNER IN VIEW

OF THE CO-INSURANCE CLAUSE IN THE SHIPREPAIR AGREEMENT; AND 3) WHY PIONEER ALONE SHOULD BEAR THE COSTS OF ARBITRATION. 4. FAILURE TO CREDIT FOR SALVAGE RECOVERY EVEN IF THE COURT OF APPEALS RULINGS ON ALL OF THE FOREGOING ISSUES WERE CORRECT AND THE YARD MAY PROPERLY BE HELD EQUALLY LIABLE FOR THE DAMAGE TO THE VESSEL AND REQUIRED TO PAY HALF OF THE DAMAGES AWARDED (P25 MILLION), THE COURT OF APPEALS STILL ERRED IN NOT DEDUCTING THE SALVAGE VALUE OF THE VESSEL RECOVERED AND RECEIVED BY THE INSURER, PIONEER, TO REDUCE ANY LIABILITY ON THE PART OF THE YARD TO P9.874 MILLION.[20]

To our minds, these errors assigned by both Pioneer and KCSI may be summed up in the following core issues:
A. To whom may negligence over the fire that broke out on board M/V Superferry 3 be imputed? B. Is subrogation proper? If proper, to what extent can subrogation be made? C. Should interest be imposed on the award of damages? If so, how much? D. Who should bear the cost of the arbitration?

To resolve these issues, it is imperative that we digress from the general rule that in petitions for review under Rule 45 of the Rules of Court, only questions of law shall be entertained. Considering the disparate findings of fact of the CIAC and the CA which led them to different conclusions, we are constrained to revisit the factual circumstances surrounding this controversy.[21]

The Courts Ruling A. The issue of negligence

Undeniably, the immediate cause of the fire was the hot work done by Angelino Sevillejo (Sevillejo) on the accommodation area of the vessel, specifically on Deck A. As established before the CIAC
The fire broke out shortly after 10:25 and an alarm was raised (Exh. 1-Ms. Aini Ling,[22] p. 20). Angelino Sevillejo tried to put out the fire by pouring the contents of a five-liter drinking water container on it and as he did so, smoke came up from under Deck A. He got another container of water which he also poured whence the smoke was coming. In the meantime, other workers in the immediate vicinity tried to fight the fire by using fire extinguishers and buckets of water. But because the fire was inside the ceiling void, it was extremely difficult to contain or extinguish; and it spread rapidly because it was not possible to direct water jets or the fire extinguishers into the space at the source. Fighting the fire was extremely difficult because the life jackets and the construction materials of the Deck B ceiling were combustible and permitted the fire to spread within the ceiling void. From there, the fire dropped into the Deck B accommodation areas at various locations, where there were combustible materials. Respondent points to cans of paint and thinner, in addition to the plywood partitions and foam mattresses on deck B (Exh. 1-Mullen,[23] pp. 7-8, 18; Exh. 2-Mullen, pp. 1112).[24]

Pioneer contends that KCSI should be held liable because Sevillejo was its employee who, at the time the fire broke out, was doing his assigned task, and that KCSI was solely responsible for all the hot works done on board the vessel. KCSI claims otherwise, stating that the hot work done was beyond the scope of Sevillejos assigned tasks, the same not having been authorized under the Work Order[25] dated January 26, 2000 or under the Shiprepair Agreement. KCSI further posits that WG&A was itself negligent, through its crew, particularly Dr. Raymundo Joniga (Dr. Joniga),

for failing to remove the life jackets from the ceiling void, causing the immediate spread of the fire to the other areas of the ship. We rule in favor of Pioneer. First. The Shiprepair Agreement is clear that WG&A, as owner of M/V Superferry 3, entered into a contract for the dry docking and repair of the vesselunder KCSIs Standard Conditions of Contract for Shiprepair, and its guidelines and regulations on safety and security. Thus, the CA erred when it said that WG&A would renovate and reconstruct its own vessel merely using the dry docking facilities of KCSI. Second. Pursuant to KCSIs rules and regulations on safety and security, only employees of KCSI may undertake hot works on the vessel while it was in the graving dock in Lapu-Lapu City, Cebu. This is supported by Clause 3 of the Shiprepair Agreement requiring the prior written approval of KCSIs Vice President for Operations before WG&A could effect any work performed by its own workers or sub-contractors. In the exercise of this authority, KCSIs Vice-President for Operations, in the letter dated January 2, 1997, banned any hot works from being done except by KCSIs workers, viz.:
The Yard will restrict all hot works in the engine room, accommodation cabin, and fuel oil tanks to be carried out only by shipyard workers x x x.[26]

WG&A recognized and complied with this restrictive directive such that, during the arrival conference on January 26, 2000, Dr. Joniga, the vessels passage team leader in charge of its hotel department, specifically requested KCSI to finish the hot works started by the vessels contractors on the passenger accommodation decks.[27] This was corroborated by the statements of the vessels hotel manager Marcelo Rabe[28] and the vessels quality control officer Joselito Esteban.[29] KCSI knew of the unfinished hot works in the passenger accommodation areas. Its safety supervisor Esteban Cabalhug confirmed that KCSI was aware that the owners of this vessel

(M/V Superferry 3) had undertaken their own (hot) works prior to arrival alongside (sic) on 26th January, and that no hot work permits could thereafter be issued to WG&As own workers because this was not allowed for the Superferry 3.[30] This shows that Dr. Joniga had authority only to request the performance of hot works by KCSIs welders as needed in the repair of the vessel while on dry dock. Third. KCSI welders covered by the Work Order performed hot works on various areas of the M/V Superferry 3, aside from its promenade deck. This was a recognition of Dr. Jonigas authority to request the conduct of hot works even on the passenger accommodation decks, subject to the provision of the January 26, 2000 Work Order that KCSI would supply welders for the promenade deck of the ship. At the CIAC proceedings, it was adequately shown that between February 4 and 6, 2000, the welders of KCSI: (a) did the welding works on the ceiling hangers in the lobby of Deck A; (b) did the welding and cutting works on the deck beam to access aircon ducts; and (c) did the cutting and welding works on the protection bars at the tourist dining salon of Deck B, [31] at a rate of P150.00/welder/hour.[32] In fact, Orcullo, Project Superintendent of KCSI, admitted that as early as February 3, 2000 (five days before the fire) [the Yard] had acknowledged Dr. Jonigas authority to order such works or additional jobs.[33] It is evident, therefore, that although the January 26, 2000 Work Order was a special order for the supply of KCSI welders to the promenade deck, it was not restricted to the promenade deck only. The Work Order was only a special arrangement between KCSI and WG&A that meant additional cost to the latter. Fourth. At the time of the fire, Sevillejo was an employee of KCSI and was subject to the latters direct control and supervision. Indeed, KCSI was the employer of Sevillejopaying his salaries; retaining the power and the right to discharge or substitute him with another welder; providing him and the other welders with its equipment; giving him

and the other welders marching orders to work on the vessel; and monitoring and keeping track of his and the other welders activities on board, in view of the delicate nature of their work.[34] Thus, as such employee, aware of KCSIs Safety Regulations on Vessels Afloat/Dry, which specifically provides that (n)o hotwork (welding/cutting works) shall be done on board [the] vessel without [a] Safety Permit from KCSI Safety Section,[35] it was incumbent upon Sevillejo to obtain the required hot work safety permit before starting the work he did, including that done on Deck A where the fire started. Fifth. There was a lapse in KCSIs supervision of Sevillejos work at the time the fire broke out. It was established that no hot works could be hidden from or remain undetected by KCSI because the welding cables and the gas hoses emanating from the dock would give the hot works away. Moreover, KCSI had roving fire watchmen and safety assistants who were moving around the vessel. [36] This was confirmed by Restituto Rebaca (Rebaca), KCSIs Safety Supervisor, who actually spotted Sevillejo on Deck A, two hours before the fire, doing his cutting work without a hot work permit, a fire watchman, or a fire extinguisher. KCSI contends that it did its duty when it prohibited Sevillejo from continuing the hot work. However, it is noteworthy that, after purportedly scolding Sevillejo for working without a permit and telling him to stop until the permit was acquired and the other safety measures were observed, Rebaca left without pulling Sevillejo out of the work area or making sure that the latter did as he was told. Unfortunately for KCSI, Sevillejo reluctantly proceeded with his cutting of the bulkhead door at Deck A after Rebaca left, even disregarding the 4-inch marking set, thus cutting the door level with the deck, until the fire broke out. This conclusion on the failure of supervision by KCSI was absolutely supported by Dr. Eric Mullen of the Dr. J.H. Burgoyne & Partners (International) Ltd., Singapore, KCSIs own fire expert, who observed that

4.3. The foregoing would be compounded by Angelino Sevillejo being an electric arc welder, not a cutter. The dangers of ignition occurring as a result of the two processes are similar in that both electric arc welding and hot cutting produce heat at the work area and sparks and incendive material that can travel some distance from the work area. Hence, the safety precautions that are expected to be applied by the supervisor are the same for both types of work. However, the quantity and incendivity of the spray from the hot cutting are much greater than those of sparks from electric arc welding, and it may well be that Angelino Sevillejo would not have a full appreciation of the dangers involved. This made it all the more important that the supervisor, who should have had such an appreciation, ensured that the appropriate safety precautions were carried out.[37]

In this light, therefore, Sevillejo, being one of the specially trained welders specifically authorized by KCSI to do the hot works on M/V Superferry 3 to the exclusion of other workers, failed to comply with the strict safety standards of KCSI, not only because he worked without the required permit, fire watch, fire buckets, and extinguishers, but also because he failed to undertake other precautionary measures for preventing the fire. For instance, he could have, at the very least, ensured that whatever combustible material may have been in the vicinity would be protected from the sparks caused by the welding torch. He could have easily removed the life jackets from the ceiling void, as well as the foam mattresses, and covered any holes where the sparks may enter. Conjunctively, since Rebaca was already aware of the hazard, he should have taken all possible precautionary measures, including those above mentioned, before allowing Sevillejo to continue with his hot work on Deck A. In addition to scolding Sevillejo, Rebaca merely checked that no fire had started yet. Nothing more. Also, inasmuch as KCSI had the power to substitute Sevillejo with another electric arc welder, Rebaca should have replaced him.

There is negligence when an act is done without exercising the competence that a reasonable person in the position of the actor would recognize as necessary to prevent an unreasonable risk of harm to another. Those who undertake any work calling for special skills are required to exercise reasonable care in what they do.[38] Verily, there is an obligation all persons have to take due care which, under ordinary circumstances of the case, a reasonable and prudent man would take. The omission of that care constitutes negligence. Generally, the degree of care required is graduated according to the danger a person or property may be subjected to, arising from the activity that the actor pursues or the instrumentality that he uses. The greater the danger, the greater the degree of care required. Extraordinary risk demands extraordinary care. Similarly, the more imminent the danger, the higher degree of care warranted.[39] In this aspect,

KCSI failed to exercise the necessary degree of caution and foresight called for by the circumstances. We cannot subscribe to KCSIs position that WG&A, through Dr. Joniga, was negligent. On the one hand, as discussed above, Dr. Joniga had authority to request the performance of hot works in the other areas of the vessel. These hot works were deemed included in the January 26, 2000 Work Order and the Shiprepair Agreement. In the exercise of this authority, Dr. Joniga asked Sevillejo to do the cutting of the bulkhead door near the staircase of Deck A. KCSI was aware of what Sevillejo was doing, but failed to supervise him with the degree of care warranted by the attendant circumstances. Neither can Dr. Joniga be faulted for not removing the life jackets from the ceiling void for two reasons (1) the life jackets were not even contributory to the occurrence of the fire; and (2) it was not incumbent upon him to remove the same. It was shown during the hearings before the CIAC that the removal of the life jackets would not have made much of a difference. The fire would still have occurred due to the presence of other combustible materials in the area. This was the uniform conclusion of both WG&As[40] and KCSIs[41] fire experts. It was also proven during the CIAC proceedings that KCSI did not see the life jackets as being in the way of the hot works, thus, making their removal from storage unnecessary.[42] These circumstances, taken collectively, yield the inevitable conclusion that Sevillejo was negligent in the performance of his assigned task. His negligence was the proximate cause of the fire on board M/V Superferry 3. As he was then definitely engaged in the performance of his assigned tasks as an employee of KCSI, his negligence gave rise to the vicarious liability of his employer[43] under Article 2180 of the Civil Code, which provides
Art. 2180. The obligation imposed by article 2176 is demandable not only for ones own act or omission, but also for those of persons for whom one is responsible.

xxxx Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks, even though the former are not engaged in any business or industry. xxxx The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a good father of a family to prevent damage.

KCSI failed to prove that it exercised the necessary diligence incumbent upon it to rebut the legal presumption of its negligence in supervising Sevillejo.[44] Consequently, it is responsible for the damages caused by the negligent act of its employee, and its liability is primary and solidary. All that is needed is proof that the employee has, by his negligence, caused damage to another in order to make the employer responsible for the tortuous act of the former.[45] From the foregoing disquisition, there is ample proof of the employees negligence. B. The right of subrogation

Pioneer asseverates that there existed a total constructive loss so that it had to pay WG&A the full amount of the insurance coverage and, by operation of law, it was entitled to be subrogated to the rights of WG&A to claim the amount of the loss. It further argues that the limitation of liability clause found in the Shiprepair Agreement is null and void for being iniquitous and against public policy. KCSI counters that a total constructive loss was not adequately proven by Pioneer, and that there is no proof of payment of the insurance proceeds. KCSI insists on the validity of the limited-liability clause up to P50,000,000.00, because WG&A acceded to the provision when it executed the Shiprepair Agreement. KCSI also claims that the salvage value

of the vessel should be deducted from whatever amount it will be made to pay to Pioneer. We find in favor of Pioneer, subject to the claim of KCSI as to the salvage value of M/V Superferry 3. In marine insurance, a constructive total loss occurs under any of the conditions set forth in Section 139 of the Insurance Code, which provides
Sec. 139. A person insured by a contract of marine insurance may abandon the thing insured, or any particular portion hereof separately valued by the policy, or otherwise separately insured, and recover for a total loss thereof, when the cause of the loss is a peril insured against: (a) If more than three-fourths thereof in value is actually lost, or would have to be expended to recover it from the peril; (b) If it is injured to such an extent as to reduce its value more than three-fourths; x x x.

It appears, however, that in the execution of the insurance policies over M/V Superferry 3, WG&A and Pioneer incorporated by reference the American Institute Hull Clauses 2/6/77, the Total Loss Provision of which reads
Total Loss In ascertaining whether the Vessel is a constructive Total Loss the Agreed Value shall be taken as the repaired value and nothing in respect of the damaged or break-up value of the Vessel or wreck shall be taken into account. There shall be no recovery for a constructive Total Loss hereunder unless the expense of recovering and repairing the Vessel would exceed the Agreed Value in policies on Hull and Machinery. In making this determination, only expenses incurred

or to be incurred by reason of a single accident or a sequence of damages arising from the same accident shall be taken into account, but expenses incurred prior to tender of abandonment shall not be considered if such are to be claimed separately under the Sue and Labor clause. x x x.

In the course of the arbitration proceedings, Pioneer adduced in evidence the estimates made by three (3) disinterested and qualified shipyards for the cost of the repair of the vessel, specifically: (a) P296,256,717.00, based on the Philippine currency equivalent of the quotation dated April 17, 2000 turned in by Tsuneishi Heavy Industries (Cebu) Inc.; (b) P309,780,384.15, based on the Philippine currency equivalent of the quotation of Sembawang Shipyard Pte. Ltd., Singapore; and (c)P301,839,974.00, based on the Philippine currency equivalent of the quotation of Singapore Technologies Marine Ltd. All the estimates showed that the repair expense would exceed P270,000,000.00, the amount equivalent to of the vessels insured value of P360,000,000.00. Thus, WG&A opted to abandon M/V Superferry 3 and claimed from Pioneer the full amount of the policies. Pioneer paid WG&As claim, and now demands from KCSI the full amount of P360,000,000.00, by virtue of subrogation. KCSI denies the liability because, aside from its claim that it cannot be held culpable for negligence resulting in the destructive fire, there was no constructive total loss, as the amount of damage was only US$3,800,000.00 or P170,611,260.00, the amount of repair expense quoted by Simpson, Spence & Young. In the face of this apparent conflict, we hold that Section 139 of the Insurance Code should govern, because (1) Philippine law is deemed incorporated in every locally executed contract; and (2) the marine insurance policies in question expressly provided the following:
IMPORTANT This insurance is subject to English jurisdiction, except in the event that loss or losses are payable in the Philippines, in

which case if the said laws and customs of England shall be in conflict with the laws of the Republic of the Philippines, then the laws of the Republic of the Philippines shall govern. (Underscoring supplied.)

The CA held that Section 139 of the Insurance Code is merely permissive on account of the word may in the provision. This is incorrect. Properly considered, the word may in the provision is intended to grant the insured (WG&A) the option or discretion to choose the abandonment of the thing insured (M/V Superferry 3), or any particular portion thereof separately valued by the policy, or otherwise separately insured, and recover for a total loss when the cause of the loss is a peril insured against. This option or discretion is expressed as a right in Section 131 of the same Code, to wit:
Sec. 131. A constructive total loss is one which gives to a person insured a right to abandon under Section one hundred thirty-nine.

It cannot be denied that M/V Superferry 3 suffered widespread damage from the fire that occurred on February 8, 2000, a covered peril under the marine insurance policies obtained by WG&A from Pioneer. The estimates given by the three disinterested and qualified shipyards show that the damage to the ship would exceed P270,000,000.00, or of the total value of the policies P360,000,000.00. These estimates constituted credible and acceptable proof of the extent of the damage sustained by the vessel. It is significant that these estimates were confirmed by the Adjustment Report dated June 5, 2000 submitted by Richards Hogg Lindley (Phils.), Inc., the average adjuster that Pioneer had enlisted to verify and confirm the extent of the damage. The Adjustment Report verified and confirmed that the damage to the vessel amounted to a constructive total loss and that the claim for P360,000,000.00 under the policies was compensable. [46] It is also noteworthy that KCSI did not cross-examine Henson Lim, Director of Richards Hogg, whose affidavit-direct testimony submitted to the CIAC confirmed that the vessel was a constructive total loss.

Considering the extent of the damage, WG&A opted to abandon the ship and claimed the value of its policies. Pioneer, finding the claim compensable, paid the claim, with WG&A issuing a Loss and Subrogation Receipt evidencing receipt of the payment of the insurance proceeds from Pioneer. On this note, we find as unacceptable the claim of KCSI that there was no ample proof of payment simply because the person who signed the Receipt appeared to be an employee of Aboitiz Shipping Corporation. [47] The Loss and Subrogation Receipt issued by WG&A to Pioneer is the best evidence of payment of the insurance proceeds to the former, and no controverting evidence was presented by KCSI to rebut the presumed authority of the signatory to receive such payment. On the matter of subrogation, Article 2207 of the Civil Code provides
Art. 2207. If the plaintiffs property has been insured and he has received indemnity from the insurance company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

Subrogation is the substitution of one person by another with reference to a lawful claim or right, so that he who is substituted succeeds to the rights of the other in relation to a debt or claim, including its remedies or securities. The principle covers a situation wherein an insurer has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. It contemplates full substitution such that it places the party subrogated in the shoes of the creditor, and he may use all means that the creditor could employ to enforce payment.[48]

We have held that payment by the insurer to the insured operates as an equitable assignment to the insurer of all the remedies that the insured may have against the third party whose negligence or wrongful act caused the loss. The right of subrogation is not dependent upon, nor does it grow out of, any privity of contract. It accrues simply upon payment by the insurance company of the insurance claim. The doctrine of subrogation has its roots in equity. It is designed to promote and to accomplish justice; and is the mode that equity adopts to compel the ultimate payment of a debt by one who, in justice, equity, and good conscience, ought to pay.[49] We cannot accept KCSIs insistence on upholding the validity Clause 20, which provides that the limit of its liability is only up to P50,000,000.00; nor of Clause 22(a), that KCSI stands as a co-assured in the insurance policies, as found in the Shiprepair Agreement. Clauses 20 and 22(a) of the Shiprepair Agreement are without factual and legal foundation. They are unfair and inequitable under the premises. It was established during arbitration that WG&A did not voluntarily and expressly agree to these provisions. Engr. Elvin F. Bello, WG&As fleet manager, testified that he did not sign the fine-print portion of the Shiprepair Agreement where Clauses 20 and 22(a) were found, because he did not want WG&A to be bound by them. However, considering that it was only KCSI that had shipyard facilities large enough to accommodate the dry docking and repair of big vessels owned by WG&A, such as M/V Superferry 3, in Cebu, he had to sign the front portion of the Shiprepair Agreement; otherwise, the vessel would not be accepted for dry docking.[50] Indeed, the assailed clauses amount to a contract of adhesion imposed on WG&A on a take-it-or-leave-it basis. A contract of adhesion is socalled because its terms are prepared by only one party, while the other party merely affixes his signature signifying his adhesion thereto. Although not invalid, per se, a contract of adhesion is void when the weaker party is imposed upon in dealing with the dominant bargaining party, and its option is reduced to the alternative of taking it or leaving it, completely depriving such party of the opportunity to bargain on equal footing.[51]

Clause 20 is also a void and ineffectual waiver of the right of WG&A to be compensated for the full insured value of the vessel or, at the very least, for its actual market value. There was clearly no intention on the part of WG&A to relinquish such right. It is an elementary rule that a waiver must be positively proved, since awaiver by implication is not normally countenanced. The norm is that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an actual intention to relinquish the right. [52] This has not been demonstrated in this case. Likewise, Clause 20 is a stipulation that may be considered contrary to public policy. To allow KCSI to limit its liability to only P50,000,000.00, notwithstanding the fact that there was a constructive total loss in the amount of P360,000,000.00, would sanction the exercise of a degree of diligence short of what is ordinarily required. It would not be difficult for a negligent party to escape liability by the simple expedient of paying an amount very much lower than the actual damage or loss sustained by the other.[53] Along the same vein, Clause 22(a) cannot be upheld. The intention of the parties to make each other a co-assured under an insurance policy is to be gleaned principally from the insurance contract or policy itself and not from any other contract or agreement, because the insurance policy denominates the assured and the beneficiaries of the insurance contract. Undeniably, the hull and machinery insurance procured by WG&A from Pioneer named only the former as the assured. There was no manifest intention on the part of WG&A to constitute KCSI as a co-assured under the policies. To have deemed KCSI as a co-assured under the policies would have had the effect of nullifying any claim of WG&A from Pioneer for any loss or damage caused by the negligence of KCSI. No ship owner would agree to make a ship repairer a co-assured under such insurance policy. Otherwise, any claim for loss or damage under the policy would be rendered nugatory. WG&A could not have intended such a result.[54]

Nevertheless, we concur with the position of KCSI that the salvage value of the damaged M/V Superferry 3 should be taken into account in the grant of any award. It was proven before the CIAC that the machinery and the hull of the vessel were separately sold for P25,290,000.00 (or US$468,333.33) and US$363,289.50, respectively. WG&As claim for the upkeep of the wreck until the same were sold amounts to P8,521,737.75 (or US$157,809.96), to be deducted from the proceeds of the sale of the machinery and the hull, for a net recovery of US$673,812.87, or equivalent to P30,252,648.09, at P44.8977/$1, the prevailing exchange rate when the Request for Arbitration was filed. Not considering this salvage value in the award would amount to unjust enrichment on the part of Pioneer. C. On the imposition of interest

Pursuant to our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals,[55] the award in favor of Pioneer in the amount of P350,146,786.89 should earn interest at 6% per annum from the filing of the case until the award becomes final and executory. Thereafter, the rate of interest shall be 12% per annum from the date the award becomes final and executory until its full satisfaction. D. On the payment for the cost of arbitration

It is only fitting that both parties should share in the burden of the cost of arbitration, on a pro rata basis. We find that Pioneer had a valid reason to institute a suit against KCSI, as it believed that it was entitled to claim reimbursement of the amount it paid to WG&A. However, we disagree with Pioneer that only KCSI should shoulder the arbitration costs. KCSI cannot be faulted for defending itself for perceived wrongful acts and conditions. Otherwise, we would be putting a price on the right to litigate on the part of Pioneer. WHEREFORE, the Petition of Pioneer Insurance and Surety Corporation in G.R. No. 180896-97 and the Petition of Keppel Cebu Shipyard, Inc. in G.R. No. 180880-81 are PARTIALLY GRANTED and the Amended Decision dated December 20, 2007 of the Court of Appeals

is MODIFIED. Accordingly, KCSI is ordered to pay Pioneer the amount of P360,000,000.00 less P30,252,648.09, equivalent to the salvage value recovered by Pioneer from M/V Superferry 3, or the net total amount of P329,747,351.91, with six percent (6%) interest per annum reckoned from the time the Request for Arbitration was filed until this Decision becomes final and executory, plus twelve percent (12%) interest per annum on the said amount or any balance thereof from the finality of the Decision until the same will have been fully paid. The arbitration costs shall be borne by both parties on a pro rata basis. Costs against KCSI. SO ORDERED. ANTONIO EDUARDO B. NACHURA Associate Justice WE CONCUR:

CONSUELO YNARES-SANTIAGO Acting Chief Justice Chairperson

MINITA V. CHICO-NAZARIO Associate Justice

PRESBITERO J. VELASCO, JR. Associate Justice

DIOSDADO M. PERALTA Associate Justice

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO Acting Chief Justice

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 183526 August 25, 2009

VIOLETA R. LALICAN, Petitioner, vs. THE INSULAR LIFE ASSURANCE COMPANY LIMITED, AS REPRESENTED BY THE PRESIDENT VICENTE R. AVILON, Respondent. DECISION CHICO-NAZARIO, J.: Challenged in this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court are the Decision2 dated 30 August 2007 and the Orders dated 10 April 20083 and 3 July 20084 of the Regional Trial Court (RTC) of Gapan City, Branch 34, in Civil Case No. 2177. In its assailed Decision, the RTC dismissed the claim for death benefits filed by petitioner Violeta R. Lalican (Violeta) against respondent Insular Life Assurance Company Limited (Insular Life); while in its questioned Orders dated 10 April 2008 and 3 July 2008, respectively, the RTC declared the finality of the aforesaid Decision and denied petitioners Notice of Appeal. The factual and procedural antecedents of the case, as culled from the records, are as follows:

Violeta is the widow of the deceased Eulogio C. Lalican (Eulogio). During his lifetime, Eulogio applied for an insurance policy with Insular Life. On 24 April 1997, Insular Life, through Josephine Malaluan (Malaluan), its agent in Gapan City, issued in favor of Eulogio Policy No. 9011992,5 which contained a 20-Year Endowment Variable Income Package Flexi Plan worth P500,000.00,6 with two riders valued at P500,000.00 each.7 Thus, the value of the policy amounted to P1,500,000.00. Violeta was named as the primary beneficiary. Under the terms of Policy No. 9011992, Eulogio was to pay the premiums on a quarterly basis in the amount ofP8,062.00, payable every 24 April, 24 July, 24 October and 24 January of each year, until the end of the 20-year period of the policy. According to the Policy Contract, there was a grace period of 31 days for the payment of each premium subsequent to the first. If any premium was not paid on or before the due date, the policy would be in default, and if the premium remained unpaid until the end of the grace period, the policy would automatically lapse and become void.8 Eulogio paid the premiums due on 24 July 1997 and 24 October 1997. However, he failed to pay the premium due on 24 January 1998, even after the lapse of the grace period of 31 days. Policy No. 9011992, therefore, lapsed and became void. Eulogio submitted to the Cabanatuan District Office of Insular Life, through Malaluan, on 26 May 1998, an Application for Reinstatement9 of Policy No. 9011992, together with the amount of P8,062.00 to pay for the premium due on 24 January 1998. In a letter10 dated 17 July 1998, Insular Life notified Eulogio that his Application for Reinstatement could not be fully processed because, although he already deposited P8,062.00 as payment for the 24 January 1998 premium, he left unpaid the overdue interest thereon amounting to P322.48. Thus, Insular Life instructed Eulogio to pay the amount of interest and to file another application for reinstatement. Eulogio was likewise advised by Malaluan to pay the premiums that subsequently became due on 24 April 1998 and 24 July 1998, plus interest. On 17 September 1998, Eulogio went to Malaluans house and submitted a second Application for Reinstatement11 of Policy No. 9011992, including the amount of P17,500.00, representing payments for the overdue interest on the premium for 24 January 1998, and the premiums which became due on 24 April 1998 and 24 July 1998. As Malaluan was away on a business errand, her husband received Eulogios second Application for Reinstatement and issued a receipt for the amount Eulogio deposited. A while later, on the same day, 17 September 1998, Eulogio died of cardio-respiratory arrest secondary to electrocution. Without knowing of Eulogios death, Malaluan forwarded to the Insular Life Regional Office in the City of San Fernando, on 18 September 1998, Eulogios second Application for Reinstatement of Policy No. 9011992 andP17,500.00 deposit. However, Insular Life no longer acted upon Eulogios second Application for Reinstatement, as the former was informed on 21 September 1998 that Eulogio had already passed away. On 28 September 1998, Violeta filed with Insular Life a claim for payment of the full proceeds of Policy No. 9011992. In a letter12 dated 14 January 1999, Insular Life informed Violeta that her claim could not be granted since, at the time of Eulogios death, Policy No. 9011992 had already lapsed, and

Eulogio failed to reinstate the same. According to the Application for Reinstatement, the policy would only be considered reinstated upon approval of the application by Insular Life during the applicants "lifetime and good health," and whatever amount the applicant paid in connection thereto was considered to be a deposit only until approval of said application. Enclosed with the 14 January 1999 letter of Insular Life to Violeta was DBP Check No. 0000309734, for the amount of P25,417.00, drawn in Violetas favor, representing the full refund of the payments made by Eulogio on Policy No. 9011992. On 12 February 1998, Violeta requested a reconsideration of the disallowance of her claim. In a letter13 dated 10 March 1999, Insular Life stated that it could not find any reason to reconsider its decision rejecting Violetas claim. Insular Life again tendered to Violeta the above-mentioned check in the amount of P25,417.00. Violeta returned the letter dated 10 March 1999 and the check enclosed therein to the Cabanatuan District Office of Insular Life. Violetas counsel subsequently sent a letter14 dated 8 July 1999 to Insular Life, demanding payment of the full proceeds of Policy No. 9011992. On 11 August 1999, Insular Life responded to the said demand letter by agreeing to conduct a reevaluation of Violetas claim. Without waiting for the result of the re-evaluation by Insular Life, Violeta filed with the RTC, on 11 October 1999, a Complaint for Death Claim Benefit,15 which was docketed as Civil Case No. 2177. Violeta alleged that Insular Life engaged in unfair claim settlement practice and deliberately failed to act with reasonable promptness on her insurance claim. Violeta prayed that Insular Life be ordered to pay her death claim benefits on Policy No. 9011992, in the amount of P1,500,000.00, plus interests, attorneys fees, and cost of suit. Insular Life filed with the RTC an Answer with Counterclaim,16 asserting that Violetas Complaint had no legal or factual bases. Insular Life maintained that Policy No. 9011992, on which Violeta sought to recover, was rendered void by the non-payment of the 24 January 1998 premium and non-compliance with the requirements for the reinstatement of the same. By way of counterclaim, Insular Life prayed that Violeta be ordered to pay attorneys fees and expenses of litigation incurred by the former. Violeta, in her Reply and Answer to Counterclaim, asserted that the requirements for the reinstatement of Policy No. 9011992 had been complied with and the defenses put up by Insular Life were purely invented and illusory. After trial, the RTC rendered, on 30 August 2007, a Decision in favor of Insular Life. The RTC found that Policy No. 9011992 had indeed lapsed and Eulogio needed to have the same reinstated: [The] arguments [of Insular Life] are not without basis. When the premiums for April 24 and July 24, 1998 were not paid by [Eulogio] even after the lapse of the 31-day grace period, his insurance policy necessarily lapsed. This is clear from the terms and conditions of the contract between [Insular Life] and [Eulogio] which are written in [the] Policy provisions of Policy No. 9011992 x x x.17 The RTC, taking into account the clear provisions of the Policy Contract between Eulogio and Insular Life and the Application for Reinstatement Eulogio subsequently signed and submitted to Insular Life, held that Eulogio was not able to fully comply with the requirements for the reinstatement of Policy No. 9011992:

The well-settled rule is that a contract has the force of law between the parties. In the instant case, the terms of the insurance contract between [Eulogio] and [Insular Life] were spelled out in the policy provisions of Insurance Policy No. 9011992. There is likewise no dispute that said insurance contract is by nature a contract of adhesion[,] which is defined as "one in which one of the contracting parties imposes a ready-made form of contract which the other party may accept or reject but cannot modify." (Polotan, Sr. vs. CA, 296 SCRA 247). xxxx The New Lexicon Websters Dictionary defines ambiguity as the "quality of having more than one meaning" and "an idea, statement or expression capable of being understood in more than one sense." In Nacu vs. Court of Appeals, 231 SCRA 237 (1994), the Supreme Court stated that[:] "Any ambiguity in a contract, whose terms are susceptible of different interpretations as a result thereby, must be read and construed against the party who drafted it on the assumption that it could have been avoided by the exercise of a little care." In the instant case, the dispute arises from the afore-quoted provisions written on the face of the second application for reinstatement. Examining the said provisions, the court finds the same clearly written in terms that are simple enough to admit of only one interpretation. They are clearly not ambiguous, equivocal or uncertain that would need further construction. The same are written on the very face of the application just above the space where [Eulogio] signed his name. It is inconceivable that he signed it without reading and understanding its import.
1avvphi1

Similarly, the provisions of the policy provisions (sic) earlier mentioned are written in simple and clear laymans language, rendering it free from any ambiguity that would require a legal interpretation or construction. Thus, the court believes that [Eulogio] was well aware that when he filed the said application for reinstatement, his lapsed policy was not automatically reinstated and that its approval was subject to certain conditions. Nowhere in the policy or in the application for reinstatement was it ever mentioned that the payment of premiums would have the effect of an automatic and immediate renewal of the lapsed policy. Instead, what was clearly stated in the application for reinstatement is that pending approval thereof, the premiums paid would be treated as a "deposit only and shall not bind the company until this application is finally approved during my/our" lifetime and good health[.]" Again, the court finds nothing in the aforesaid provisions that would even suggest an ambiguity either in the words used or in the manner they were written. [Violeta] did not present any proof that [Eulogio] was not conversant with the English language. Hence, his having personally signed the application for reinstatement[,] which consisted only of one page, could only mean that he has read its contents and that he understood them. x x x Therefore, consistent with the above Supreme Court ruling and finding no ambiguity both in the policy provisions of Policy No. 9011992 and in the application for reinstatement subject of this case, the court finds no merit in [Violetas] contention that the policy provision stating that [the lapsed policy of Eulogio] should be reinstated during his lifetime is ambiguous and should be construed in his favor. It is true that [Eulogio] submitted his application for reinstatement, together with his premium and interest payments, to [Insular Life] through its agent Josephine Malaluan in the morning of September 17, 1998. Unfortunately, he died in the afternoon of that same day. It was only on the following day, September 18, 1998 that Ms. Malaluan brought the said document to [the regional office of Insular Life] in San Fernando, Pampanga for approval.

As correctly pointed out by [Insular Life] there was no more application to approve because the applicant was already dead and no insurance company would issue an insurance policy to a dead person.18 (Emphases ours.) The RTC, in the end, explained that: While the court truly empathizes with the [Violeta] for the loss of her husband, it cannot express the same by interpreting the insurance agreement in her favor where there is no need for such interpretation. It is conceded that [Eulogios] payment of overdue premiums and interest was received by [Insular Life] through its agent Ms. Malaluan. It is also true that [the] application for reinstatement was filed by [Eulogio] a day before his death. However, there is nothing that would justify a conclusion that such receipt amounted to an automatic reinstatement of the policy that has already lapsed. The evidence suggests clearly that no such automatic renewal was contemplated in the contract between [Eulogio] and [Insular Life]. Neither was it shown that Ms. Malaluan was the officer authorized to approve the application for reinstatement and that her receipt of the documents submitted by [Eulogio] amounted to its approval.19 (Emphasis ours.) The fallo of the RTC Decision thus reads: WHEREFORE, all the foregoing premises considered and finding that [Violeta] has failed to establish by preponderance of evidence her cause of action against the defendant, let this case be, as it is hereby DISMISSED.20 On 14 September 2007, Violeta filed a Motion for Reconsideration21 of the afore-mentioned RTC Decision. Insular Life opposed22 the said motion, averring that the arguments raised therein were merely a rehash of the issues already considered and addressed by the RTC. In an Order23 dated 8 November 2007, the RTC denied Violetas Motion for Reconsideration, finding no cogent and compelling reason to disturb its earlier findings. Per the Registry Return Receipt on record, the 8 November 2007 Order of the RTC was received by Violeta on 3 December 2007. In the interim, on 22 November 2007, Violeta filed with the RTC a Reply24 to the Motion for Reconsideration, wherein she reiterated the prayer in her Motion for Reconsideration for the setting aside of the Decision dated 30 August 2007. Despite already receiving on 3 December 2007, a copy of the RTC Order dated 8 November 2007, which denied her Motion for Reconsideration, Violeta still filed with the RTC, on 26 February 2008, a Reply Extended Discussion elaborating on the arguments she had previously made in her Motion for Reconsideration and Reply. On 10 April 2008, the RTC issued an Order,25 declaring that the Decision dated 30 August 2007 in Civil Case No. 2177 had already attained finality in view of Violetas failure to file the appropriate notice of appeal within the reglementary period. Thus, any further discussions on the issues raised by Violeta in her Reply and Reply Extended Discussion would be moot and academic. Violeta filed with the RTC, on 20 May 2008, a Notice of Appeal with Motion,26 praying that the Order dated 10 April 2008 be set aside and that she be allowed to file an appeal with the Court of Appeals. In an Order27 dated 3 July 2008, the RTC denied Violetas Notice of Appeal with Motion given that the Decision dated 30 August 2007 had long since attained finality.

Violeta directly elevated her case to this Court via the instant Petition for Review on Certiorari, raising the following issues for consideration: 1. Whether or not the Decision of the court a quo dated August 30, 2007, can still be reviewed despite having allegedly attained finality and despite the fact that the mode of appeal that has been availed of by Violeta is erroneous? 2. Whether or not the Regional Trial Court in its original jurisdiction has decided the case on a question of law not in accord with law and applicable decisions of the Supreme Court? Violeta insists that her former counsel committed an honest mistake in filing a Reply, instead of a Notice of Appeal of the RTC Decision dated 30 August 2007; and in the computation of the reglementary period for appealing the said judgment. Violeta claims that her former counsel suffered from poor health, which rapidly deteriorated from the first week of July 2008 until the latters death just shortly after the filing of the instant Petition on 8 August 2008. In light of these circumstances, Violeta entreats this Court to admit and give due course to her appeal even if the same was filed out of time. Violeta further posits that the Court should address the question of law arising in this case involving the interpretation of the second sentence of Section 19 of the Insurance Code, which provides: Section. 19. x x x [I]nterest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs. On the basis thereof, Violeta argues that Eulogio still had insurable interest in his own life when he reinstated Policy No. 9011992 just before he passed away on 17 September 1998. The RTC should have construed the provisions of the Policy Contract and Application for Reinstatement in favor of the insured Eulogio and against the insurer Insular Life, and considered the special circumstances of the case, to rule that Eulogio had complied with the requisites for the reinstatement of Policy No. 9011992 prior to his death, and that Violeta is entitled to claim the proceeds of said policy as the primary beneficiary thereof. The Petition lacks merit. At the outset, the Court notes that the elevation of the case to us via the instant Petition for Review on Certiorari is not justified. Rule 41, Section 1 of the Rules of Court,28 provides that no appeal may be taken from an order disallowing or dismissing an appeal. In such a case, the aggrieved party may file a Petition for Certiorari under Rule 65 of the Rules of Court.29 Furthermore, the RTC Decision dated 30 August 2007, assailed in this Petition, had long become final and executory. Violeta filed a Motion for Reconsideration thereof, but the RTC denied the same in an Order dated 8 November 2007. The records of the case reveal that Violeta received a copy of the 8 November 2007 Order on 3 December 2007. Thus, Violeta had 15 days30 from said date of receipt, or until 18 December 2007, to file a Notice of Appeal. Violeta filed a Notice of Appeal only on 20 May 2008, more than five months after receipt of the RTC Order dated 8 November 2007 denying her Motion for Reconsideration.

Violetas claim that her former counsels failure to file the proper remedy within the reglementary period was an honest mistake, attributable to the latters deteriorating health, is unpersuasive. Violeta merely made a general averment of her former counsels poor health, lacking relevant details and supporting evidence. By Violetas own admission, her former counsels health rapidly deteriorated only by the first week of July 2008. The events pertinent to Violetas Notice of Appeal took place months before July 2008, i.e., a copy of the RTC Order dated 8 November 2007, denying Violetas Motion for Reconsideration of the Decision dated 30 August 2007, was received on 3 December 2007; and Violetas Notice of Appeal was filed on 20 May 2008. There is utter lack of proof to show that Violetas former counsel was already suffering from ill health during these times; or that the illness of Violetas former counsel would have affected his judgment and competence as a lawyer. Moreover, the failure of her former counsel to file a Notice of Appeal within the reglementary period binds Violeta, which failure the latter cannot now disown on the basis of her bare allegation and self-serving pronouncement that the former was ill. A client is bound by his counsels mistakes and negligence.31 The Court, therefore, finds no reversible error on the part of the RTC in denying Violetas Notice of Appeal for being filed beyond the reglementary period. Without an appeal having been timely filed, the RTC Decision dated 30 August 2007 in Civil Case No. 2177 already became final and executory. A judgment becomes "final and executory" by operation of law. Finality becomes a fact when the reglementary period to appeal lapses and no appeal is perfected within such period. As a consequence, no court (not even this Court) can exercise appellate jurisdiction to review a case or modify a decision that has become final.32 When a final judgment is executory, it becomes immutable and unalterable. It may no longer be modified in any respect either by the court, which rendered it or even by this Court. The doctrine is founded on considerations of public policy and sound practice that, at the risk of occasional errors, judgments must become final at some definite point in time.33 The only recognized exceptions to the doctrine of immutability and unalterability are the correction of clerical errors, the so-called nunc pro tunc entries, which cause no prejudice to any party, and void judgments.34 The instant case does not fall under any of these exceptions. Even if the Court ignores the procedural lapses committed herein, and proceeds to resolve the substantive issues raised, the Petition must still fail. Violeta makes it appear that her present Petition involves a question of law, particularly, whether Eulogio had an existing insurable interest in his own life until the day of his death. An insurable interest is one of the most basic and essential requirements in an insurance contract. In general, an insurable interest is that interest which a person is deemed to have in the subject matter insured, where he has a relation or connection with or concern in it, such that the person will derive pecuniary benefit or advantage from the preservation of the subject matter insured and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against.35 The existence of an insurable interest gives a person the legal right to insure the subject matter of the policy of insurance.36 Section 10 of the Insurance Code indeed provides that every person has an insurable interest in his own life.37 Section 19 of the same code also states that an interest in the life or health of a

person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.38 Upon more extensive study of the Petition, it becomes evident that the matter of insurable interest is entirely irrelevant in the case at bar. It is actually beyond question that while Eulogio was still alive, he had an insurable interest in his own life, which he did insure under Policy No. 9011992. The real point of contention herein is whether Eulogio was able to reinstate the lapsed insurance policy on his life before his death on 17 September 1998. The Court rules in the negative. Before proceeding, the Court must correct the erroneous declaration of the RTC in its 30 August 2007 Decision that Policy No. 9011992 lapsed because of Eulogios non-payment of the premiums which became due on 24 April 1998 and 24 July 1998. Policy No. 9011992 had lapsed and become void earlier, on 24 February 1998, upon the expiration of the 31-day grace period for payment of the premium, which fell due on 24 January 1998, without any payment having been made. That Policy No. 9011992 had already lapsed is a fact beyond dispute. Eulogios filing of his first Application for Reinstatement with Insular Life, through Malaluan, on 26 May 1998, constitutes an admission that Policy No. 9011992 had lapsed by then. Insular Life did not act on Eulogios first Application for Reinstatement, since the amount Eulogio simultaneously deposited was sufficient to cover only the P8,062.00 overdue premium for 24 January 1998, but not the P322.48 overdue interests thereon. On 17 September 1998, Eulogio submitted a second Application for Reinstatement to Insular Life, again through Malaluan, depositing at the same timeP17,500.00, to cover payment for the overdue interest on the premium for 24 January 1998, and the premiums that had also become due on 24 April 1998 and 24 July 1998. On the very same day, Eulogio passed away. To reinstate a policy means to restore the same to premium-paying status after it has been permitted to lapse.39Both the Policy Contract and the Application for Reinstatement provide for specific conditions for the reinstatement of a lapsed policy. The Policy Contract between Eulogio and Insular Life identified the following conditions for reinstatement should the policy lapse: 10. REINSTATEMENT You may reinstate this policy at any time within three years after it lapsed if the following conditions are met: (1) the policy has not been surrendered for its cash value or the period of extension as a term insurance has not expired; (2) evidence of insurability satisfactory to [Insular Life] is furnished; (3) overdue premiums are paid with compound interest at a rate not exceeding that which would have been applicable to said premium and indebtedness in the policy years prior to reinstatement; and (4) indebtedness which existed at the time of lapsation is paid or renewed.40 Additional conditions for reinstatement of a lapsed policy were stated in the Application for Reinstatement which Eulogio signed and submitted, to wit:

I/We agree that said Policy shall not be considered reinstated until this application is approved by the Company during my/our lifetime and good health and until all other Company requirements for the reinstatement of said Policy are fully satisfied. I/We further agree that any payment made or to be made in connection with this application shall be considered as deposit only and shall not bind the Company until this application is finally approved by the Company during my/our lifetime and good health. If this application is disapproved, I/We also agree to accept the refund of all payments made in connection herewith, without interest, and to surrender the receipts for such payment.41(Emphases ours.) In the instant case, Eulogios death rendered impossible full compliance with the conditions for reinstatement of Policy No. 9011992. True, Eulogio, before his death, managed to file his Application for Reinstatement and deposit the amount for payment of his overdue premiums and interests thereon with Malaluan; but Policy No. 9011992 could only be considered reinstated after the Application for Reinstatement had been processed and approved by Insular Life during Eulogios lifetime and good health. Relevant herein is the following pronouncement of the Court in Andres v. The Crown Life Insurance Company,42citing McGuire v. The Manufacturer's Life Insurance Co.43: "The stipulation in a life insurance policy giving the insured the privilege to reinstate it upon written application does not give the insured absolute right to such reinstatement by the mere filing of an application. The insurer has the right to deny the reinstatement if it is not satisfied as to the insurability of the insured and if the latter does not pay all overdue premium and all other indebtedness to the insurer. After the death of the insured the insurance Company cannot be compelled to entertain an application for reinstatement of the policy because the conditions precedent to reinstatement can no longer be determined and satisfied." (Emphases ours.) It does not matter that when he died, Eulogios Application for Reinstatement and deposits for the overdue premiums and interests were already with Malaluan. Insular Life, through the Policy Contract, expressly limits the power or authority of its insurance agents, thus: Our agents have no authority to make or modify this contract, to extend the time limit for payment of premiums, to waive any lapsation, forfeiture or any of our rights or requirements, such powers being limited to our president, vice-president or persons authorized by the Board of Trustees and only in writing.44 (Emphasis ours.) Malaluan did not have the authority to approve Eulogios Application for Reinstatement. Malaluan still had to turn over to Insular Life Eulogios Application for Reinstatement and accompanying deposits, for processing and approval by the latter. The Court agrees with the RTC that the conditions for reinstatement under the Policy Contract and Application for Reinstatement were written in clear and simple language, which could not admit of any meaning or interpretation other than those that they so obviously embody. A construction in favor of the insured is not called for, as there is no ambiguity in the said provisions in the first place. The words thereof are clear, unequivocal, and simple enough so as to preclude any mistake in the appreciation of the same. Violeta did not adduce any evidence that Eulogio might have failed to fully understand the import and meaning of the provisions of his Policy Contract and/or Application for Reinstatement, both of which he voluntarily signed. While it is a cardinal principle of insurance

law that a policy or contract of insurance is to be construed liberally in favor of the insured and strictly as against the insurer company, yet, contracts of insurance, like other contracts, are to be construed according to the sense and meaning of the terms, which the parties themselves have used. If such terms are clear and unambiguous, they must be taken and understood in their plain, ordinary and popular sense.45 Eulogios death, just hours after filing his Application for Reinstatement and depositing his payment for overdue premiums and interests with Malaluan, does not constitute a special circumstance that can persuade this Court to already consider Policy No. 9011992 reinstated. Said circumstance cannot override the clear and express provisions of the Policy Contract and Application for Reinstatement, and operate to remove the prerogative of Insular Life thereunder to approve or disapprove the Application for Reinstatement. Even though the Court commiserates with Violeta, as the tragic and fateful turn of events leaves her practically emptyhanded, the Court cannot arbitrarily burden Insular Life with the payment of proceeds on a lapsed insurance policy. Justice and fairness must equally apply to all parties to a case. Courts are not permitted to make contracts for the parties. The function and duty of the courts consist simply in enforcing and carrying out the contracts actually made.46 Policy No. 9011992 remained lapsed and void, not having been reinstated in accordance with the Policy Contract and Application for Reinstatement before Eulogios death. Violeta, therefore, cannot claim any death benefits from Insular Life on the basis of Policy No. 9011992; but she is entitled to receive the full refund of the payments made by Eulogio thereon. WHEREFORE, premises considered, the Court DENIES the instant Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Court AFFIRMS the Orders dated 10 April 2008 and 3 July 2008 of the RTC of Gapan City, Branch 34, in Civil Case No. 2177, denying petitioner Violeta R. Lalicans Notice of Appeal, on the ground that the Decision dated 30 August 2007 subject thereof, was already final and executory. No costs. SO ORDERED. MINITA V. CHICO-NAZARIO Associate Justice Acting Chairperson WE CONCUR: CONCHITA CARPIO MORALES* Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice ANTONIO EDUARDO B. NACHURA Associate Justice

DIOSDADO M. PERALTA Associate Justice ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

MINITA V. CHICO-NAZARIO** Associate Justice Acting Chairperson, Third Division CERTIFICATION Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Chief Justice

THIRD DIVISION HEIRS OF LORETO C. MARAMAG, represented by surviving spouse VICENTA PANGILINAN MARAMAG, Petitioners, - versus G.R. No. 181132

Present:

YNARES-SANTIAGO, J., Chairperson, EVA VERNA DE GUZMAN CARPIO,* MARAMAG, ODESSA DE GUZMAN CORONA,** MARAMAG, KARL BRIAN DE NACHURA, and GUZMAN MARAMAG, TRISHA ANGELIE MARAMAG, THE INSULAR PERALTA, JJ. LIFE ASSURANCE COMPANY, LTD., Promulgated: and GREAT PACIFIC LIFE ASSURANCE CORPORATION, June 5, 2009 Respondents. 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 these Islands by virtue of Section 428 of the Code of Commerce x x x. In [the] light of the above pronouncements, it is very clear that the plaintiffs has (sic) no sufficient cause of action against defendants Odessa, Karl Brian and Trisha Angelie Maramag for the reduction and/or declaration of inofficiousness of donation as primary beneficiary (sic) in the insurances (sic) of the late Loreto C. Maramag. However, herein plaintiffs are not totally bereft of any cause of action. One of the named beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is his concubine Eva Verna De Guzman. Any person who is forbidden from receiving any donation under Article 739 cannot be named beneficiary of a life insurance policy of the person who cannot make any donation to him, according to said article (Art. 2012, Civil Code). If a concubine is made the beneficiary, it is believed that the insurance contract will still remain valid, but the indemnity must go to the legal heirs and not to the concubine, for evidently, what is prohibited under Art. 2012 is the naming of the improper beneficiary. In such case, the action for the declaration of nullity may be brought by the spouse of the donor or donee, and the guilt of the donor and donee may be proved by preponderance of evidence in the same action (Comment of Edgardo L.

Paras, Civil Code of the Philippines, page 897). Since the designation of defendant Eva Verna de Guzman as one of the primary beneficiary (sic) in the insurances (sic) taken by the late Loreto C. Maramag is void under Art. 739 of the Civil Code, the insurance indemnity that should be paid to her must go to the legal heirs of the deceased which this court may properly take cognizance as the action for the declaration for the nullity of a void donation falls within the general jurisdiction of this Court.[11]

Insular[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 only Odessa, Karl Brian, and Trisha Angelie; thus, it upheld the dismissal of the case as to the illegitimate children. It further held that the matter of Loretos misrepresentation was premature; the appropriate action may be filed only upon denial of the claim of the named beneficiaries for the insurance proceeds by Grepalife. Petitioners appealed the June 16, 2005 Resolution to the CA, but it dismissed the appeal for lack of jurisdiction, holding that the decision of the trial court dismissing the complaint for failure to state a cause of action involved a pure question of law. The appellate court also noted that petitioners did not file within the reglementary period a motion for reconsideration of the trial courts Resolution, dated September 21, 2004, dismissing the complaint as against Odessa, Karl Brian, and Trisha Angelie; thus, the said Resolution had already attained finality. Hence, this petition raising the following issues:
a. In determining the merits of a motion to dismiss for failure to state a cause of action, may the Court consider matters which were not alleged in the Complaint, particularly the defenses put up by the defendants in their Answer? b. In granting a motion for reconsideration of a motion to dismiss for failure to state a cause of action, did not the Regional Trial Court engage in the examination and determination of what were the facts and their probative value, or the truth thereof, when it premised the dismissal on allegations of the defendants in their answer which had not been proven? c. x x x (A)re the members of the legitimate family entitled to the proceeds of the insurance for the concubine?[15]

In essence, petitioners posit that their petition before the trial court should not have been dismissed for failure to state a cause of action because the finding that Eva was either disqualified as a beneficiary by the insurance companies or that her designation was revoked by Loreto, hypothetically admitted as true, was raised only in the answers and motions for reconsideration of both Insular and Grepalife. They argue that for a motion to dismiss to prosper on that ground, only the allegations in the complaint should be considered. They further contend that, even assuming Insular disqualified Eva as a beneficiary, her share should not have been distributed to her children with Loreto but, instead, awarded to them, being the legitimate heirs of the insured deceased, in accordance with law and jurisprudence. The petition should be denied. The grant of the motion to dismiss was based on the trial courts finding that the petition failed to state a cause of action, as provided in Rule 16, Section 1(g), of the Rules of Court, which reads
SECTION 1. Grounds. Within the time for but before filing the answer to the complaint or pleading asserting a claim, a motion to dismiss may be made on any of the following grounds: xxxx (g) action. That the pleading asserting the claim states no cause of

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. 2. 3. 4. 5. the falsity of the allegations is subject to judicial notice; such allegations are legally impossible; the allegations refer to facts which are inadmissible in evidence; by the record or document in the pleading, the allegations appear unfounded; or 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. ANTONIO EDUARDO B. NACHURA Associate Justice WE CONCUR:

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson

ANTONIO T. CARPIO Associate Justice

RENATO C. CORONA Associate Justice

DIOSDADO M. PERALTA Associate Justice

ATTESTATION
I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

CONSUELO YNARES-SANTIAGO Associate Justice Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO Chief Justice

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION G.R. No. 168433 February 10, 2009

UCPB GENERAL INSURANCE CO., INC., Petitioner, vs. ABOITIZ SHIPPING CORP. EAGLE EXPRESS LINES, DAMCO INTERMODAL SERVICES, INC., and PIMENTEL CUSTOMS BROKERAGE CO., Respondents. DECISION TINGA, J.: UCPB General Insurance Co., Inc. (UCPB) assails the Decision1 of the Court of Appeals dated October 29, 2004, which reversed the Decision2 dated November 29, 1999 of the Regional Trial Court of Makati City, Branch 146, and its Resolution3 dated June 14, 2005, which denied UCPBs motion for reconsideration. The undisputed facts, culled from the assailed Decision, are as follows: On June 18, 1991, three (3) units of waste water treatment plant with accessories were purchased by San Miguel Corporation (SMC for brevity) from Super Max Engineering Enterprises, Co., Ltd. of Taipei, Taiwan. The goods came from Charleston, U.S.A. and arrived at the port of Manila on board MV "SCANDUTCH STAR". The same were then transported to Cebu on board MV "ABOITIZ SUPERCON II". After its arrival at the port of Cebu and clearance from the Bureau of Customs, the goods were delivered to and received by SMC at its plant site on August 2, 1991. It was then discovered that one electrical motor of DBS Drive Unit Model DE-30-7 was damaged. Pursuant to an insurance agreement, plaintiff-appellee paid SMC the amount of P1,703,381.40 representing the value of the damaged unit. In turn, SMC executed a Subrogation Form dated March 31, 1992 in favor of plaintiff-appellee. Consequently, plaintiff-appellee filed a Complaint on July 21, 1992 as subrogee of SMC seeking to recover from defendants the amount it had paid SMC. On September 20, 1994, plaintiff-appellee moved to admit its Amended Complaint whereby it impleaded East Asiatic Co. Ltd. (EAST for brevity) as among the defendants for being the "general agent" of DAMCO. In its Order dated September 23, 1994, the lower court admitted the said amended complaint. Upon plaintiff-appellees motion, defendant DAMCO was declared in default by the lower court in its Order dated January 6, 1995. In the meantime, on January 25, 1995, defendant EAST filed a Motion for Preliminary Hearing on its affirmative defenses seeking the dismissal of the complaint against it on the ground of prescription, which motion was however denied by the court a quo in its Order dated

September 1, 1995. Such denial was elevated by defendant EAST to this Court through a Petition for Certiorari on October 30, 1995 in CA G.R. SP No. 38840. Eventually, this Court issued its Decision dated February 14, 1996 setting aside the lower courts assailed order of denial and further ordering the dismissal of the complaint against defendant EAST. Plaintiffappellee moved for reconsideration thereof but the same was denied by this Court in its Resolution dated November 8, 1996. As per Entry of Judgment, this Courts decision ordering the dismissal of the complaint against defendant EAST became final and executory on December 5, 1996. Accordingly, the court a quo noted the dismissal of the complaint against defendant EAST in its Order dated December 5, 1997. Thus, trial ensued with respect to the remaining defendants. On November 29, 1999, the lower court rendered its assailed Decision, the dispositive portion of which reads: WHEREFORE, all the foregoing premises considered, judgment is hereby rendered declaring DAMCO Intermodal Systems, Inc., Eagle Express Lines, Inc. and defendant Aboitiz Shipping solidarily liable to plaintiff-subrogee for the damaged shipment and orders them to pay plaintiff jointly and severally the sum of P1,703,381.40. No costs. SO ORDERED. Not convinced, defendants-appellants EAGLE and ABOITIZ now come to this Court through their respective appeals x x x4 The appellate court, as previously mentioned, reversed the decision of the trial court and ruled that UCPBs right of action against respondents did not accrue because UCPB failed to file a formal notice of claim within 24 hours from (SMCs) receipt of the damaged merchandise as required under Art. 366 of the Code of Commerce. According to the Court of Appeals, the filing of a claim within the time limitation in Art. 366 is a condition precedent to the accrual of a right of action against the carrier for the damages caused to the merchandise. In its Memorandum5 dated February 8, 2007, UCPB asserts that the claim requirement under Art. 366 of the Code of Commerce does not apply to this case because the damage to the merchandise had already been known to the carrier. Interestingly, UCPB makes this revelation: "x x x damage to the cargo was found upon discharge from the foreign carrier onto the International Container Terminal Services, Inc. (ICTSI) in the presence of the carriers representative who signed the Request for Bad Order Survey6 and the Turn Over of Bad Order Cargoes.7 On transshipment, the cargo was already damaged when loaded on board the interisland carrier."8 This knowledge, UCPB argues, dispenses with the need to give the carrier a formal notice of claim. Incidentally, the carriers representative mentioned by UCPB as present at the time the merchandise was unloaded was in fact a representative of respondent Eagle Express Lines (Eagle Express). UCPB claims that under the Carriage of Goods by Sea Act (COGSA), notice of loss need not be given if the condition of the cargo has been the subject of joint inspection such as, in this case, the inspection in the presence of the Eagle Express representative at the time the cargo was opened at the ICTSI.

UCPB further claims that the issue of the applicability of Art. 366 of the Code of Commerce was never raised before the trial court and should, therefore, not have been considered by the Court of Appeals. Eagle Express, in its Memorandum9 dated February 7, 2007, asserts that it cannot be held liable for the damage to the merchandise as it acted merely as a freight forwarders agent in the transaction. It allegedly facilitated the transshipment of the cargo from Manila to Cebu but represented the interest of the cargo owner, and not the carriers. The only reason why the name of the Eagle Express representative appeared on the Permit to Deliver Imported Goods was that the form did not have a space for the freight forwarders agent, but only for the agent of the shipping line. Moreover, UCPB had previously judicially admitted that upon verification from the Bureau of Customs, it was East Asiatic Co., Ltd. (East Asiatic), regarding whom the original complaint was dismissed on the ground of prescription, which was the real agent of DAMCO Intermodal Services, Inc. (DAMCO), the ship owner. Eagle Express argues that the applicability of Art. 366 of the Code of Commerce was properly raised as an issue before the trial court as it mentioned this issue as a defense in its Answer to UCPBs Amended Complaint. Hence, UCPBs contention that the question was raised for the first time on appeal is incorrect. Aboitiz Shipping Corporation (Aboitiz), on the other hand, points out, in its Memorandum10 dated March 29, 2007, that it obviously cannot be held liable for the damage to the cargo which, by UCPBs admission, was incurred not during transshipment to Cebu on board one of Aboitizs vessels, but was already existent at the time of unloading in Manila. Aboitiz also argues that Art. 366 of the Code of Commerce is applicable and serves as a condition precedent to the accrual of UCPBs cause of action against it.
lawphil.net

The Memorandum11 dated June 3, 2008, filed by Pimentel Customs Brokerage Co. (Pimentel Customs), is also a reiteration of the applicability of Art. 366 of the Code of Commerce. It should be stated at the outset that the issue of whether a claim should have been made by SMC, or UCPB as SMCs subrogee, within the 24-hour period prescribed by Art. 366 of the Code of Commerce was squarely raised before the trial court. In its Answer to Amended Complaint12 dated May 10, 1993, Eagle Express averred, thus: The amended complaint states no cause of action under the provisions of the Code of Commerce and the terms of the bill of lading; consignee made no claim against herein defendant within twenty four (24) hours following the receipt of the alleged cargo regarding the condition in which said cargo was delivered; however, assuming arguendo that the damage or loss, if any, could not be ascertained from the outside part of the shipment, consignee never made any claim against herein defendant at the time of receipt of said cargo; herein defendant learned of the alleged claim only upon receipt of the complaint.13 Likewise, in its Answer14 dated September 21, 1992, Aboitiz raised the defense that UCPB did not file a claim with it and that the complaint states no cause of action. UCPB obviously made a gross misrepresentation to the Court when it claimed that the issue regarding the applicability of the Code of Commerce, particularly the 24-hour formal claim rule, was not raised as an issue before the trial court. The appellate court, therefore, correctly

looked into the validity of the arguments raised by Eagle Express, Aboitiz and Pimentel Customs on this point after the trial court had so ill-advisedly centered its decision merely on the matter of extraordinary diligence. Interestingly enough, UCPB itself has revealed that when the shipment was discharged and opened at the ICTSI in Manila in the presence of an Eagle Express representative, the cargo had already been found damaged. In fact, a request for bad order survey was then made and a turnover survey of bad order cargoes was issued, pursuant to the procedure in the discharge of bad order cargo. The shipment was then repacked and transshipped from Manila to Cebu on board MV Aboitiz Supercon II. When the cargo was finally received by SMC at its Mandaue City warehouse, it was found in bad order, thereby confirming the damage already uncovered in Manila.15 In charging Aboitiz with liability for the damaged cargo, the trial court condoned UCPBs wrongful suit against Aboitiz to whom the damage could not have been attributable since there was no evidence presented that the cargo was further damaged during its transshipment to Cebu. Even by the exercise of extraordinary diligence, Aboitiz could not have undone the damage to the cargo that had already been there when the same was shipped on board its vessel. That said, it is nonetheless necessary to ascertain whether any of the remaining parties may still be held liable by UCPB. The provisions of the Code of Commerce, which apply to overland, river and maritime transportation, come into play. Art. 366 of the Code of Commerce states: Art. 366. Within twenty-four hours following the receipt of the merchandise, the claim against the carrier for damage or average which may be found therein upon opening the packages, may be made, provided that the indications of the damage or average which gives rise to the claim cannot be ascertained from the outside part of such packages, in which case the claim shall be admitted only at the time of receipt. After the periods mentioned have elapsed, or the transportation charges have been paid, no claim shall be admitted against the carrier with regard to the condition in which the goods transported were delivered.
1avvphi1

The law clearly requires that the claim for damage or average must be made within 24 hours from receipt of the merchandise if, as in this case, damage cannot be ascertained merely from the outside packaging of the cargo. In Philippine Charter Insurance Corporation v. Chemoil Lighterage Corporation,16 petitioner, as subrogee of Plastic Group Phil., Inc. (PGP), filed suit against respondent therein for the damage found on a shipment of chemicals loaded on board respondents barge. Respondent claimed that no timely notice in accordance with Art. 366 of the Code of Commerce was made by petitioner because an employee of PGP merely made a phone call to respondents Vice President, informing the latter of the contamination of the cargo. The Court ruled that the notice of claim was not timely made or relayed to respondent in accordance with Art. 366 of the Code of Commerce. The requirement to give notice of loss or damage to the goods is not an empty formalism. The fundamental reason or purpose of such a stipulation is not to relieve the carrier from just liability, but reasonably to inform it that the shipment has been damaged and that it is charged

with liability therefor, and to give it an opportunity to examine the nature and extent of the injury. This protects the carrier by affording it an opportunity to make an investigation of a claim while the matter is still fresh and easily investigated so as to safeguard itself from false and fraudulent claims.17 We have construed the 24-hour claim requirement as a condition precedent to the accrual of a right of action against a carrier for loss of, or damage to, the goods. The shipper or consignee must allege and prove the fulfillment of the condition. Otherwise, no right of action against the carrier can accrue in favor of the former.18 The shipment in this case was received by SMC on August 2, 1991. However, as found by the Court of Appeals, the claims were dated October 30, 1991, more than three (3) months from receipt of the shipment and, at that, even after the extent of the loss had already been determined by SMCs surveyor. The claim was, therefore, clearly filed beyond the 24-hour time frame prescribed by Art. 366 of the Code of Commerce. But what of the damage already discovered in the presence of Eagle Expresss representative at the time the shipment was discharged in Manila? The Request for Bad Order Survey and Turn Over Survey of Bad Order Cargoes, respectively dated June 17, 1999 and June 28, 1991, evince the fact that the damage to the cargo was already made known to Eagle Express and, possibly, SMC, as of those dates. Sec. 3(6) of the COGSA provides a similar claim mechanism as the Code of Commerce but prescribes a period of three (3) days within which notice of claim must be given if the loss or damage is not apparent. It states: Sec. 3(6). Unless notice of loss or damage and the general nature of such loss or damage be given in writing to the carrier or his agent at the port of discharge or at the time of the removal of the goods into the custody of the person entitled to delivery thereof under the contract of carriage, such removal shall be prima facie evidence of the delivery by the carrier of the goods as descibed in the bill of lading. If the loss or damage is not apparent, the notice must be given within three days of the delivery. Said notice of loss or damage may be endorsed upon the receipt of the goods given by the person taking delivery thereof. The notice in writing need not be given if the state of the goods has at the time of their receipt been the subject of joint survey or inspection. UCPB seizes upon the last paragraph which dispenses with the written notice if the state of the goods has been the subject of a joint survey which, in this case, was the opening of the shipment in the presence of an Eagle Express representative. It should be noted at this point that the applicability of the above-quoted provision of the COGSA was not raised as an issue by UCPB before the trial court and was only cited by UCPB in its Memorandum in this case. UCPB, however, is ambivalent as to which party Eagle Express represented in the transaction. By its own manifestation, East Asiatic, and not Eagle Express, acted as the agent through which summons and court notices may be served on DAMCO. It would be unjust to hold that Eagle Expresss knowledge of the damage to the cargo is such that it served to preclude or dispense with the

24-hour notice to the carrier required by Art. 366 of the Code of Commerce. Neither did the inspection of the cargo in which Eagle Expresss representative had participated lead to the waiver of the written notice under the Sec. 3(6) of the COGSA. Eagle Express, after all, had acted as the agent of the freight consolidator, not that of the carrier to whom the notice should have been made. At any rate, the notion that the request for bad order survey and turn over survey of bad cargoes signed by Eagle Expresss representative is construable as compliant with the notice requirement under Art. 366 of the Code of Commerce was foreclosed by the dismissal of the complaint against DAMCOs representative, East Asiatic. As regards respondent Pimentel Customs, it is sufficient to acknowledge that it had no participation in the physical handling, loading and delivery of the damaged cargo and should, therefore, be absolved of liability. Finally, UCPBs misrepresentation that the applicability of the Code of Commerce was not raised as an issue before the trial court warrants the assessment of double costs of suit against it. WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 68168, dated October 29, 2004 and its Resolution dated June 14, 2005 are AFFIRMED. Double costs against petitioner. SO ORDERED. DANTE O. TINGAM Associate Justice WE CONCUR: LEONARDO A. QUISUMBING Associate Justice Chairperson CONCHITA CARPIO MORALES Associate Justice PRESBITERO J. VELASCO, JR. Associate Justice

ARTURO D. BRION Associate Justice ATTESTATION I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. LEONARDO A. QUISUMBING Associate Justice Chairperson, Second Division CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairpersons Attestation, it is hereby certified that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division. REYNATO S. PUNO Chief Justice
SECOND DIVISION [G.R. No. 156571, July 09, 2008] INTRA-STRATA ASSURANCE CORPORATION AND PHILIPPINE HOME ASSURANCE CORPORATION, PETITIONERS, VS. REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE BUREAU OF CUSTOMS, RESPONDENT. DECISION
BRION, J.: Before this Court is the Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by Intra-Strata Assurance Corporation (Intra-Strata) and Philippine Home Assurance Corporation (PhilHome), collectively referred to as "petitioners." The petition seeks to set aside the decision dated November 26, 2002 of the Court of Appeals[1] (CA) that in turn affirmed the ruling of the Regional Trial Court (RTC), Branch 20, Manila in Civil Case No. 83-15071. [2] In its ruling, the RTC found the petitioners liable as sureties for the customs duties, internal revenue taxes, and other charges due on the importations made by the importer, Grand Textile Manufacturing Corporation (Grand Textile). [3] BACKGROUND FACTS Grand Textile is a local manufacturing corporation. In 1974, it imported from different countries various articles such as dyestuffs, spare parts for textile machinery, polyester filament yarn, textile auxiliary chemicals, trans open type reciprocating compressor, and trevira filament. Subsequent to the importation, these articles were transferred to Customs Bonded Warehouse No. 462. As computed by the Bureau of Customs, the customs duties, internal revenue taxes, and other charges due on the importations amounted to P2,363,147.00. To secure the payment of these obligations pursuant to Section 1904 of the Tariff and Customs Code ( Code),[4] Intra- Strata and PhilHome each issued general warehousing bonds in favor of the Bureau of Customs. These bonds, the terms of which are fully quoted below, commonly provide that the goods shall be withdrawn from the bonded warehouse "on payment of the legal customs duties, internal revenue, and other charges to which they shall then be subject."[5] Without payment of the taxes, customs duties, and charges due and for purposes of domestic consumption, Grand Textile withdrew the imported goods from storage.[6]The Bureau of Customs demanded payment of the amounts due from Grand Textile as importer, and from Intra-Strata and PhilHome as sureties. All three failed to pay. The government responded on January 14, 1983 by filing a collection suit against the parties with the RTC of Manila. LOWER COURT DECISIONS After hearing, the RTC rendered its January 4, 1995 decision finding Grand Textile (as importer) and the petitioners (as sureties) liable for the taxes, duties, and charges due on the imported articles. The dispositive portion of this decision states: [7]

WHEREFORE, premises considered, the Court RESOLVES directing:

(1) (2) the defendant Grand Textile Manufacturing Corporation to pay plaintiff, the sum of P2,363,174.00, plus interests at the legal rate from the filing of the Complaint until fully paid; the defendant Intra-Strata Assurance Corporation to pay plaintiff, jointly and severally, with defendant Grand, the sum of P2,319,211.00 plus interest from the filing of the Complaint until fully paid; and the defendant Philippine Home Assurance Corporation to pay plaintiff the sum of P43,936.00 plus interests to be computed from the filing of the Complaint until fully paid; the forfeiture of all the General Warehousing Bonds executed by Intra- Strata and PhilHome; and all the defendants to pay the costs of suit.

(3) (4)

SO ORDERED. The CA fully affirmed the RTC decision in its decision dated November 26, 2002. From this CA decision, the petitioners now come before this Court through a petition for review on certiorari alleging that the CA decided the presented legal questions in a way not in accord with the law and with the applicable jurisprudence. ASSIGNED ERRORS The petitioners present the following points as the conclusions the CA should have made: 1. that they were released from their obligations under their bonds when Grand Textile withdrew the imported goods without payment of taxes, duties, and other charges; and that their non-involvement in the active handling of the warehoused items from the time they were stored up to their withdrawals substantially increased the risks they assumed under the bonds they issued, thereby releasing them from liabilities under these bonds.[8] In their arguments, they essentially pose the legal issue of whether the withdrawal of the stored goods, wares, and merchandise - without notice to them as sureties - released them from any liability for the duties, taxes, and charges they committed to pay under the bonds they issued. They additionally posit that they should be released from any liability because the Bureau of Customs, through the fault or negligence of its employees, allowed the withdrawal of the goods without the payment of the duties, taxes, and other charges due. The respondent, through the Solicitor General, maintains the opposite view. THE COURT'S RULING We find no merit in the petition and consequently affirm the CA decision. Nature of the Surety's Obligations Section 175 of the Insurance Code defines a contract of suretyship as an agreement whereby a party called the surety guarantees the performance by another party called the principal or obligor of an obligation or undertaking in favor of another party called the obligee, and includes among its various species bonds such as those issued pursuant to Section 1904 of the Code.[9] Significantly, "pertinent provisions of the Civil Code of the Philippines shall be applied in a suppletory character whenever necessary in interpreting the provisions of a contract of suretyship."[10] By its very nature under the terms of the laws regulating suretyship, the liability of the surety is joint and several but limited to the amount of the bond, and its terms are determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee.[11] The definition and characteristics of a suretyship bring into focus the fact that a surety agreement is an accessory contract that introduces a third party element in the fulfillment of the principal

2.

obligation that an obligor owes an obligee. In short, there are effectively two (2) contracts involved when a surety agreement comes into play - a principal contract and an accessory contract of suretyship. Under the accessory contract, the surety becomes directly, primarily, and equally bound with the principal as the original promissor although he possesses no direct or personal interest over the latter's obligations and does not receive any benefit therefrom.[12] The Bonds Under Consideration That the bonds under consideration are surety bonds (and hence are governed by the above laws and rules) is not disputed; the petitioners merely assert that they should not be liable for the reasons summarized above. Two elements, both affecting the suretyship agreement, are material in the issues the petitioners pose. The first is the effect of the law on the suretyship agreement; the terms of the suretyship agreement constitute the second. A feature of the petitioners' bonds, not stated expressly in the bonds themselves but one that is true in every contract, is that applicable laws form part of and are read into the contract without need for any express reference. This feature proceeds from Article 1306 of the Civil Code pursuant to which we had occasion to rule: It is to be recognized that a large degree of autonomy is accorded the contracting parties. Not that it is unfettered. They may, according to Article 1306 of the Civil Code "establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that they are not contrary to law, morals, good customs, public order, or public policy." The law thus sets limits. It is a fundamental requirement that the contract entered into must be in accordance with, and not repugnant to, an applicable statute. Its terms are embodied therein. The contracting parties need not repeat them. They do not even have to be referred to. Every contract thus contains not only what has been explicitly stipulated but also the statutory provisions that have any bearing on the matter."[13] Two of the applicable laws, principally pertaining to the importer, are Sections 101 and 1204 of the Tariff and Customs Code which provide that: Sec 101. Imported Items Subject to Duty - All articles when imported from any foreign country into the Philippines shall be subject to duty upon such importation even though previously exported from the Philippines, except as otherwise specifically provided for in this Code or in clear laws. xxxx Sec. 1204. Liability of Importer for Duties - Unless relieved by laws or regulations, the liability for duties, taxes, fees, and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees, and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced which such articles are in custody or subject to the control of the government. The obligation to pay, principally by the importer, is shared by the latter with a willing third party under a suretyship agreement under Section 1904 of the Code which itself provides: Section 1904. Irrevocable Domestic Letter of Credit or Bank Guarantee or Warehousing Bond - After articles declared in the entry of warehousing shall have been examined and the duties, taxes, and other charges shall have been determined, the Collector shall require from the importer, an irrevocable domestic letter of credit, bank guarantee, or bond equivalent to the amount of such duties, taxes, and other charges conditioned upon the withdrawal of the articles within the period prescribed by Section 1908 of this Code and for payment of any duties, taxes, and other charges to which the articles shall then be subject and upon compliance with all legal requirements regarding their importation. We point these out to stress the legal basis for the submission of the petitioners' bonds and the conditions attaching to these bonds. As heretofore mentioned, there is,firstly, a principal obligation belonging to the importer-obligor as provided under Section 101; secondly, there is an accessory obligation, assumed by the sureties pursuant to Section 1904 which, by the nature of a surety

agreement, directly, primarily, and equally bind them to the obligee to pay the obligor's obligation. The second element to consider in a suretyship agreement relates to the terms of the bonds themselves, under the rule that the terms of the suretyship are determined by the suretyship contract itself.[14] The General Warehousing Bond [15] that is at the core of the present dispute provides: KNOW ALL MEN BY THESE PRESENTS: That I/we GRAND TEXTILE MANUFACTURING CORPORATION - Km. 21, Marilao, Bulacan, as Principal, and PHILIPPINE HOME ASSURANCE as the latter being a domestic corporation duly organized and existing under and by virtue of the laws of the Philippines, as Surety, are held and firmly bound unto the Republic of the Philippines, in the sum of PESOS TWO MILLION ONLY (P2,000,000.00), Philippine Currency, to be paid to the Republic of the Philippines, for the payment whereof, we bind ourselves, our heirs, executors, administrators and assigns, jointly and severally, firmly by these presents: WHEREAS, the above-bounden Principal will from time to time make application to make entry for storing in customs-internal revenue bonded warehouse certain goods, wares, and merchandise, subject to customs duties and special import tax or internal revenue taxes or both; WHEREAS, the above principal in making application for storing merchandise in customs-internal revenue bonded warehouse as above stated, will file this in his name as principal, which bond shall be approved by the Collector of Customs or his Deputy; and WHEREAS, the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond. NOW THEREFORE, the condition of this obligation is such that if within six (6) months from the date of arrival of the importing vessel in any case, the goods, wares, and merchandise shall be regularly and lawfullywithdrawn from public stores or bonded warehouse on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall then be subject; or if at any time within six (6) months from the said date of arrival, or within nine (9) months if the time is extended for a period of three (3) months, as provided in Section 1903 of the Tariff and Customs Code of the Philippines, said importation shall be so withdrawn for consumption,then the above obligation shall be void, otherwise, to remain in full force and effect. Obligations hereunder may only be accepted during the calendar year 1974 and the right to reserve by the corresponding Collector of Customs to refuse to accept further liabilities under this general bond, whenever, in his opinion, conditions warrant doing so. IN WITNESS WHEREOF, we have signed our names and affixed our seals on this 20th day of September, 1974 at Makati, Rizal, Philippines. Considered in relation with the underlying laws that are deemed read into these bonds, it is at once clear that the bonds shall subsist - that is, "shall remain in full force and effect" - unless the imported articles are "regularly and lawfully withdrawn. . .on payment of the legal customs duties, internal revenue taxes, and other charges to which they shall be subject...." Fully fleshed out, the obligation to pay the duties, taxes, and other charges primarily rested on the principal Grand Textile; it was allowed to warehouse the imported articles without need for prior payment of the amounts due, conditioned on the filing of a bond that shall remain in full force and effect until the payment of the duties, taxes, and charges due. Under these terms, the fact that a withdrawal has been made and its circumstances are not material to the sureties' liability, except to signal both the principal's default and the elevation to a due and demandable status of the sureties' solidary obligation to pay. Under the bonds' plain terms, this solidary obligation subsists for as long as the

amounts due on the importations have not been paid. Thus, it is completely erroneous for the petitioners to say that they were released from their obligations under their bond when Grand Textile withdrew the imported goods without payment of taxes, duties, and charges. From a commonsensical perspective, it may well be asked: why else would the law require a surety when such surety would be bound only if the withdrawal would be regular due to the payment of the required duties, taxes, and other charges? We note in this regard the rule that a surety is released from its obligation when there is a material alteration of the contract in connection with which the bond is given, such as a change which imposes a new obligation on the promising party, or which takes away some obligation already imposed, or one which changes the legal effect of the original contract and not merely its form. A surety, however, is not released by a change in the contract which does not have the effect of making its obligation more onerous.[16] We find under the facts of this case no significant or material alteration in the principal contract between the government and the importer, nor in the obligation that the petitioners assumed as sureties. Specifically, the petitioners never assumed, nor were any additional obligation imposed, due to any modification of the terms of importation and the obligations thereunder. The obligation, and one that never varied, is - on the part of the importer , to pay the customs duties, taxes, and charges due on the importation, and on the part of the sureties, to be solidarily bound to the payment of the amounts due on the imported goods upon their withdrawal or upon expiration of the given terms. The petitioners' lack of consent to the withdrawal of the goods, if this is their complaint, is a matter between them and the principal Grand Textile; it is a matter outside the concern of government whose interest as creditor-obligee in the importation transaction is the payment by the importer-obligor of the duties, taxes, and charges due before the importation process is concluded. With respect to the sureties who are there as third parties to ensure that the amounts due are paid, the creditor-obligee's active concern is to enforce the sureties' solidary obligation that has become due and demandable. This matter is further and more fully explored below. The Need for Notice to Bondsmen To support the conclusion that they should be released from the bonds they issued, the petitioners argue that upon the issuance and acceptance of the bonds, they became direct parties to the bonded transaction entitled to participate and actively intervene, as sureties, in the handling of the imported articles; that, as sureties, they are entitled to notice of any act of the bond obligee and of the bond principal that would affect the risks secured by the bond; and that otherwise, the door becomes wide open for possible fraudulent conspiracy between the bond obligee and principal to defraud the surety.[17] In taking these positions, the petitioners appear to misconstrue the nature of a surety relationship, particularly the fact that two types of relationships are involved, that is, the underlying principal relationship between the creditor (government) and the debtor (importer), and the accessory surety relationship whereby the surety binds itself, for a consideration paid by the debtor, to be jointly and solidarily liable to the creditor for the debtor's default. The creditor in this latter relationship accepts the surety's solidary undertaking to pay if the debtor does not pay.[18] Such acceptance, however, does not change in any material way the creditor's relationship with the principal debtor nor does it make the surety an active party to the principal creditor-debtor relationship. The contract of surety simply gives rise to an obligation on the part of the surety in relation with the creditor and is a oneway relationship for the benefit of the latter.[19] In other words, the surety does not, by reason of the surety agreement, earn the right to intervene in the principal creditor-debtor relationship; its role becomes alive only upon the debtor's default, at which time it can be directly held liable by the creditor for payment as a solidary obligor. A surety

contract is made principally for the benefit of the creditor-obligee and this is ensured by the solidary nature of the sureties' undertaking.[20] Under these terms, the surety is not entitled as a rule to a separate notice of default,[21] nor to the benefit of excussion,[22] and may be sued separately or together with the principal debtor.[23] The words of this Court inPalmares v. CA[24] are worth noting: Demand on the surety is not necessary before bringing the suit against them. On this point, it may be worth mentioning that a surety is not even entitled, as a matter of right, to be given notice of the principal's default. Inasmuch as the creditor owes no duty of active diligence to take care of the interest of the surety, his mere failure to voluntarily give information to the surety of the default of the principal cannot have the effect of discharging the surety. The surety is bound to take notice of the principal's default and to perform the obligation. He cannot complain that the creditor has not notified him in the absence of a special agreement to that effect in the contract of suretyship. Significantly, nowhere in the petitioners' bonds does it state that prior notice is required to fix the sureties' liabilities. Without such express requirement, the creditor's right to enforce payment cannot be denied as the petitioners became bound as soon as Grand Textile, the principal debtor, defaulted. Thus, the filing of the collection suit was sufficient notice to the sureties of their principal's default. The petitioners' reliance on Visayan Surety and Insurance Corporation v. Pascual[25]and Aguasin v. Velasquez[26] does not appear to us to be well taken as these cases do not squarely apply to the present case. These cases relate to bonds issued as a requirement for the issuance of writs of replevin. The Rules of Court expressly require that before damages can be claimed against such bonds, notice must be given to the sureties to bind them to the award of damages. No such requirement is evident in this case as neither the Tariff and Customs Code nor the issued bonds require prior notice to sureties. The petitioners' argument focusing on the additional risks they incur if they cannot intervene in the handling of the warehoused articles must perforce fail in light of what we have said above regarding the nature of their obligation as sureties and the relationships among the parties where a surety agreement exists. We add that the petitioners have effectively waived as against the creditor (the government) any such claim in light of the provision of the bond that "the surety hereon agrees to accept all responsibility jointly and severally for the acts of the principal done in accordance with the terms of this bond."[27] Any such claim including those arising from the withdrawal of the warehoused articles without the payment of the requisite duties, taxes and charges is for the principal and the sureties to thresh out between or among themselves. Government is Not Bound by Estoppel As its final point, the petitioners argue that they cannot be held liable for the unpaid customs duties, taxes, and other charges because it is the Bureau of Customs' duty to ensure that the duties and taxes are paid before the imported goods are released from its custody and they cannot be made to pay for the error or negligence of the Bureau's employees in authorizing the unlawful and irregular withdrawal of the goods. It has long been a settled rule that the government is not bound by the errors committed by its agents. Estoppel does not also lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers.[28] This is particularly true in the collection of legitimate taxes due where the collection has to be made whether or not there is error, complicity, or plain neglect on the part of the collecting agents.[29] In CIR v. CTA,[30] we pointedly said: It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. Thus, it should be collected without unnecessary hindrance or delay.

We see no reason to deviate from this rule and we shall not do so now. WHEREFORE, premises considered, we hereby DENY the petition and AFFIRM the Decision of the Court of Appeals. Costs against the petitioners. SO ORDERED. Quisumbing, (Chairperson), Tinga, Reyes, and Leonardo-De Castro,. JJ., concur.

SECOND DIVISION [G.R. No. 151133, June 30, 2008] AFP GENERAL INSURANCE CORPORATION, PETITIONER, VS. NOEL MOLINA, JUANITO ARQUEZA, LEODY VENANCIO, JOSE OLAT, ANGEL CORTEZ, PANCRASIO SIMPAO, CONRADO CALAPON AND NATIONAL LABOR RELATIONS COMMISSION (FIRST DIVISION), RESPONDENTS. DECISION
QUISUMBING, J.: This is a petition for review on certiorari of the Decision[1] dated August 20, 2001 of the Court of Appeals in CA-G.R. SP No. 58763 which dismissed herein petitioner's special civil action for certiorari. Before the appellate court, petitioner AFP General Insurance Corporation (AFPGIC) sought to reverse the Resolution[2] dated October 5, 1999 of the National Labor Relations Commission (NLRC) in NLRC NCR CA-011705-96 for having been issued with grave abuse of discretion. The NLRC affirmed the Order[3]dated March 30, 1999 of Labor Arbiter Edgardo Madriaga in NLRC NCR Case No. 02-00672-90 which had denied AFPGIC's Omnibus Motion to Quash Notice/Writ of Garnishment and Discharge AFPGIC's appeal bond for failure of Radon Security & Allied Services Agency (Radon Security) to pay the premiums on said bond. Equally challenged is the Resolution[4] dated December 14, 2001 of the appellate court in CA-G.R. SP No. 58763 which denied herein petitioner's motion for reconsideration. The facts of this case are not disputed. The private respondents are the complainants in a case for illegal dismissal, docketed as NLRC NCR Case No. 02-00672-90, filed against Radon Security & Allied Services Agency and/or Raquel Aquias and Ever Emporium, Inc. In his Decision dated August 20, 1996, the Labor Arbiter ruled that the private respondents were illegally dismissed and ordered Radon Security to pay them separation pay, backwages, and other monetary claims. Radon Security appealed the Labor Arbiter's decision to public respondent NLRC and posted a supersedeas bond, issued by herein petitioner AFPGIC as surety. The appeal was docketed as NLRC NCR CA-011705-96. On April 6, 1998, the NLRC affirmed with modification the decision of the Labor Arbiter. The NLRC found the herein private respondents constructively dismissed and ordered Radon Security to pay them their separation pay, in lieu of reinstatement with backwages, as well as their monetary benefits limited to three years, plus attorney's fees equivalent to 10% of the entire amount, with Radon Security and Ever Emporium, Inc. adjudged jointly and severally liable. Radon Security duly moved for reconsideration, but this was denied by the NLRC in its Resolution

dated June 22, 1998. Radon Security then filed a Petition for Certiorari docketed as G.R. No. 134891 with this Court, but we dismissed this petition in our Resolution of August 31, 1998. When the Decision dated April 6, 1998 of the NLRC became final and executory, private respondents filed an Urgent Motion for Execution. As a result, the NLRC Research and Information Unit submitted a Computation of the Monetary Awards in accordance with the NLRC decision. Radon Security opposed said computation in its Motion for Recomputation. On February 5, 1999, the Labor Arbiter issued a Writ of Execution[5] incorporating the computation of the NLRC Research and Information Unit. That same date, the Labor Arbiter dismissed the Motion for Recomputation filed by Radon Security. By virtue of the writ of execution, the NLRC Sheriff issued a Notice of Garnishment[6] against thesupersedeas bond. Both Ever Emporium, Inc. and Radon Security moved to quash the writ of execution. On March 30, 1999, the Labor Arbiter denied both motions, and Radon Security appealed to the NLRC. On April 14, 1999, AFPGIC entered the fray by filing before the Labor Arbiter an Omnibus Motion to Quash Notice/Writ of Garnishment and to Discharge AFPGIC's Appeal Bond on the ground that said bond "has been cancelled and thus non-existent in view of the failure of Radon Security to pay the yearly premiums."[7] On April 30, 1999, the Labor Arbiter denied AFPGIC's Omnibus Motion for lack of merit.[8] The Labor Arbiter pointed out that the question of non-payment of premiums is a dispute between the party who posted the bond and the insurer; to allow the bond to be cancelled because of the nonpayment of premiums would result in a factual and legal absurdity wherein a surety will be rendered nugatory by the simple expedient of non-payment of premiums. The petitioner then appealed the Labor Arbiter's order to the NLRC. The appeals of Radon Security and AFPGIC were jointly heard as NLRC NCR CA-011705-96. On October 5, 1999, the NLRC disposed of NLRC NCR CA-011705-96 in this wise: WHEREFORE, premises considered, the appeals under consideration are hereby DISMISSED for lack of merit. SO ORDERED.[9] In dismissing the appeal of AFPGIC, the NLRC pointed out that AFPGIC's theory that the bond cannot anymore be proceeded against for failure of Radon Security to pay the premium is untenable, considering that the bond is effective until the finality of the decision.[10] The NLRC stressed that a contrary ruling would allow respondents to simply stop paying the premium to frustrate satisfaction of the money judgment.[11] AFPGIC then moved for reconsideration, but the NLRC denied the motion in its Resolution[12] dated February 29, 2000. AFPGIC then filed a special civil action for certiorari, docketed as CA-G.R. SP No. 58763, with the Court of Appeals, on the ground that the NLRC committed a grave abuse of discretion in affirming the Order dated March 30, 1999 of the Labor Arbiter. On August 20, 2001, the appellate court dismissed CA-G.R. SP No. 58763, disposing as follows:

WHEREFORE, the foregoing considered, the petition is denied due course and accordingly DISMISSED. SO ORDERED.[13] AFPGIC seasonably moved for reconsideration, but this was denied by the appellate court in its Resolution[14] of December 14, 2001. Hence, the instant case anchored on the lone assignment of error that: THE COURT OF APPEALS SERIOUSLY ERRED IN SUSTAINING THE PUBLIC RESPONDENT NLRC ALTHOUGH THE LATTER GRAVELY ABUSED ITS DISCRETION WHEN IT ARBITRARILY IGNORED THE FACT THAT SUBJECT APPEAL BOND WAS ALREADY CANCELLED FOR NON-PAYMENT OF PREMIUM AND THUS IT COULD NOT BE SUBJECT OF EXECUTION OR GARNISHMENT.[15] The petitioner contends that under Section 64[16] of the Insurance Code, which is deemed written into every insurance contract or contract of surety, an insurer may cancel a policy upon nonpayment of the premium. Said cancellation is binding upon the beneficiary as the right of a beneficiary is subordinate to that of the insured. Petitioner points out that in South Sea Surety & Insurance Co., Inc. v. CA,[17] this Court held that payment of premium is a condition precedent to and essential for the efficaciousness of a contract of insurance.[18] Hence, following UCPB General Ins. Co., Inc. v. Masagana Telamart, Inc.,[19] no insurance policy, other than life, issued originally or on renewal is valid and binding until actual payment of the premium.[20]The petitioner also points to Malayan Insurance Co., Inc. v. Cruz Arnaldo,[21] which reiterated that an insurer may cancel an insurance policy for non-payment of premium.[22] Hence, according to petitioner, the Court of Appeals committed a reversible error in not holding that under Section 77[23] of the Insurance Code, the surety bond between it and Radon Security was not valid and binding for non-payment of premiums, even as against a third person who was intended to benefit therefrom. The private respondents adopted in toto the ratiocinations of the Court of Appeals that inasmuch as a supersedeas bond was posted for the benefit of a third person to guarantee that the money judgment will be satisfied in case it is affirmed on appeal, the third person who stands to benefit from said bond is entitled to notice of its cancellation for any reason. Likewise, the NLRC should have been notified to enable it to take the proper action under the circumstances. The respondents submit that from its very nature, a supersedeas bond remains effective and the surety liable thereon until formally discharged from said liability. To hold otherwise would enable a losing party to frustrate a money judgment by the simple expedient of ceasing to pay premiums. We find merit in the submissions of the private respondents. The controversy before the Court involves more than just the mere application of the provisions of the Insurance Code to the factual circumstances. This instant case, after all, traces its roots to a labor controversy involving illegally dismissed workers. It thus entails the application of labor laws and regulations. Recall that the heart of the dispute is not an ordinary contract of property or life insurance, but an appeal bond required by both substantive and adjective law in appeals in labor disputes, specifically Article 223[24] of the Labor Code, as amended by Republic Act No. 6715,[25] and Rule VI, Section 6[26] of the Revised NLRC Rules of Procedure. Said provisions mandate that in labor cases where the judgment appealed from involves a monetary award, the appeal may be perfected only upon the posting of a cash or surety bond issued by a reputable bonding company accredited by the NLRC.[27] The perfection of an appeal by an employer "only" upon the posting of a cash or surety bond clearly and categorically shows the intent of the lawmakers to make the posting of a cash or surety bond by the employer to be the exclusive means by which an employer's appeal may be perfected.[28] Additionally, the filing of a cash or surety bond is a jurisdictional requirement in an appeal involving a money judgment to the NLRC.[29] In addition, Rule VI, Section 6 of the Revised NLRC Rules of Procedure is a contemporaneous construction of Article 223 by the NLRC. As an interpretation of a law by the implementing administrative agency, it is accorded great respect by this Court.[30] Note that Rule VI, Section 6 categorically states that the cash or surety bond posted in

appeals involving monetary awards in labor disputes "shall be in effect until final disposition of the case." This could only be construed to mean that the surety bond shall remain valid and in force until finality and execution of judgment, with the resultant discharge of the surety company only thereafter, if we are to give teeth to the labor protection clause of the Constitution. To construe the provision any other way would open the floodgates to unscrupulous and heartless employers who would simply forego paying premiums on their surety bond in order to evade payment of the monetary judgment. The Court cannot be a party to any such iniquity. Moreover, the Insurance Code supports the private respondents' arguments. The petitioner's reliance on Sections 64 and 77 of the Insurance Code is misplaced. The said provisions refer to insurance contracts in general. The instant case pertains to a surety bond; thus, the applicable provision of the Insurance Code is Section 177,[31]which specifically governs suretyship. It provides that a surety bond, once accepted by the obligee becomes valid and enforceable, irrespective of whether or not the premium has been paid by the obligor. The private respondents, the obligees here, accepted the bond posted by Radon Security and issued by the petitioner. Hence, the bond is both valid and enforceable. A verbis legis non est recedendum (from the language of the law there must be no departure).[32] When petitioner surety company cancelled the surety bond because Radon Security failed to pay the premiums, it gave due notice to the latter but not to the NLRC. By its failure to give notice to the NLRC, AFPGIC failed to acknowledge that the NLRC had jurisdiction not only over the appealed case, but also over the appeal bond. This oversight amounts to disrespect and contempt for a quasijudicial agency tasked by law with resolving labor disputes. Until the surety is formally discharged, it remains subject to the jurisdiction of the NLRC. Our ruling, anchored on concern for the employee, however, does not in any way seek to derogate the rights and interests of the petitioner as against Radon Security. The former is not devoid of remedies against the latter. Under Section 176[33] of the Insurance Code, the liability of petitioner and Radon Security is solidary in nature. There is solidary liability only when the obligation expressly so states, or when the law so provides, or when the nature of the obligation so requires. [34] Since the law provides that the liability of the surety company and the obligor or principal is joint and several, then either or both of them may be proceeded against for the money award. The Labor Arbiter directed the NLRC Sheriff to garnish the surety bond issued by the petitioner. The latter, as surety, is mandated to comply with the writ of garnishment, for as earlier pointed out, the bond remains enforceable and under the jurisdiction of the NLRC until it is discharged. In turn, the petitioner may proceed to collect the amount it paid on the bond, plus the premiums due and demandable, plus any interest owing from Radon Security. This is pursuant to the principle of subrogation enunciated in Article 2067[35] of the Civil Code which we apply to the suretyship agreement between AFPGIC and Radon Security, in accordance with Section 178[36] of the Insurance Code. Finding no reversible error committed by the Court of Appeals in CA-G.R. SP No. 58763, we sustain the challenged decision. WHEREFORE, the instant petition is DENIED for lack of merit. The assailed Decision dated August 20, 2001 of the Court of Appeals in CA-G.R. SP No. 58763 and the Resolution dated December 14, 2001, of the appellate court denying the herein petitioner's motion for reconsideration are AFFIRMED. Costs against the petitioner. SO ORDERED. Carpio Morales, Tinga, Velasco, Jr., and Brion, consur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 156956 October 9, 2006

REPUBLIC OF THE PHILIPPINES, by EDUARDO T. MALINIS, in His Capacity as Insurance Commissioner,petitioner, vs. DEL MONTE MOTORS, INC., respondent.

DECISION

PANGANIBAN, CJ.: The securities required by the Insurance Code to be deposited with the Insurance Commissioner are intended to answer for the claims of all policy holders in the event that the depositing insurance company becomes insolvent or otherwise unable to satisfy their claims. The security deposit must be ratably distributed among all the insured who are entitled to their respective shares; it cannot be garnished or levied upon by a single claimant, to the detriment of the others. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to reverse the January 16, 2003 Order2 of the Regional Court (RTC) of Quezon City (Branch 221) in Civil Case No. Q-97-30412. The RTC found Insurance Commissioner Eduardo T. Malinis guilty of indirect contempt for refusing to comply with the December 18, 2002 Resolution3 of the lower court. The January 16, 2003 Order states in full: "On January 8, 2003, [respondent] filed a Motion to Cite Commissioner Eduardo T. Malinis of the Office of the Insurance Commission in Contempt of Court because of his failure and refusal to obey the lawful order of this court embodied in a Resolution dated December 18, 2002 directing him to allow the withdrawal of the security deposit of Capital Insurance and Surety Co. (CISCO) in the amount of P11,835,375.50 to be paid to Sheriff Manuel Paguyo in the satisfaction of the Notice of Garnishment pursuant to a Decision of this Court which has become final and executory. "During the hearing of the Motion set last January 10, 2003, Commissioner Malinis or his counsel or his duly authorized representative failed to appear despite notice in utter disregard of the order of this Court. However, Commissioner Malinis filed on January 15, 2003 a written Comment reiterating the same grounds already passed upon and

rejected by this Court. This Court finds no lawful justification or excuse for Commissioner Malinis' refusal to implement the lawful orders of this Court. "Wherefore, premises considered and after due hearing, Commissioner Eduardo T. Malinis is hereby declared guilty of Indirect Contempt of Court pursuant to Section 3 [of] Rule 71 of the 1997 Rules of Civil Procedure for willfully disobeying and refusing to implement and obey a lawful order of this Court."4 The Facts On January 15, 2002, the RTC rendered a Decision in Civil Case No. Q-97-30412, finding the defendants (Vilfran Liner, Inc., Hilaria Villegas and Maura Villegas) jointly and severally liable to pay Del Monte Motors, Inc.,P11,835,375.50 representing the balance of Vilfran Liner's service contracts with respondent. The trial court further ordered the execution of the Decision against the counterbond posted by Vilfran Liner on June 10, 1997, and issued by Capital Insurance and Surety Co., Inc. (CISCO). On April 18, 2002, CISCO opposed the Motion for Execution filed by respondent, claiming that the latter had no record or document regarding the alleged issuance of the counterbond; thus, the bond was not valid and enforceable. On June 13, 2002, the RTC granted the Motion for Execution and issued the corresponding Writ. Armed with this Writ, Sheriff Manuel S. Paguyo proceeded to levy on the properties of CISCO. He also issued a Notice of Garnishment on several depository banks of the insurance company. Moreover, he served a similar notice on the Insurance Commission, so as to enforce the Writ on the security deposit filed by CISCO with the Commission in accordance with Section 203 of the Insurance Code. On December 18, 2002, after a hearing on all the pending Motions, the RTC ruled that the Notice of Garnishment served by Sheriff Paguyo on the insurance commission was valid. The trial court added that the letter and spirit of the law made the security deposit answerable for contractual obligations incurred by CISCO under the insurance contracts the latter had entered into. The RTC resolved thus: "Furthermore, the Commissioner of the Office of the Insurance Commission is hereby ordered to comply with its obligations under the Insurance Code by upholding the integrity and efficacy of bonds validly issued by duly accredited Bonding and Insurance Companies; and to safeguard the public interest by insuring the faithful performance to enforce contractual obligations under existing bonds. Accordingly said office is ordered to withdraw from the security deposit of Capital Insurance & Surety Company, Inc. the amount ofP11,835.50 to be paid to Sheriff Manuel S. Paguyo in satisfaction of the Notice of Garnishment served on August 16, 2002."5 On January 8, 2003, respondent moved to cite Insurance Commissioner Eduardo T. Malinis in contempt of court for his refusal to obey the December 18, 2002 Resolution of the trial court. Ruling of the Trial Court The RTC held Insurance Commissioner Malinis in contempt for his refusal to implement its Order. It explained that the commissioner had no legal justification for his refusal to allow the withdrawal of CISCO's security deposit.

Hence, this Petition.6 Issues Petitioner raises this sole issue for the Court's consideration: "Whether or not the security deposit held by the Insurance Commissioner pursuant to Section 203 of the Insurance Code may be levied or garnished in favor of only one insured."7 The Court's Ruling The Petition is meritorious. Preliminary Issue: Propriety of Review Before discussing the principal issue, the Court will first dispose of the question of mootness. Prior to the filing of the instant Petition, Insurance Commissioner Malinis sent the treasurer of the Philippines a letter dated March 26, 2003, stating that the former had no objection to the release of the security deposit to Del Monte Motors. Portions of the fund were consequently released to respondent in July, October, and December 2003. Thus, the issue arises: whether these circumstances render the case moot. Petitioner, however, contends that the partial releases should not be construed as an abandonment of its stand that security deposits under Section 203 of the Insurance Code are exempt from levy and garnishment. The Republic claims that the releases were made pursuant to the commissioner's power of control over the fund, not to the lower court's Order of garnishment. Petitioner further invokes the jurisdiction of this Court to put to rest the principal issue of whether security deposits made with the Insurance Commission may be levied and garnished. The issue is not totally moot. To stress, only a portion of respondent's claim was satisfied, and the Insurance Commission has required CISCO to replenish the latter's security deposit. Respondent, therefore, may one day decide to further garnish the security deposit, once replenished. Moreover, after the questioned Order of the lower court was issued, similar claims on the security deposits of various insurance companies have been made before the Insurance Commission. To set aside the resolution of the issue will only postpone a task that is certain to crop up in the future. Besides, the business of insurance is imbued with public interest. It is subject to regulation by the State, with respect not only to the relations between the insurer and the insured, but also to the internal affairs of insurance companies.8 As this case is undeniably endowed with public interest and involves a matter of public policy, this Court shall not shirk from its duty to educate the bench and the bar by formulating guiding and controlling principles, precepts, doctrines and rules.9 Principal Issue: Exemption of Security Deposit from Levy or Garnishment

Section 203 of the Insurance Code provides as follows: "Sec. 203. Every domestic insurance company shall, to the extent of an amount equal in value to twenty-fiveper centum of the minimum paid-up capital required under section one hundred eighty-eight, invest its funds only in securities, satisfactory to the Commissioner, consisting of bonds or other evidences of debt of the Government of the Philippines or its political subdivisions or instrumentalities, or of government-owned or controlled corporations and entities, including the Central Bank of the Philippines: Provided, That such investments shall at all times be maintained free from any lien or encumbrance; and Provided, further, That such securities shall be deposited with and held by the Commissioner for the faithful performance by the depositing insurer of all its obligations under its insurance contracts. The provisions of section one hundred ninety-two shall, so far as practicable, apply to the securities deposited under this section. "Except as otherwise provided in this Code, no judgment creditor or other claimant shall have the right to levy upon any of the securities of the insurer held on deposit pursuant to the requirement of the Commissioner." (Emphasis supplied) Respondent notes that Section 203 does not provide for an absolute prohibition on the levy and garnishment of the security deposit. It contends that the law requires the deposit, precisely to ensure faithful performance of all the obligations of the depositing insurer under the latter's various insurance contracts. Hence, respondent claims that the security deposit should be answerable for the counterbond issued by CISCO. The Court is not convinced. As worded, the law expressly and clearly states that the security deposit shall be (1) answerable for all the obligations of the depositing insurer under its insurance contracts; (2) at all times free from any liens or encumbrance; and (3) exempt from levy by any claimant. To be sure, CISCO, though presently under conservatorship, has valid outstanding policies. Its policy holders have a right under the law to be equally protected by its security deposit. To allow the garnishment of that deposit would impair the fund by decreasing it to less than the percentage of paid-up capital that the law requires to be maintained. Further, this move would create, in favor of respondent, a preference of credit over the other policy holders and beneficiaries. Our Insurance Code is patterned after that of California.10 Thus, the ruling of the state's Supreme Court on a similar concept as that of the security deposit is instructive. Engwicht v. Pacific States Life Assurance Co.11 held that the money required to be deposited by a mutual assessment insurance company with the state treasurer was "a trust fund to be ratably distributed amongst all the claimants entitled to share in it. Such a distribution cannot be had except in an action in the nature of a creditors' bill, upon the hearing of which, and with all the parties interested in the fund before it, the court may make equitable distribution of the fund, and appoint a receiver to carry that distribution into effect."12 Basic is the statutory construction rule that provisions of a statute should be construed in accordance with the purpose for which it was enacted.13 That is, the securities are held as a contingency fund to answer for the claims against the insurance company by all its policy holders and their beneficiaries. This step is taken in the event that the company becomes insolvent or otherwise unable to satisfy the claims against it. Thus, a single claimant may not

lay stake on the securities to the exclusion of all others. The other parties may have their own claims against the insurance company under other insurance contracts it has entered into. Respondent's Inchoate Right The right to lay claim on the fund is dependent on the solvency of the insurer and is subject to all other obligations of the company arising from its insurance contracts. Thus, respondent's interest is merely inchoate. Being a mere expectancy, it has no attribute of property. At this time, it is nonexistent and may never exist.14 Hence, it would be premature to make the security deposit answerable for CISCO's present obligation to Del Monte Motors. Moreover, since insolvency proceedings against CISCO have yet to be conducted, it would be impossible to establish at this time which claimants are entitled to the security deposit and in what pro-rated amounts. Only after all other claimants under subsisting policies issued by CISCO have been heard can respondent's share be determined. Powers of the Commissioner The Insurance Code has vested the Office of the Insurance Commission with both regulatory and adjudicatoryauthority over insurance matters.15 The general regulatory authority of the insurance commissioner is described in Section 414 of the Code as follows: "Sec. 414. The Insurance Commissioner shall have the duty to see that all laws relating to insurance, insurance companies and other insurance matters, mutual benefit associations, and trusts for charitable uses are faithfully executed and to perform the duties imposed upon him by this Code, and shall, notwithstanding any existing laws to the contrary, have sole and exclusive authority to regulate the issuance and sale of variable contracts as defined in section two hundred thirty-two and to provide for the licensing of persons selling such contracts, and to issue such reasonable rules and regulations governing the same. "The Commissioner may issue such rulings, instructions, circulars, orders and decisions as he may deem necessary to secure the enforcement of the provisions of this Code, subject to the approval of the Secretary of Finance. Except as otherwise specified, decisions made by the Commissioner shall be appealable to the Secretary of Finance." (Emphasis supplied) Pursuant to these regulatory powers, the commissioner is authorized to (1) issue (or to refuse to issue) certificates of authority to persons or entities desiring to engage in insurance business in the Philippines;16 (2) revoke or suspend these certificates of authority upon finding grounds for the revocation or suspension;17 (3) impose upon insurance companies, their directors and/or officers and/or agents appropriate penalties -- fines, suspension or removal from office -- for failing to comply with the Code or with any of the commissioner's orders, instructions, regulations or rulings, or for otherwise conducting business in an unsafe or unsound manner.18 Included in the above regulatory responsibilities is the duty to hold the security deposits under Sections 19119 and 203 of the Code, for the benefit and security of all policy holders. In relation to these provisions, Section 192 of the Insurance Code states:

"Sec. 192. The Commissioner shall hold the securities, deposited as aforesaid, for the benefit and security of all the policyholders of the company depositing the same, but shall as long as the company is solvent, permit the company to collect the interest or dividends on the securities so deposited, and, from time to time, with his assent, to withdraw any of such securities, upon depositing with said Commissioner other like securities, the market value of which shall be equal to the market value of such as may be withdrawn. In the event of any company ceasing to do business in the Philippines the securities deposited as aforesaid shall be returned upon the company's making application therefor and proving to the satisfaction of the Commissioner that it has no further liability under any of its policies in the Philippines." (Emphasis supplied) Undeniably, the insurance commissioner has been given a wide latitude of discretion to regulate the insurance industry so as to protect the insuring public. The law specifically confers custody over the securities upon the commissioner, with whom these investments are required to be deposited. An implied trust20 is created by the law for the benefit of all claimants under subsisting insurance contracts issued by the insurance company.21 As the officer vested with custody of the security deposit, the insurance commissioner is in the best position to determine if and when it may be released without prejudicing the rights of other policy holders. Before allowing the withdrawal or the release of the deposit, the commissioner must be satisfied that the conditions contemplated by the law are met and all policy holders protected. Commissioner's Actions Entitled to Great Respect In this case, Commissioner Malinis refused to release the security deposit of CISCO. Believing that the funds were exempt from execution as provided by law, he sought to protect other policy holders. His interpretation of the provisions of the law carries great weight and consideration,22 as he is the head of a specialized body tasked with the regulation of insurance matters and primarily charged with the implementation of the Insurance Code. The emergence of the multifarious needs of modern society necessitates the establishment of diverse administrative agencies. In addressing these needs, the administrative agencies charged with applying and implementing particular statutes have accumulated experience and specialized capabilities. Thus, in a long line of cases, this Court has recognized that their construction of a statute is entitled to great respect and should ordinarily be controlling, unless clearly shown to be in sharp conflict with the governing statute or the Constitution and other laws.23 Clearly, then, the trial court erred in issuing the Writ of Garnishment against the security deposit of CISCO. It follows that without the issuance of a valid order, the insurance commissioner could not have been in contempt of court.24 WHEREFORE, the Petition is GRANTED and the assailed Order SET ASIDE. No costs. SO ORDERED. Ynares-Santiago, Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.

Republic of the Philippines SUPREME COURT FIRST DIVISION G.R. No. 154514. July 28, 2005 WHITE GOLD MARINE SERVICES, INC., Petitioners, vs. PIONEER INSURANCE AND SURETY CORPORATION AND THE STEAMSHIP MUTUAL UNDERWRITING ASSOCIATION (BERMUDA) LTD., Respondents. DECISION QUISUMBING, J.: This petition for review assails the Decision1 dated July 30, 2002 of the Court of Appeals in CA-G.R. SP No. 60144, affirming the Decision2 dated May 3, 2000 of the Insurance Commission in I.C. Adm. Case No. RD-277. Both decisions held that there was no violation of the Insurance Code and the respondents do not need license as insurer and insurance agent/broker. The facts are undisputed. White Gold Marine Services, Inc. (White Gold) procured a protection and indemnity coverage for its vessels from The Steamship Mutual Underwriting Association (Bermuda) Limited (Steamship Mutual) through Pioneer Insurance and Surety Corporation (Pioneer). Subsequently, White Gold was issued a Certificate of Entry and Acceptance.3Pioneer also issued receipts evidencing payments for the coverage. When White Gold failed to fully pay its accounts, Steamship Mutual refused to renew the coverage. Steamship Mutual thereafter filed a case against White Gold for collection of sum of money to recover the latters unpaid balance. White Gold on the other hand, filed a complaint before the Insurance Commission claiming that Steamship Mutual violated Sections 1864 and 1875 of the Insurance Code, while Pioneer violated Sections 299,63007 and 3018 in relation to Sections 302 and 303, thereof. The Insurance Commission dismissed the complaint. It said that there was no need for Steamship Mutual to secure a license because it was not engaged in the insurance business. It explained that Steamship Mutual was a Protection and Indemnity Club (P & I Club). Likewise, Pioneer need not obtain another license as insurance agent and/or a broker for Steamship Mutual because Steamship Mutual was not engaged in the insurance business. Moreover, Pioneer was already licensed, hence, a separate license solely as agent/broker of Steamship Mutual was already superfluous. The Court of Appeals affirmed the decision of the Insurance Commissioner. In its decision, the appellate court distinguished between P & I Clubs vis--vis conventional insurance. The appellate court also held that Pioneer merely acted as a collection agent of Steamship Mutual. In this petition, petitioner assigns the following errors allegedly committed by the appellate court,

FIRST ASSIGNMENT OF ERROR THE COURT A QUO ERRED WHEN IT RULED THAT RESPONDENT STEAMSHIP IS NOT DOING BUSINESS IN THE PHILIPPINES ON THE GROUND THAT IT COURSED . . . ITS TRANSACTIONS THROUGH ITS AGENT AND/OR BROKER HENCE AS AN INSURER IT NEED NOT SECURE A LICENSE TO ENGAGE IN INSURANCE BUSINESS IN THE PHILIPPINES. SECOND ASSIGNMENT OF ERROR THE COURT A QUO ERRED WHEN IT RULED THAT THE RECORD IS BEREFT OF ANY EVIDENCE THAT RESPONDENT STEAMSHIP IS ENGAGED IN INSURANCE BUSINESS. THIRD ASSIGNMENT OF ERROR THE COURT A QUO ERRED WHEN IT RULED, THAT RESPONDENT PIONEER NEED NOT SECURE A LICENSE WHEN CONDUCTING ITS AFFAIR AS AN AGENT/BROKER OF RESPONDENT STEAMSHIP. FOURTH ASSIGNMENT OF ERROR THE COURT A QUO ERRED IN NOT REVOKING THE LICENSE OF RESPONDENT PIONEER AND [IN NOT REMOVING] THE OFFICERS AND DIRECTORS OF RESPONDENT PIONEER.9 Simply, the basic issues before us are (1) Is Steamship Mutual, a P & I Club, engaged in the insurance business in the Philippines? (2) Does Pioneer need a license as an insurance agent/broker for Steamship Mutual? The parties admit that Steamship Mutual is a P & I Club. Steamship Mutual admits it does not have a license to do business in the Philippines although Pioneer is its resident agent. This relationship is reflected in the certifications issued by the Insurance Commission. Petitioner insists that Steamship Mutual as a P & I Club is engaged in the insurance business. To buttress its assertion, it cites the definition of a P & I Club in Hyopsung Maritime Co., Ltd. v. Court of Appeals10 as "an association composed of shipowners in general who band together for the specific purpose of providing insurance cover on a mutual basis against liabilities incidental to shipowning that the members incur in favor of third parties." It stresses that as a P & I Club, Steamship Mutuals primary purpose is to solicit and provide protection and indemnity coverage and for this purpose, it has engaged the services of Pioneer to act as its agent. Respondents contend that although Steamship Mutual is a P & I Club, it is not engaged in the insurance business in the Philippines. It is merely an association of vessel owners who have come together to provide mutual protection against liabilities incidental to shipowning.11 Respondents aver Hyopsung is inapplicable in this case because the issue in Hyopsung was the jurisdiction of the court over Hyopsung. Is Steamship Mutual engaged in the insurance business? Section 2(2) of the Insurance Code enumerates what constitutes "doing an insurance business" or "transacting an insurance business". These are:

(a) making or proposing to make, as insurer, any insurance contract; (b) making, or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; (c) doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; (d) doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code. ... The same provision also provides, the fact that no profit is derived from the making of insurance contracts, agreements or transactions, or that no separate or direct consideration is received therefor, shall not preclude the existence of an insurance business.12 The test to determine if a contract is an insurance contract or not, depends on the nature of the promise, the act required to be performed, and the exact nature of the agreement in the light of the occurrence, contingency, or circumstances under which the performance becomes requisite. It is not by what it is called.13 Basically, an insurance contract is a contract of indemnity. In it, one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event.14 In particular, a marine insurance undertakes to indemnify the assured against marine losses, such as the losses incident to a marine adventure.15 Section 9916 of the Insurance Code enumerates the coverage of marine insurance. Relatedly, a mutual insurance company is a cooperative enterprise where the members are both the insurer and insured. In it, the members all contribute, by a system of premiums or assessments, to the creation of a fund from which all losses and liabilities are paid, and where the profits are divided among themselves, in proportion to their interest.17 Additionally, mutual insurance associations, or clubs, provide three types of coverage, namely, protection and indemnity, war risks, and defense costs.18 A P & I Club is "a form of insurance against third party liability, where the third party is anyone other than the P & I Club and the members."19 By definition then, Steamship Mutual as a P & I Club is a mutual insurance association engaged in the marine insurance business. The records reveal Steamship Mutual is doing business in the country albeit without the requisite certificate of authority mandated by Section 18720 of the Insurance Code. It maintains a resident agent in the Philippines to solicit insurance and to collect payments in its behalf. We note that Steamship Mutual even renewed its P & I Club cover until it was cancelled due to non-payment of the calls. Thus, to continue doing business here, Steamship Mutual or through its agent Pioneer, must secure a license from the Insurance Commission. Since a contract of insurance involves public interest, regulation by the State is necessary. Thus, no insurer or insurance company is allowed to engage in the insurance business without a license or a certificate of authority from the Insurance Commission.21

Does Pioneer, as agent/broker of Steamship Mutual, need a special license? Pioneer is the resident agent of Steamship Mutual as evidenced by the certificate of registration22 issued by the Insurance Commission. It has been licensed to do or transact insurance business by virtue of the certificate of authority23 issued by the same agency. However, a Certification from the Commission states that Pioneer does not have a separate license to be an agent/broker of Steamship Mutual.24 Although Pioneer is already licensed as an insurance company, it needs a separate license to act as insurance agent for Steamship Mutual. Section 299 of the Insurance Code clearly states: SEC. 299 . . . No person shall act as an insurance agent or as an insurance broker in the solicitation or procurement of applications for insurance, or receive for services in obtaining insurance, any commission or other compensation from any insurance company doing business in the Philippines or any agent thereof, without first procuring a license so to act from the Commissioner, which must be renewed annually on the first day of January, or within six months thereafter. . . Finally, White Gold seeks revocation of Pioneers certificate of authority and removal of its directors and officers. Regrettably, we are not the forum for these issues. WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated July 30, 2002 of the Court of Appeals affirming the Decision dated May 3, 2000 of the Insurance Commission is hereby REVERSED AND SET ASIDE. The Steamship Mutual Underwriting Association (Bermuda) Ltd., and Pioneer Insurance and Surety Corporation are ORDERED to obtain licenses and to secure proper authorizations to do business as insurer and insurance agent, respectively. The petitioners prayer for the revocation of Pioneers Certificate of Authority and removal of its directors and officers, is DENIED. Costs against respondents. SO ORDERED. Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur.

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 which dismissed its two appeals and affirmed the judgment of the trial court.
[1]

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 G-1) and in said policy the earthquake endorsement clause as indicated in Exhibits C-1, D-1, Exhibits E and F1 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 paidP42,658.14 (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%; 393,000.00on the two swimming pools, only (against the peril of earthquake shock only) @ 0.100% 116,600.00other buildings include as follows: a) Tilter HouseP19,800.00- 0.551% b) Power HouseP41,000.00- 0.551% c) House ShedP55,000.00 -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. 206-4568061-9 (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 3,068.10 776.89 409.05 45,159.92;

Doc. Stamps F.S.T. Prem. Tax TOTAL

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. 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, rendered a preliminary report 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. On August 11, 1990, petitioner filed its formal demand 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. Petitioner and respondent failed to arrive at a settlement. Thus, on January 24, 1991, petitioner filed a complaint with the regional trial court of Pasig praying for the payment of the following:
[3] [4] [5] [6] [7] [8] [9] [10]

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; The sum of P428,842.00 per month, representing continuing losses sustained by plaintiff on account of defendants refusal to pay the claims; The sum of P500,000.00, by way of exemplary damages;

2.)

3.)

4.) 5.)

The sum of P500,000.00 by way of attorneys fees and expenses of litigation; 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 PLAINTIFFAPPELLANT 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 PLAINTIFFAPPELLANTS RIGHT TO RECOVER UNDER DEFENDANTAPPELLEES 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 PLAINTIFFAPPELLANT 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 plaintiffappellants prayer for the imposition of interest 24% on the insurance claim and 6% on loss of income allegedly amounting toP4,280,000.00. 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, longstanding 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: A.

[16]

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 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.
[19]

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, it was stated that:
[21]

PREMIUM RECAPITULATION ITEM NOS. xxx 3 393,000.00 0.100%-E/S 393.00

[22]

AMOUNT

RATES

PREMIUM

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. 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
[25]

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. (Emphasis ours)
[26]

An insurance premium is the consideration paid an insurer for undertaking to indemnify the insured against a specified peril. In fire, casualty, and marine insurance, the premium payable becomes a debt as soon as the risk attaches. 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:
[27] [28]

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. A. A. Yes, sir. If you are referring to Forte Insurance Agency, yes. No, sir. They are our insurance agency. Q. Did you also do this through your insurance agency? Q. Is Forte Insurance Agency a department or division of your company? 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 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.
[29]

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 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
[30]

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. 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. ATTY. MEJIA:

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. 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? ATTY. ANDRES:

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. Yes, sir, to Exhibit H.

Q. You are referring to Exhibit H of course? A. 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. 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. Consequently, any ambiguity therein is resolved against the insurer, or construed liberally in favor of the insured.
[31] [32] [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. 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., the parties, who were acute businessmen of experience, were presumed to have assented to the assailed documents with full knowledge.
[34] [35]

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 TSN, September 23, 1991 pp. 20-21

[36]

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. A. Yes, sir. 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. Q. What steps did you take?

Respondent, in compliance with the condition set by the petitioner, copied AIU Policy No. 206-4568061-9 in drafting its Insurance Policy No. 31944. It is true that there was variance in some 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. Austria-Martinez, Callejo, Sr., Tinga, and Chico-Nazario, JJ., concur.

FIRST DIVISION

[G.R. No. 125678. March 18, 2002]

PHILAMCARE HEALTH SYSTEMS, INC., petitioner, vs. COURT OF APPEALS and JULITA TRINOS, respondents.

DECISION
YNARES-SANTIAGO, J.:

Ernani Trinos, deceased husband of respondent Julita Trinos, applied for a health care coverage with petitioner Philamcare Health Systems, Inc. In the standard application form, he answered no to the following question:

Have you or any of your family members ever consulted or been treated for high blood pressure, heart trouble, diabetes, cancer, liver disease, asthma or peptic ulcer? (If Yes, give details).[1]
The application was approved for a period of one year from March 1, 1988 to March 1, 1989. Accordingly, he was issued Health Care Agreement No. P010194. Under the agreement, respondents husband was entitled to avail of hospitalization benefits, whether ordinary or emergency, listed therein. He was also entitled to avail of out-patient benefits such as annual physical examinations, preventive health care and other outpatient services. Upon the termination of the agreement, the same was extended for another year from March 1, 1989 to March 1, 1990, then from March 1, 1990 to June 1, 1990. The amount of coverage was increased to a maximum sum of P75,000.00 per disability.[2] During the period of his coverage, Ernani suffered a heart attack and was confined at the Manila Medical Center (MMC) for one month beginning March 9, 1990. While her husband was in the hospital, respondent tried to claim the benefits under the health care agreement. However, petitioner denied her claim saying that the Health Care Agreement was void. According to petitioner, there was a concealment regarding Ernanis medical history. Doctors at the MMC allegedly discovered at the time of Ernanis confinement that he was hypertensive, diabetic and asthmatic, contrary to his answer in the application form. Thus, respondent paid the hospitalization expenses herself, amounting to about P76,000.00. After her husband was discharged from the MMC, he was attended by a physical therapist at home. Later, he was admitted at the Chinese General Hospital. Due to financial difficulties, however, respondent brought her husband home again. In the morning of April 13, 1990, Ernani had fever and was feeling very weak. Respondent was constrained to bring him back to the Chinese General Hospital where he died on the same day. On July 24, 1990, respondent instituted with the Regional Trial Court of Manila, Branch 44, an action for damages against petitioner and its president, Dr. Benito Reverente, which was docketed as Civil Case No. 90-53795. She asked for reimbursement of her expenses plus moral damages and attorneys fees. After trial, the lower court ruled against petitioners, viz:

WHEREFORE, in view of the forgoing, the Court renders judgment in favor of the plaintiff Julita Trinos, ordering:

1. Defendants to pay and reimburse the medical and hospital coverage of the late Ernani Trinos in the amount of P76,000.00 plus interest, until the amount is fully paid to plaintiff who paid the same; 2. Defendants to pay the reduced amount of moral damages of P10,000.00 to plaintiff; 3. Defendants to pay the reduced amount of P10,000.00 as exemplary damages to plaintiff; 4. Defendants to pay attorneys fees of P20,000.00, plus costs of suit.

SO ORDERED. [3]
On appeal, the Court of Appeals affirmed the decision of the trial court but deleted all awards for damages and absolved petitioner Reverente.[4] Petitioners motion for reconsideration was denied.[5]Hence, petitioner brought the instant petition for review, raising the primary argument that a health care agreement is not an insurance contract; hence the incontestability clause under the Insurance Code[6]does not apply. Petitioner argues that the agreement grants living benefits, such as medical checkups and hospitalization which a member may immediately enjoy so long as he is alive upon effectivity of the agreement until its expiration one-year thereafter. Petitioner also points out that only medical and hospitalization benefits are given under the agreement without any indemnification, unlike in an insurance contract where the insured is indemnified for his loss. Moreover, since Health Care Agreements are only for a period of one year, as compared to insurance contracts which last longer,[7] petitioner argues that the incontestability clause does not apply, as the same requires an effectivity period of at least two years. Petitioner further argues that it is not an insurance company, which is governed by the Insurance Commission, but a Health Maintenance Organization under the authority of the Department of Health. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur:
1. The insured has an insurable interest; 2. The insured is subject to a risk of loss by the happening of the designated peril; 3. The insurer assumes the risk; 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 insurers promise, the insured pays a premium.[8]

Section 3 of the Insurance Code states that any contingent or unknown event, whether past or future, which may damnify a person having an insurable interest against him, may

be insured against. Every person has an insurable interest in the life and health of himself. Section 10 provides:

Every person has an insurable interest in the life and health: (1) (2) (3) of himself, of his spouse and of his children; of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; of any person under a legal obligation to him for the payment of money, respecting property or service, of which death or illness might delay or prevent the performance; and of any person upon whose life any estate or interest vested in him depends.

(4)

In the case at bar, the insurable interest of respondents husband in obtaining the health care agreement was his own health. The health care agreement was in the nature of nonlife insurance, which is primarily a contract of indemnity.[9] Once the member incurs hospital, medical or any other expense arising from sickness, injury or other stipulated contingent, the health care provider must pay for the same to the extent agreed upon under the contract. Petitioner argues that respondents husband concealed a material fact in his application. It appears that in the application for health coverage, petitioners required respondents husband to sign an express authorization for any person, organization or entity that has any record or knowledge of his health to furnish any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination.[10] Specifically, the Health Care Agreement signed by respondents husband states:

We hereby declare and agree that all statement and answers contained herein and in any addendum annexed to this application are full, complete and true and bind all parties in interest under the Agreement herein applied for, that there shall be no contract of health care coverage unless and until an Agreement is issued on this application and the full Membership Fee according to the mode of payment applied for is actually paid during the lifetime and good health of proposed Members; that no information acquired by any Representative of PhilamCare shall be binding upon PhilamCare unless set out in writing in the application; that any physician is, by these presents, expressly authorized to disclose or give testimony at anytime relative to any information acquired by him in his professional capacity upon any question affecting the eligibility for health care coverage of the Proposed Members and that the

acceptance of any Agreement issued on this application shall be a ratification of any correction in or addition to this application as stated in the space for Home Office Endorsement.[11] (Underscoring ours)
In addition to the above condition, petitioner additionally required the applicant for authorization to inquire about the applicants medical history, thus:

I hereby authorize any person, organization, or entity that has any record or knowledge of my health and/or that of __________ to give to the PhilamCare Health Systems, Inc. any and all information relative to any hospitalization, consultation, treatment or any other medical advice or examination. This authorization is in connection with the application for health care coverage only. A photographic copy of this authorization shall be as valid as the original.[12] (Underscoring ours)
Petitioner cannot rely on the stipulation regarding Invalidation of agreement which reads:

Failure to disclose or misrepresentation of any material information by the member in the application or medical examination, whether intentional or unintentional, shall automatically invalidate the Agreement from the very beginning and liability of Philamcare shall be limited to return of all Membership Fees paid. An undisclosed or misrepresented information is deemed material if its revelation would have resulted in the declination of the applicant by Philamcare or the assessment of a higher Membership Fee for the benefit or benefits applied for.[13]
The answer assailed by petitioner was in response to the question relating to the medical history of the applicant. This largely depends on opinion rather than fact, especially coming from respondents husband who was not a medical doctor. Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid a policy even though they are untrue.[14]Thus,

(A)lthough false, a representation of the expectation, intention, belief, opinion, or judgment of the insured will not avoid the policy if there is no actual fraud in inducing the acceptance of the risk, or its acceptance at a lower rate of premium, and this is likewise the rule although the statement is material to the risk, if the statement is obviously of the foregoing character, since in such case the insurer is not justified in relying upon such statement, but is obligated to make further inquiry. There is a clear distinction between such a case and one in which the insured is fraudulently and intentionally states to be true, as a matter of expectation or belief, that which he then knows, to be actually untrue, or the impossibility of which is shown by the facts within his knowledge, since

in such case the intent to deceive the insurer is obvious and amounts to actual fraud.[15] (Underscoring ours)
The fraudulent intent on the part of the insured must be established to warrant rescission of the insurance contract.[16] Concealment as a defense for the health care provider or insurer to avoid liability is an affirmative defense and the duty to establish such defense by satisfactory and convincing evidence rests upon the provider or insurer. In any case, with or without the authority to investigate, petitioner is liable for claims made under the contract. Having assumed a responsibility under the agreement, petitioner is bound to answer the same to the extent agreed upon. In the end, the liability of the health care provider attaches once the member is hospitalized for the disease or injury covered by the agreement or whenever he avails of the covered benefits which he has prepaid. Under Section 27 of the Insurance Code, a concealment entitles the injured party to rescind a contract of insurance. The right to rescind should be exercised previous to the commencement of an action on the contract. [17] In this case, no rescission was made. Besides, the cancellation of health care agreements as in insurance policies require the concurrence of the following conditions:

1.

Prior notice of cancellation to insured;

2. Notice must be based on the occurrence after effective date of the policy of one or more of the grounds mentioned; 3. Must be in writing, mailed or delivered to the insured at the address shown in the policy; 4. Must state the grounds relied upon provided in Section 64 of the Insurance Code and upon request of insured, to furnish facts on which cancellation is based.[18]
None of the above pre-conditions was fulfilled in this case. When the terms of insurance contract contain limitations on liability, courts should construe them in such a way as to preclude the insurer from non-compliance with his obligation.[19] Being a contract of adhesion, the terms of an insurance contract are to be construed strictly against the party which prepared the contract the insurer.[20] By reason of the exclusive control of the insurance company over the terms and phraseology of the insurance contract, ambiguity must be strictly interpreted against the insurer and liberally in favor of the insured, especially to avoid forfeiture.[21] This is equally applicable to Health Care Agreements. The phraseology used in medical or hospital service contracts, such as the one at bar, must be liberally construed in favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the construction conferring coverage is to be adopted, and exclusionary clauses of doubtful import should be strictly construed against the provider.[22] Anent the incontestability of the membership of respondents husband, we quote with approval the following findings of the trial court:

(U)nder the title Claim procedures of expenses, the defendant Philamcare Health Systems Inc. had twelve months from the date of issuance of the Agreement within which to contest the membership of the patient if he had previous ailment of asthma, and six months from the issuance of the agreement if the patient was sick of diabetes or hypertension. The periods having expired, the defense of concealment or misrepresentation no longer lie.[23]
Finally, petitioner alleges that respondent was not the legal wife of the deceased member considering that at the time of their marriage, the deceased was previously married to another woman who was still alive. The health care agreement is in the nature of a contract of indemnity. Hence, payment should be made to the party who incurred the expenses. It is not controverted that respondent paid all the hospital and medical expenses. She is therefore entitled to reimbursement. The records adequately prove the expenses incurred by respondent for the deceaseds hospitalization, medication and the professional fees of the attending physicians.[24] WHEREFORE, in view of the foregoing, the petition is DENIED. The assailed decision of the Court of Appeals dated December 14, 1995 is AFFIRMED. SO ORDERED. Davide, Jr., C.J., (Chairman), Puno, and Kapunan, JJ., concur.